JP\/7\/DICK2<\/p>\n
Dewi Anggraeni
\nContributor
\nMelbourne<\/p>\n
Dr Howard Dick, Associate Professor in the Australian Centre
\nfor International Business at the University of Melbourne, sees
\nimproving the investment climate as the key to speeding up
\nIndonesia's economic recovery. Dick, one of the university's
\nIndonesianists who has written numerous books on the region, the
\nlatest being Surabaya: City of Work: A Socioeconomic History,
\n1900-2000, The Emergence of a National Economy: An economic
\nhistory of Indonesia, 1800-2000, and Corruption in Asia shares
\nhis thoughts with Dewi Anggraeni in an interview in Melbourne.<\/p>\n
Question: The draft budget is out now. To boost the economic
\ngrowth, the government seems to rely on export, increase in taxes
\nand domestic consumption, and it is expecting 5 percent growth.
\nDo you think it is realistic?<\/p>\n
Answer: The economy can sustain growth of 3 or 4 percent. At
\nthe moment it is like a six-cylinder motor car using only 4
\ncylinders. These 4 cylinders are consumption and exports. At this
\nrate you can reach a certain speed, but if you want to achieve 5,
\n6 or 7 percent, you need the other two cylinders, which are
\ndomestic and foreign investment. Those two cylinders are not
\nworking at the moment.<\/p>\n
You don't think investment is going to pick up?<\/p>\n
There is no reason for it to pick up, because investors are
\nbeing frightened away. The Manulife case has been a complete
\ndisaster for Indonesia. It has been very widely publicized around
\nthe world and crystallized all the fears that foreign investors
\nhave about investment in Indonesia. In the background, you have
\nthe difficulties that resource companies are having in the other
\nislands because of decentralization and various forms of strife.
\nNowhere are property rights secure at law.<\/p>\n
Domestic investors are also penalized. Those who withdrew
\ntheir capital at the time of the Asian crisis have little
\nincentive to repatriate their offshore interests and every
\nincentive to continue siphoning part of their local profits
\noffshore. Many apparently domestic firms now discreetly run their
\noperations from more secure offshore bases such as Singapore.
\nThis is a re-run of what happened during the economic instability
\nof the 1950s and 1960s.<\/p>\n
There was a chance after May 1998 for reconciliation, but that
\nopportunity is now lost. While Indonesian Chinese now have more
\nrights and are better accepted, the underlying problem of
\ndiscrimination remains. Private business is therefore hamstrung
\nand ever vulnerable to rent-seeking by the political elite.
\nIndonesia will have to survive on a very modest private
\ninvestment for quite some time.<\/p>\n
You don't think that the increase in taxes is a factor that
\nwill frighten away investors?<\/p>\n
No. The effective tax rate is still extremely low. It is not
\nthe high tax rate that scares away investors, but the high risks,
\nwhich involve general insecurity of property rights and
\ndiscrimination against the ethnic Chinese.<\/p>\n
You see the ethnic Chinese business still essential for the
\ngrowth of the economy?<\/p>\n
Certainly the pribumi (indigenous) sector is bigger than it
\nused to be but it is still the minor part of the private business
\nsector. The problem is that Indonesia has not moved far from the
\n1950s view that the way to achieve progress for the pribumi
\nsector is to discriminate against the non indigenous sector.
\nMalaysia tried that in the 1970s, but it has moved on. Mahathir
\nrealized that the best way to stimulate bumiputera business is to
\nimprove the investment climate for the whole business sector, not
\njust for the minor part. You cannot boost private investment by
\ndiscriminating against the major part of the business sector.<\/p>\n
How about the government's foreign debt problems?<\/p>\n
The foreign debt is not in itself a big problem. It is a lot
\nof money, but with some ongoing rescheduling Indonesia has the
\nexport capability to service that debt. Where it bites is the
\nloss of economic sovereignty. A high foreign debt, a poor
\ninvestment climate and slow growth restrict the political and
\neconomic options and extend the period of IMF supervision.<\/p>\n
The domestic debt is a more pressing problem. It was a debt
\nincurred to recapitalize the banking system, which still does not
\nmeet the liquidity target. This is a heavy mortgage on
\nIndonesia's future, to pay for past mistakes and gross
\ncorruption. Because bondholders are paid out of taxes, it is also
\na substantial diversion of government revenue. On the financial
\nside, the bonds are a dead weight on the financial market.<\/p>\n
Do you see the likelihood of the resource-rich regions
\nenforcing their own policies, thus increasing the existing fiscal
\nburden on the central government?<\/p>\n
That certainly is a problem. It was predictable that the
\nresource-rich regions would use autonomy for their own benefit.
\nResource-poor regions may not actually become poorer but
\nrelatively they will more and more be left behind. The central
\ngovernment has a fiscal transfer mechanism to balance this but it
\nis too early to say how effective it will be. If Indonesia is
\ngoing to hold together, regional imbalances will have to be
\nmanaged.<\/p>\n
However, the immediate problem that flows from
\ndecentralization is the worsening investment climate. Projects in
\nthe regions are very dependent on the goodwill of the local and
\nprovincial governments. The problems of Kaltim Prima coal miner
\nare well known. Other mining projects are being held to ransom by
\nrapacious local interests. Each case does further damage to
\nIndonesia's international reputation and its investment climate.<\/p>\n
What is your view about the House of Representatives' role?<\/p>\n
This is part of a settling down process. The technocrats no
\nlonger have a free hand in economic policy. They along with the
\nrest of the government are being held accountable, and that is
\nthe essence of democracy. The question is, when are they held
\naccountable, and by what process? No one would argue that some
\nparliamentary interventions have been very opportunistic, or that
\nsome policies require more time to become effective. However the
\nprinciple of accountability is a good one. There has to be
\ncontinuing negotiation to work out the best ways to achieve it.<\/p>\n
How about growing sentiment against the International Monetary
\nFund?<\/p>\n
The IMF has become an influential player in internal
\nIndonesian politics. Though wary of the dangers, the IMF can not
\navoid some involvement. It has to work closely with the
\ngovernment. On occasions it has also lobbied parliament for and
\nagainst certain policies. After five years there can be observed
\na kind of moral hazard. It is too easy for parliamentarians,
\npoliticians, bureaucrats and members of the public, including the
\nmedia, to expect the IMF to deliver miracle cures, and attack it
\nas a scapegoat when it fails to do so. Eventually the Indonesian
\ngovernment and parliament have to accept responsibility for
\neconomic policy. Now is a good time for that to happen. I'm not
\nsure that it would be healthy for the IMF to continue its role
\nthrough to the next election in 2004.<\/p>",
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