RI economy continues to muddle through<\/p>\n
Rizal Ramli, Economist, Jakarta<\/p>\n
From an economics perspective, two important facts emerged
\nduring 2003. First, Indonesia's exit from the IMF program did not
\ntrigger an economic collapse, as predicted by conservative
\neconomists.<\/p>\n
Over the past year these commentators had conjured up a
\ndoomsday scenario in Jakarta-based newspapers, in which the
\nconclusion of the IMF program was seen as precipitating a
\ncollapse in the country's credit rating, loss of confidence among
\nforeign investors, capital flight and economic isolation.<\/p>\n
Fortunately, the doomsday scenario proved to be little more
\nthan pro-IMF propaganda. Recent events have confirmed the view,
\nlong held among colleagues associated with the Indonesia Bangkit
\ngroup of economists, that Indonesia's credit ratings would
\nimprove following the conclusion of the IMF program. The view
\nthat only the IMF could forestall economic collapse in Indonesia
\nhas been revealed as nothing more than scare-mongering.<\/p>\n
Second, during and after the IMF program the government
\nadopted a minimalist approach to economic recovery. The approach
\nis minimalist in the sense that economic targets set by the
\ngovernment, particularly for the real sector of the economy, are
\ndecidedly unambitious and far below that which could be achieved
\ngiven existing opportunities.<\/p>\n
There is a tendency to confuse targets and trends. For
\nexample, if the economy is predicted to grow at x percent, then
\nthe target is also set at x percent. But trends are not targets.
\nGreat national ambitions can only be achieved on the basis of a
\nmarked break from existing trends. Japan in the 1960s, Taiwan,
\nMalaysia, Korea and China set their economic targets well above
\nprevailing trends and worked hard to achieve them.<\/p>\n
The performance of the economy was unimpressive in 2003,
\nparticularly from the perspective of economic growth and job
\ncreation. The only meaningful improvements appeared in financial
\nindicators such as the exchange rate, inflation and interest
\nrates. Despite these advances the financial system is still
\nvulnerable. The Bank BNI and BRI scandals demonstrate that, even
\nafter the massive bank recapitalization totaling Rp 650 trillion,
\nthe conduct and behavior of Indonesian bankers has not changed
\nmuch. Meanwhile, exports increased by only four percent to five
\npercent in 2003, to US$62 billion, still below the figure of $65
\nbillion recorded in 2000.<\/p>\n
At present financial stability is externally driven. First,
\nthe weakening of the U.S. dollar since early 2002 against all of
\nthe major world currencies has led to an apparent strengthening
\nof the rupiah. The rupiah's rise has reduced imported inflation
\nas prices of imports priced in dollars have stabilized, thus
\ncreating space for interest rate reductions. Second, IMF loans to
\naugment foreign exchange reserves give the illusion of financial
\nstability, reducing pressure on policy makers to stimulate
\nexports and domestic efficiency. This is reflected in the slow
\nrate of export growth of 4 percent to 5 percent. Third, low U.S.
\ndollar interest rates have encouraged short-term capital inflows.
\nAmerican interest rates are at their lowest levels since the
\n1950s. Moreover, interest rates in Japan, Singapore, Malaysia,
\nHong Kong and Thailand are extremely low, at present 0.07
\npercent, 0.5 percent, 3 percent, 0.28 percent and 1.31 percent,
\nrespectively.<\/p>\n
Domestic factors contributing to financial stability include
\nthe political consensus among the major parties that Megawati
\nshould not be challenged prior to the 2004 elections. Political
\nstability is of great importance to financial stability because
\nit reduces political risk premiums. Yet this period of relative
\npolitical stability has not been used to accelerate the
\nresolution of the country's economic problems.<\/p>\n
Other domestic factors include the sale of state-owned
\ncorporations and state assets held by IBRA at fire sale prices.
\nThe financial burden from the fire sale of state assets
\nultimately falls on the national budget and the Indonesian
\npeople. Privatization policy has not been oriented toward
\nimproving the performance of state-owned firms and increasing
\nvalue added, but instead has been driven by the desire to
\nmobilize political and personal resources.<\/p>\n
There is a significant difference between the nature of
\ncapital flows to Indonesia and those to China and Thailand.
\nCapital flows to Indonesia over the past year were largely
\ndirected to the acquisition of IBRA assets by former owners of
\nthese assets, and for speculative portfolio investments.
