Seize momentum, ensure change in right direction<\/p>\n
By Mari Pangestu<\/p>\n
SHANGHAI (JP): We will soon enter a new millennium. As the
\nrest of the world debates how to anticipate and respond to new
\ntechnologies and the new economy -- the \"bits\" economy -- we in
\nIndonesia are still facing the basic issue of how to rebuild our
\nbasic economic structure, or the \"bricks\" of our economy. As the
\n20th century approaches its end, we need to take stock of what
\nhas happened, review the challenges and prospects and reflect on
\nthe future.<\/p>\n
Taking Stock: Modest Recovery and Continued Ambivalence.<\/p>\n
Despite the ups and downs faced throughout the year, the good
\nnews is that Indonesia has experienced a modest recovery, one
\nthat began in the latter part of 1999. Growth up to the third
\nquarter of 2000 reached 5 percent per annum and is expected to
\nreach the targeted 4 percent or higher this year.<\/p>\n
Indonesia's recovery has been much slower and at a much more
\nmodest rate than other crisis-hit Asian countries such as
\nThailand, Malaysia and Korea, which have experienced growth rates
\nabove 5 percent.<\/p>\n
The main sources of growth were initially consumption followed
\nby exports. A rebound in consumer demand has occurred since the
\nlast half of 1999 and can be expected after the extent of
\ncontraction experienced in 1998.<\/p>\n
There was also the realization of consumption deferred during
\n1998, especially of consumer durables, and consumers choosing to
\nspend rather than keeping their funds in deposits as the interest
\nrates drastically declined from the high levels in 1998 and the
\nfirst half of 1999.<\/p>\n
Whereas export growth has been partly driven by high oil
\nprices, with oil and gas exports, which still account for close
\nto a quarter of exports, growing at 57 percent per annum by
\nSeptember 2000.<\/p>\n
Non-oil export growth has also been robust at 26 percent per
\nannum by September 2000 and this has been caused by a combination
\nof strong external demand, including recovery in the Asian
\nregion, greater macro and political stability, and
\ncompetitiveness due to the large depreciation of the rupiah.<\/p>\n
Imports have also picked up with the increase in exports and
\nsome initial increase of investment; however, the level of
\ncapital goods imports still remains much below precrisis levels.
\nThe situation has led to a trade surplus for Indonesia and rising
\nforeign exchange reserves.<\/p>\n
Other good news is that higher oil prices have provided the
\nnecessary buffer for now and possibly into next year to finance
\nthe government budget deficit. Progress has also been achieved in
\nthe formal completion of the bank recapitalization program and
\nthe Indonesian Bank Restructuring Agency (IBRA) appears set to
\nmeet its revenue target from asset sales for this year. Recently
\nIBRA sold four major assets worth at least US$300 million.<\/p>\n
Reviewing challenges<\/p>\n
However, the modest recovery is subject to many challenges and
\nthe prospect for continued or higher growth remains very fragile.
\nOne major worry is sustaining the sources of growth. Growth in
\nprivate consumer demand has slowed down throughout 2000 and this
\ntrend is supported by a decline in consumer confidence recorded
\nby recent consumer confidence surveys conducted by the central
\nbank. Whereas, the prospect of non-oil export growth will be
\naffected by the expected soft, or even worse, hard landing of the
\nU.S. economy.<\/p>\n
The increase in production to meet consumer and export demand
\nhas been possible despite a nonfunctioning banking sector and
\ncontinued political uncertainties, because of existing excess
\ncapacity. Firms have been able to fund their working capital
\nneeds by using internally generated funds, especially retained
\nearnings.<\/p>\n
Some exporters and prime domestic companies such as the kretek
\n(clove cigarette) producers have also issued rupiah-denominated
\nbonds to raise funds, and some are still able to borrow abroad.<\/p>\n
Many of the domestic firms taking advantage of increased
\nexport opportunities are also the more medium-sized firms, which
\ndid not experience the debt crisis of the larger conglomerates
\nand they are a new segment of the Indonesian private sector which
\nmust be nurtured.<\/p>\n
There has been little by way of new investments to replace
\nneeded machinery and equipment, to restructure companies, or to
\nexpand existing capacity. Therefore, while businesses appear to
\nbe more resilient to political developments, their growth is and
\nwill be constrained without any new investment inflows and
\nresumption of lending and\/or financing from the financial sector.<\/p>\n
Thus, without resumption of investment, restoration of
\nconsumer confidence and continued robust exports, growth will be
\npositive but continue to be modest. The government assumption is
\nfor growth of 4.5 percent in 2001. The obvious implication of a
\nscenario of low or modest growth is that it will take Indonesia
\nmuch longer to get back to the precrisis per capita level of
