Living with another lean year<\/p>\n
Indonesia is going to add another pale year into its post-
\nSoeharto era. Its already tarnished image as a state was damaged
\nagain severely following the Bali Bombing, which demonstrated
\nundeniably how vulnerable Indonesia has become to acts of
\nterrorism.<\/p>\n
The bombing, however tragic, is not the only humiliation that
\nthe government is forced to swallow. Through the Binjai shooting
\nthe absurd rivalry between the armed forces and the police for
\ncommercialized protection was revealed shamelessly.<\/p>\n
The domestic insecurity is impossible to hide. Equally
\nhumiliating is the lack of progress in the war against
\ncorruption. Along with the redistribution and decentralization of
\npower corruption has permeated all crevices. Government offices
\nare ostensibly bribing each other to quicken the speed of
\ntransactions.<\/p>\n
Culprits do not have to worry about punishment. No one in high
\nplaces was jailed in 2002 for corruption. The government is
\nunable to remove from office politicians whom the court has found
\nguilty. While new laws are written and existing ones amended,
\nenforcement shows no credible signs of progress. What is more no
\none in the government feels responsible for what has happened or
\nfailed to happen. No high official resigned or was fired for
\ninstance after the Bali bombing.<\/p>\n
Under the highly frustrating political environment Indonesia
\ndid manage to produce some good news. In spite of the combination
\nof a global economic slowdown and implication of Indonesia in
\ninternational terrorism the economy grew at between 3 - 4
\npercent.<\/p>\n
A strong growth of consumption, revival of certain segments of
\nconstruction, persistent high growth in electricity generation
\nand telecommunication services and rampant black economy such as
\nillegal logging and mining suggest that statistics have failed to
\ncapture recent changes in the economy.<\/p>\n
Inflation has been decelerating throughout 2002, though it
\nbecomes less impressive against the background of a worldwide
\ndisinflation. The rupiah has appreciated strongly against US
\ndollar and Singaporean dollar, making the servicing of
\ninternational debts less burdensome. IBRA has managed to
\naccelerate the disposal of its assets, though different
\nstakeholders received the announcement with dismay. Spatial
\ncompetition has been enlivened in the economy.<\/p>\n
Complaints about myopic local governments are mounting. The
\nlearning process may proceed at the speed of a snail.
\nNevertheless, decentralization is perhaps the most promising
\nchange in the entire post-Soeharto period, followed by a maturing
\ncivil society.<\/p>\n
Indonesia has some compelling reasons to return to high-growth
\npath at the earliest point in time. In spite of a careless
\ndepletion its relative endowment has remained favorable. What is
\nmore, a high growth is needed to reduce unemployment, the
\nseriousness of which is puzzlingly overlooked by politicians.<\/p>\n
Given the new starting conditions productivity improvement is
\nnot a realistic choice for Indonesia to boost growth. High growth
\nin the new future will have to come from more labor and capital.<\/p>\n
The problem is that Indonesia's attractiveness as business
\nlocation has fallen to an abyss, except for investors in rent-
\nintensive businesses.<\/p>\n
Investment indicators have signaled a deeply worrying trend
\nsince the financial crisis of 1997. Gross fixed capital formation
\nas a fraction of GDP fell to the range of 20 percent. Gross Fixed
\nCapital Formation in the first quarter of 2002 was one third
\nsmaller than in the same period of 1997. In real terms it shrunk
\nin the first semester of 2002 over the same period in 2001. Since
\nits deep fall in 1998 import of capital goods has remained at a
\nsmall fraction of import of the same category in 1997.<\/p>\n
Outstanding bank loans in a year ending July 2002 increased by
\nonly 11 percent or by zero percent in real terms. Investment
\napproval in 2001 was as small as 27 percent for foreign
\ninvestment and 47 percent for domestic investment compared to
\n1997, and approval in the first half of 2002 fell again by 52
\npercent for foreign investment and by 68 percent for domestic
\ninvestment over the same period in 2001. Worst of all, some
\nforeign companies have moved some of their activities abroad
\nbecause of frustration with an increasingly hostile environment,
\nuncoupling Indonesia farther away from the global production
\nsystem.<\/p>\n
If this trend continues for another year, Indonesia would get
\nstranded in the periphery of world trade and investment where
\nearning a cent is harder than a dollar in the center.<\/p>\n
The miserable post-crisis investment performance is no
\nmystery. Considering that output in most industries is yet to
\nreturn to its 1997 level weak demand for new assets is almost
\nself-explanatory.<\/p>\n
Labyrinthine policy and bad practices of governance
\nexacerbated the situation. When ministers of the same government
\nadhere to contradicting policies businesses are bound to flee
\naway to more reasonable hosts of which there is abundance around
\nIndonesia. The billion-dollar question is how does one get out of
\nthe petrified policy mess.<\/p>\n
Bearing in mind the contractive impacts of the Bali Bombing
\nand a projected hesitant recovery in the world economy the
\ngovernment and the parliament have agreed on a budget, which is
\nslightly more expansionary than originally conceived.<\/p>\n
However, one should not expect too much from macroeconomic
\nstimulation under the current economic conditions. The huge
\ngovernment debt does not allow a substantial new borrowing.<\/p>\n
Shifting servicing obligations to the future as the government
\nhas done through the Paris Club and re-profiling is not a
\nsolution. Monetary policy is faced with paralyzing handicaps as
\nwell. Indonesian banks are reluctant to lend lest doing so erodes
\ntheir capita base. From a business perspective the current
\nstrategy of investing in government bonds and Bank Indonesia's
\npromissory notes at a given rates and passing any decline in
\npolicy interest rates on to depositors is a superior choice. In
\nshort, tinkering with macroeconomic policies is unlikely to cure
\nstructural weaknesses.<\/p>\n
When people risked their life in the interest of political
\nchange they expect to see a New Indonesia where the government is
\ndetermined to confront the issues of human rights, poverty,
\ncorruption, demilitarization of politics, and many other basic
\nissues. So far, the government has been beating around the bush
\nor just left difficult issues untouched. To recover in 2003 under
\na weak global upturn Indonesia needs an awaken government.<\/p>\n
Unfortunately the year 2003 is a pre-election year.
\nParliamentarians will be preoccupied with reelection. The contest
\nfor presidency will be getting heated. Can miraculous changes
\noccur in the coming six months or so? If not, Indonesia will have
\nto live with a weak growth with all the bitter implications upon
\nunemployment and poverty.<\/p>",
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"sponsor": "Okusi Associates",
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