Indonesia commits to economic reforms<\/p>\n
Reza Y. Siregar examines Indonesia's success with its various
\neconomic reform programs.<\/p>\n
From the end of the era of the oil price boom in the early
\n1980s up to 1994, Indonesia has attempted about 23 economic
\nreform packages. This, plainly, is an impressive showing of
\ncommitment to economic liberalization. More remarkably, within a
\nspan of five years (1985-1990), roughly 12 reform proposals were
\nannounced and implemented, transforming Indonesia into one of the
\nmost dynamic developing economies in the world. As a result of
\nthese efforts, despite the country's still modest per capita GNP,
\nIndonesia has been well distinguished as a part of the East Asian
\nMiracle in the World Bank's 1993 special report.<\/p>\n
However, in an April 1995 Economic Conference, commemorating
\nthe country's Golden Jubilee, a number of participants referred
\nto the phenomenon of \"reform fatigue\" of the past four years.
\nFrom 1991 to 1994, nominal unweighed average tariffs on imports,
\nfor instance, still stood at 20 percent, compared with just over
\n25 percent tariff reductions implemented between 1989 and 1991.
\nTherefore, the tariff reductions on more than 6,000 items,
\nannounced on May 23 this year, was a long-awaited deregulation
\npackage, registering another significant move to integrate the
\ndomestic economy with the international economy.<\/p>\n
The results of this latest reform move remain to be seen. Yet,
\none thing is for sure: the most urgent issue now has to do with
\nthe effectiveness of this reform to tackle the \"grassroots\" of
\nthe high-cost economy, which has been hampering the
\ncompetitiveness of the country. To address this issue, a review
\nof the achievements of the previous reforms, and an evaluation of
\nthe still-existing obstacles, is necessary.<\/p>\n
Most commonly used statistics to highlight the outcome of a
\nderegulation program are still the growth rates of domestic and
\nforeign investment in an economy. For Indonesia, the rates of
\ngrowth of approved domestic and foreign investment for 1983-1994
\nwere estimated at 245 percent and 860 percent respectively.
\nUnfortunately, those inspiring numbers fail to address the most
\nfundamental concern -- how competitive is the domestic market
\nvis-a-vis the international market after the reforms? To shed
\nsome light on this question, one needs to assess the success of
\nthe deregulation process not in terms of the size of either gross
\nor net capital inflows, but by the extent to which expected
\nreturns are converged to a competitive level between domestic and
\nforeign assets\/investments of a comparable type.<\/p>\n
In a recent study, several comparisons between real interest
\nrates (nominal minus inflation) offered by the Indonesian
\nmonetary authorities and by its banking sector with the rates of
\ntheir counterparts in United States, were made for the period
\n1984 to 1993. The objectives were to analyze the policy and the
\ncompetitiveness of the domestic monetary authorities' and the
\ncountry's financial sector respectively. From the findings, it
\nwas apparent that Bank Indonesia has been fully committed to the
\ninternational integration of its domestic financial market, which
\nwas clearly evidenced by its spontaneous response in realigning
\nits rates to adjustments made by the US Federal Reserve over the
\npast two years.<\/p>\n
Interestingly, the findings did not arrive at the same
\nconclusion for the banking sector rate, represented by the three
\nmonth time deposit (TD) rates. The prevailing market rate in
\nIndonesia's banking sector has not been integrated at all to U.S.
\nrates, even when the domestic central bank has repeatedly made
\nefforts to integrate its key rates with Federal Reserve rates.
\nThis outcome is not difficult to understand, given the fact that
\nthese TD rates are strongly affected by numerous changes in
\ndifferent market fundamentals, especially those of the domestic
\nsector, in addition to the targets predetermined by the monetary
\nauthorities.<\/p>\n
With oil revenues continuing to decline as a percentage of
\nGDP, the previous deregulations have successfully attracted high
\nrates of capital into the economy. Yet, the fact remains that the
\naverage spread between the Indonesian real TD rate and its U.S.
\ncounterpart is still large, at about 9 percent for the 1984-1993
\nperiod and, presumably, higher for lending rates. Even after
\naccounting for 3 to 5 percent annual depreciation of the rupiah
\nagainst the U.S. dollar, an estimated 4 to 6 percent gap still
\nprevails per annum. This illustrates the essential problem of
\nhigh domestic cost of capital, where more concrete deregulation
\npackages are urgently needed.<\/p>\n
During early reform programs, the authorities had rightly
\ntargeted the macro-financial sector of the economy to swiftly
\nliberalize and attract required foreign capital and to repatriate
\ndomestic funds. Recent challenges, however, are demanding much
\nmore comprehensive micro\/real sector reforms to target existing
\nhigh tariff barriers and, more importantly, the practices of
\nmonopoly or other types of market barriers. These grassroots of
\nimperfectly competitive market structures are inherent
\ninfrastructure problems, which largely explain the speculative
\ndistortions in the economy. Initial research has found that,
\nsurprisingly, more than 90 percent of the variance of the real TD
\nspreads is generated through this speculative factor.<\/p>\n
With respect to the tariff reductions, the May 1995 reform
\nproposal is undoubtedly an important package. However, it could
\nalso be argued that it is just another \"timely-recommended\"
\npackage, in terms of meeting recent challenges but lacking long
\nawaited breakthroughs. This deregulation has guaranteed a gradual
\nprocess for the country in its preparations for more competitive
\nenvironments as set by APEC and the Asean Free Trade Area. Yet,
\nsome of those vital industries, affecting not only a majority of
\nthe domestic industries but also daily household consumption, are
\nnot included in the list of deregulated items. Without the
\npolitical will to seriously address some of these grassroots, any
\nreform package would only have a marginal effect.<\/p>\n
Dr. Reza Y. Siregar is a Fellow at the Institute of Southeast
\nAsian Studies, Singapore.<\/p>",
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