\nSpeculative capital flows have responded to the decrease in
\nsociopolitical risk as the main parties refrained from overt
\nattacks on the government prior to the 2004 election campaign.<\/p>\n
By way of contrast, capital flows to China and Thailand
\nlargely represent long-term investments attracted by the bright
\neconomic prospects of these countries. The main difference,
\ntherefore, relates to the attitudes of overseas investors in
\nIndonesia versus China and Thailand: Until now, investors have
\nviewed Indonesia only from the perspective of risk minimization
\nand not yet as a dynamic, growing economy and economic engine for
\nthe region as a whole.<\/p>\n
Investors' responses will change only when stability is
\nachieved on the basis of internal factors. Indonesia will be more
\nattractive to investors when, for example, capacity utilization
\napproaches 90 percent (at the moment it is about 41 percent),
\nwhen Indonesian goods are more competitive and law enforcement
\nimproves. Strong and stable economic prospects are what draw in
\nlong-term investors.<\/p>\n
Efforts to achieve internally driven stability are more
\ndifficult because they require the formulation of viable
\nstrategies and policies as well as strong political and economic
\nleadership.<\/p>\n
Aside from the apparent financial stability of recent months,
\nhas the economy really improved? What economic indicators are
\nmost appropriate to answer this question? It is often said that
\nif unemployment is on the rise the economy cannot be said to be
\nimproving.<\/p>\n
Across the globe it is considered a huge contradiction to
\nclaim that the economy is performing well when unemployment is
\nincreasing. The level of unemployment is the single-most
\nimportant indicator of economic performance. But then why does
\nthe Indonesian government claim that the economy is recovering as
\nunemployment rises? The reason is that the government's chosen
\nindicators of economic performance are the exchange rate,
\ninflation and the interest rate.<\/p>\n
But these are intermediate rather than ultimate objectives of
\neconomic policy. Moreover, responsibility for stabilizing the
\nexchange rate, the inflation rate and interest rates rests
\nprimarily with Bank Indonesia, according to the Central Bank Law
\n1999. The government plays only a supporting role in these areas.<\/p>\n
The contradiction between financial stability and rising
\ndomestic unemployment over the past two years is explained by the
\nsources of Indonesia's apparent stability. If the origins of
\nfinancial stability were domestic then it is unlikely that
\nimprovements in financial indicators would be accompanied by
\nrising unemployment. For example, if Indonesian export earnings
\nhad surged by more than 20 percent because of efficiency
\nimprovements and greater competitiveness, then the rupiah would
\nstrengthen and employment would increase.<\/p>\n
Internally driven stability is thus more sustainable than
\nexternally driven stability resulting from the weakness of the
\nU.S. dollar and low international interest rates, which have a
\nminimal impact on the labor market. Moreover, at the moment the
\nvolume of dollar transactions is less than $200 million per day,
\nas compared with $4 billion before the crisis. Little wonder that
\nsuch a thin foreign exchange market has such a small impact on
\nthe real side of the economy.<\/p>\n
The current situation can best be described as vulnerable
\nfinancial stability combined with a jobless recovery. Layoffs
\ncontinue unabated and factories are still closing. Even more
\npathetic is the growing number of Indonesian producers reduced to
\nbuying goods from China and relabeling them \"made in Indonesia\"
\nfor both domestic and foreign markets. Indonesia has entered the
\nearly stages of a process of deindustrialization and the economic
\nrecovery must be characterized as partial (only financial),
\nlacking the dynamism required to generate employment.<\/p>\n
According to most economic forecasts we should not expect
\nmomentous change in 2004. We should expect politically driven
\nfluctuations in financial indicators such as the exchange rate,
\nbut there will be little change in the economic fundamentals.<\/p>\n
The upcoming elections will use a more complex system. The
\nlikelihood of error estimated on the basis of field simulations
\nis as high as 10 percent of all votes cast. Uncertainties
\nsurrounding the elections represent an important and dynamic
\nfactor in 2004, and these uncertainties are likely to increase
\nthe volatility of financial indicators.<\/p>\n
In general, however, we should not expect meaningful progress
\nbecause economic policy is only oriented towards stability.
\nStagnation will continue throughout 2004. Based on such
\nconsiderations, economic growth will be about 4 percent.<\/p>\n
Developments in 2003 and forecasts for 2004 suggest that the
\nIndonesian economy is still just \"muddling through\": In other
\nwords, continued stagnation. Economic improvements are partial in
\nthat they are limited to the financial sector. Even these
\nimprovements are very fragile because of the absence of
\nsignificant changes in behavior and conduct in the banking
\nsector.<\/p>\n
Stagnation and deindustrialization have resulted in a jobless
\nrecovery in which layoffs and factory closures continue unabated.
\nIndonesia finds itself at the crossroads in 2004. What happens
\nthis year will determine whether the country continues along the
\ncurrent path of stagnation and decline until 2009. The costs of
\ndoing so will be immense. Unemployment is a time bomb that, if
\nallowed to increase over time, will give rise to huge social,
\neconomic and even political problems.<\/p>\n
But 2004 could also be the starting point of a new period of
\nrevitalization and progress for the Indonesian nation. Indonesia
\nhas the potential to become a prosperous country and to take its
\nrightful place as one of the leading countries of the Asian
\nregion. We can only achieve these ambitions on the basis of
\nbetter and more effective leadership than we now have from the
\n\"pseudo-reform\" regime in power at present.<\/p>\n
Our nation is at the crossroads between stagnation and decline
\nversus reconstruction and progress. We urgently need quality
\nleaders who possess an ambitious, but realizable vision of the
\ncountry's future. Indonesia deserves better leaders.<\/p>\n
The writer is former Coordinating Minister for the Economy.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/ri-economy-continues-to-muddle-through-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }