Economic recovery needs more than stability<\/p>\n
Hidayat Jati, Researcher, Jakarta<\/p>\n
Indonesia is blessed recently by an onslaught of good news,
\nwhich may indicate early signs of economic recovery. These vary
\nfrom the currency's strong performance against the U.S. dollar,
\nthe stock market's sharp gains in the fist three months and the
\nnumerous successful bonds issuance by Indonesian companies, some
\ndenominated in U.S. dollars and managed to receive better rating
\nthan the sovereign debt.<\/p>\n
Added to these are early signs of improvement in "real sector"
\nindicators such as increasing non-oil exports and strengthening
\nimports, which may sign a recovery in demand, that took place in
\nApril.<\/p>\n
The cheerleaders say these achievements are direct results of
\nPresident Megawati Soekarnoputri's emphasis on maintaining
\nstability. Her determination not to rock the overloaded boat of
\nthe Indonesian polity has yielded real economic benefits -- at
\nleast to this point and as reflected by very selective, and
\nmostly sentiment driven, variables.<\/p>\n
Gone are the endless noisy battles with the legislature (DPR),
\nthe quarrel with donor agencies and the muddled-peacenik stance
\ntoward separatist groups that were characteristic of the
\nadministration that preceded hers.<\/p>\n
Conservatism and compromise are the pillars of this
\nadministration. While stability and continuity are clearly
\nneeded, especially in terms of the relationship with the IMF,
\nkeeping a peaceful coexistence with DPR and freedom of the press,
\nfurther structural improvements in the economy requires major
\npolitical breakthroughs.<\/p>\n
Ultimately President Megawati must do battle with the forces
\nthat seek to harm string change. Ignoring this reality will
\nsimply prevent further economic improvements and may even erode
\ngains made so far. Conservatism and conflict aversion, though
\nthey bring remedies to the excesses of the previous
\nadministration, have their limits of usefulness. Ultimately, what
\nis needed is leadership.<\/p>\n
A monumental task is once-again to make Indonesia investment-
\nfriendly. Without new investments, whether they are in the form
\nof green-field projects, capacity expansions, or mergers and
\nacquisitions facilitated by the Indonesian Bank Restructuring
\nAgency (IBRA), the economy will not grow fast enough to absorb
\nthe ever-growing labor force.<\/p>\n
The World Bank recently noted that a gross domestic growth of
\naround 5 percent is insufficient to alleviate poverty in this
\ncountry. Clearly, a consumer-led recovery will not take Indonesia
\nbeyond 5 percent growth or even sustains the current momentum as
\nthe dangers of double-digit inflation remain in the horizon.<\/p>\n
While macro economy improvement, which yields concrete
\nbenefits such as lower costs of capital -- as reflected by lower
\ninterest rates, certainly helps to mitigate Indonesia's risk
\nprofile, the real issue holding investors at bay is operational
\nenvironment. It is here that stability does not exist beyond
\nappearance.<\/p>\n
The problem comes down to several key areas: Tax, customs,
\nlabor and legal security. In all these areas there have not been
\nreal progress at least since 1998 and the situation remains
\nchaotic, as far as businesses are concerned.<\/p>\n
Each of those points is a complex problem in its own right and
\ndeserves lengthy discussion. Significant progress cannot be
\nattained unless the administration is willing to step on a few
\ntoes.<\/p>\n
The government must overhaul, or alternatively, bypass the
\ncustoms, tax and judicial bureaucracies. The fiscal pressure
\ncertainly requires greater collection from state levies. But all
\nindications strongly suggest that the current efforts resemble
\nmore of a collective extortion and harassment on the existing
\npool of taxpayers rather than reaching to new source of payments,
\nsuch as those retired civil servants or politicians who are now
\nprivate banking clients of major offshore banks.<\/p>\n
Labor regulations and activities, obsessed with keeping
\nexisting workers on the payroll regardless of anything else, have
\nclearly worked against those who are yet to find gainful
\nemployment. The resulting extra costs for the companies' bottom
\nline will limit chances for expansions and thus constrain new
\nemployment. There is a real bias against new job creation. Dead
\nwoods prevail over fresh bloods.<\/p>\n
The legal arena resembles a gallery of rogues, whereby
\nlawyers, prosecutors, policemen, judges and court clerks conspire
\nin a kleptocracy in which politicians and hugely indebted local
\ncompanies are also frequent players. The cost to society is
\nenormous. There is no sense of justice or any credible means of
\nconflict resolution, be they are commercial or of other nature.<\/p>\n
The corrupt justice system affects not just that one
\nunfortunate Canadian life insurance company or many foreign
\ncreditors, but also ultimately the Indonesian workers,
\nspecifically those who are employed by Indonesian debtors who
\nrefuse to settle with their creditors. These companies will
\nremain credit pariahs for a long time, limiting their options to
\nexpand or even survive, unless they can turn to easily persuaded
\nbankers for new line of (questionable) funding.<\/p>\n
There is no way to improve these areas by keeping a business-
\nas-usual approach. President Megawati must demonstrate assertive
\nleadership to address these issues. She could begin, for example,
\nby appointing respected and decisive outsiders as key senior
\nofficers in charge of the institutions affecting the tax,
\ncustoms, labor and judicial issues.<\/p>\n
President Megawati must of course take into account the
\npossible reactions of her political rivals and those affected by
\nher initiatives. At the same time, she must not repeat her
\npredecessors' mistakes by making too frequent changes over key
\ngovernment personnel. But she must not shy away from initiating a
\nmuch-needed process.<\/p>\n
We have seen that when she wanted to, she could demonstrate
\nremarkable leadership. She institutionalized the process to
\nreduce energy subsidies, replace the IBRA chairman and, most
\ncourageously, defied the reactionaries by going to Timor Leste to
\nparticipate in the independence celebration of Indonesia's former
\nterritory. President Megawati must be aware that there is a
\ndifference between maintaining a facade of stability and the
\nstatus quo.<\/p>",
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