Indonesia needs new development strategy<\/p>\n
David E. Sumual, Jakarta<\/p>\n
In the past one-month, many economic discussions have focused
\non two major external risks facing the Indonesian economy, namely
\nthe possibility of aggressive interest rate hikes by the Fed and
\nthe impact of higher oil prices on the government budget.
\nMeanwhile, a possible hard landing for China's economy might not
\naffect the country so much since the 4.7 percent share of
\nIndonesia's exports to China (in April 2004) could be deemed
\ninsignificant.<\/p>\n
These external threats coupled with excess liquidity and
\npolitical uncertainty in relation to the upcoming presidential
\nelections have put pressures on the rupiah and inflation,
\nprompting Bank Indonesia (BI) to take measures to absorb banks'
\nexcess liquidity in the market.<\/p>\n
Nevertheless, Indonesia might now breathe a sigh of relief as
\noil prices have cooled off to around US$36 per barrel in recent
\nweeks.<\/p>\n
The risk of U.S. inflation in May also appears to be in check.
\nAs such, the transition to higher U.S. interest rates may also
\nhappen at a measured pace with interest rates possibly only
\nrising by a quarter-point at the Fed's next meeting on June 30th.
\nThus, business concerns over the possibility of higher interest
\nrates would also recede accordingly.<\/p>\n
What is not well understood is why the rupiah does not seem to
\nbe boosted by these encouraging developments given that it had
\nmainly depreciated on concerns relating to external risks. It
\nappears that the rupiah exchange rate in the short run is
\ninfluenced by market sentiment on political issues rather than
\nfor economic reasons.<\/p>\n
In other words, whatever happens, the political developments
\nsurrounding the July 5 presidential elections would be the best
\nleading indicator of the rupiah, at least in the short run. As
\nsuch, concerns on the rupiah are overdone, as its value will soon
\nmove back to its fundamental level as soon as the political
\nuncertainty recedes.<\/p>\n
As macro stability alone is not sufficient, what is more
\nimportant is to give attention to some domestic structural
\nproblems that may affect Indonesia's economic outlook in the
\nmiddle to long-term. As such, sustainable growth needs a policy
\nthat is unreservedly committed to both domestic and foreign
\ndirect investment (FDI).<\/p>\n
The political leaders and the soon-to-be-elected president
\nthus should become aware of how to increase Indonesia's
\ninvestment competitiveness.<\/p>\n
Developing an action program to improve Indonesia's
\ncompetitiveness should be the first priority of the next
\ngovernment. Time is ticking given that Indonesia's competitors
\nsuch as China, India, Vietnam and Thailand are now developing
\nimport-substitution industries, thus threatening the outlook for
\nIndonesia's exports. It would be no surprise then if Indonesia's
\nmanufacturing exports fell in the years ahead as those countries
\nwill no longer need the goods they now import from Indonesia.<\/p>\n
According to the World Investment Report published by the
\nEconomist magazine, world FDI will rebound by 31.2 percent to
\n$754.8 billion in 2004 after three consecutive years of declines.
\nMeanwhile, it is predicted that the global FDI inflows to
\ndeveloping countries will increase 22.8 percent from $186.9
\nbillion in 2003 to $229.6 billion in 2004.<\/p>\n
Citing data from the Investment Coordinating Board (BKPM),
\nconfidence in the investment climate continued to deteriorate in
\nthe first four months of this year as FDI approvals plummeted by
\n30.6 percent compared to the same period last year to only $2.30
\nbillion.<\/p>\n
Foreigners have regrettably lost their appetite to invest in
\nIndonesia. Some of the problems include: Less-friendly government
\npolicies, corruption, and rigidity in the labor market. The
\nrigidity in the labor market is caused, for example, by the
\nregional minimum wages that are hiked each year, outpacing gains
\nin productivity thus reducing the country's competitiveness. The
\ncountry's corrupt and unpredictable judicial system also remains
\nas a main obstacle to higher investment in Indonesia.<\/p>\n
The latest example is an unfair ruling against the foreign
\ninvestor, Rowe Evans Plc, which had to return a $2.3 million palm
\noil plantation because the executive who signed the contract in
\n2002 did not have the correct work permit. Despite the small sum
\nof money involved, the case will surely have a negative impact on
\ninvestor perceptions.<\/p>\n
To tackle the investment problems, Indonesia should think a
\nstrategy well beyond just the security, political and
\nmacroeconomic stability. The main priority is to kick-start the
\ndevelopment of domestic infrastructure to improve national
\nproductivity. Besides productivity, infrastructure investment
\nwould also be important to improve national efficiency and reduce
\nthe cost-push inflationary pressure by eliminating structural
\nbottlenecks as a result of the dilapidating infrastructure.<\/p>\n
There is already evidence of severe infrastructure
\ndeterioration in Indonesia. The decrepit road network that cannot
\ncope with the rise in traffic volumes, and the electric power
\nshortages are two main infrastructure problems in the country.
\nAnd according to the National Development Planning Agency, the
\nfunds needed to upgrade the infrastructure network in 2005-2009
\nare huge (slightly more than $72 billion). As such, breakthrough
\nideas -- for example, by creating infrastructure funds in the
\nstock market to attract new investment in infrastructure projects
\n-- are needed.<\/p>\n
The soon-to-be-elected president should also identify the
\ncountry's indigenous strengths and adopt a dual-track development
\nstrategy. In other words, besides enhancing the investment
\nclimate by offering manageable levels of risk, the next
\ngovernment should also focus on the development of skill and
\nresource driven SMEs (small and medium enterprises).<\/p>\n
Such an initiative would strengthen Indonesia's microeconomic
\nstructure, one of the essential factors to boost growth
\nsustainability. However, the real results of good strategy will
\nonly come from strong political leadership that insists on
\nreforms and on meeting investor expectations in as many areas as
\npossible.<\/p>\n
The writer is an analyst of Danareksa Research Institute. This
\narticle is a personal view.<\/p>",
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