\nincomes.<\/p>\n
In other crisis-hit countries, Malaysia and Korea which have
\nexperienced rapid recovery, their real GDP surpassed precrisis
\nlevels by the beginning of 2000. Indonesia's real GDP is still
\ncurrently around 10 percent below precrisis levels, and per
\ncapita income even lower. At a modest rate of recovery of 4
\npercent, the World Bank has estimated that it will only be 2007
\nbefore the real per capita income of precrisis is reached. The
\ncost of slower growth will be borne by the poor, and the
\nunemployed and underemployed.<\/p>\n
Maintaining confidence and macro stability will continue to be
\na challenge for Indonesia. Despite improvements compared to 1998
\nwith the rupiah strengthening to Rp 7000 per U.S. dollar when
\nPresident Abdurrahman Wahid came in as the first democratically
\nelected president in October 1999, and the stock market index
\nrising for a number of quarters, the indicators have fluctuated
\nthroughout 2000 and deteriorated for the last quarter.<\/p>\n
Since August 2000 the rupiah has weakened to around Rp 9,500
\nto the dollar and higher more recently. The stock market index
\nhas declined since mid-year and has hit an all-time low. No doubt
\nthe weakening of the rupiah is partially due to the strengthening
\nof the U.S. dollar and the rise in U.S. interest rates, and the
\nseasonal year-end needs.<\/p>\n
However, it has also been due to the deterioration of
\nconfidence in the government's ability to provide a clear
\ndirection with regard to policy; lack of implementation of rule
\nof the law; delays in reforms; security issues with the spate of
\nbombings and regional unrest; and continued political
\ninterference in major economic issues such as delaying action on
\nlarge debtors.<\/p>\n
Investor confidence is at a low point with concerns about
\nsecurity, political and economic uncertainties, and most
\nimportantly lack of clear direction on investment policy and its
\nimplementation. The latter is illustrated by how the Manulife
\ncase was handled and the change in the terms of Cemex investment
\nin Semen Gresik after nationalist pressures.<\/p>\n
Inflationary pressure has also been rising due to a loose
\nmonetary policy and the depreciation of the rupiah so that
\ninflation can be expected to be about 9 percent to 10 percent for
\nthis year. Monetary policy authorities have to depoliticize
\nmonetary policy and focus on price stability as a target and
\nallowing interest rates to rise if needed. Monetary policy should
\nnot be concerned with considerations of the rising cost of
\nservicing the government debt at the cost of price stability; the
\nissue of servicing the debt is the purview of fiscal policy
\nmanagement.<\/p>\n
Fiscal sustainability remains looming large on the horizon.
\nWhile high oil prices have provided the buffer in the fiscal
\nsituation at least for this year and possibly into next year, in
\nthe near future fiscal sustainability is still a major issue
\nfacing Indonesia. The expenditure side should be a great source
\nof concern given the cost of servicing interest payments and
\nprincipal (which begins in 2003 and 2004) on government bonds
\nissued for bank restructuring; the unpredictable costs of
\ndecentralization; and the vulnerability of the fiscal situation
\nto exchange rate and interest rate changes.<\/p>\n
The way out of the fiscal situation is to \"grow\" out of the
\ndebt. That is, growth and recovery of confidence is important for
\ntax revenue targets to be met, for a secondary market to develop
\nin government bonds, better prices and prospects for asset
\nrecovery and privatization proceeds. Again the cost of slow
\nrecovery will be that the fiscal burden will be borne over a much
\nlonger period by taxpayers and with less expenditures being
\nallocated to social needs.<\/p>\n
The banking restructuring program is still fraught with
\nproblems despite the formal completion of the recapitalization
\nprogram. Given current economic uncertainties and the need to
\nmaintain capital adequacy, banks are still channeling funds into
\nBank Indonesia promissory notes (SBI) and thus on the asset side
\nbanks are holding high levels of SBI and government bonds, and
\nsubsequently they have experienced low spreads and earnings.<\/p>\n
The growth of new loans is limited since recapitalization has
\nbeen through bond issue and not through cash injection. There are
\nalso limitations on selling the bonds in the secondary market.
\nDespite the restructuring on the loan side, there are also still
\nnonperforming loans, which could rise further with slow economic
\nrecovery and slow progress on corporate debt restructuring.<\/p>\n
It would appear that without an increase in capital, it would
\nbe difficult for banks to increase their lending. Furthermore,
\neven if banks wanted to increase lending, there are a limited
\nnumber of viable corporations without successful restructuring of
\ncorporate debt. The problems related to the lack of \"stick\" to
\npush recalcitrant debtors such as ineffectiveness of the
\nbankruptcy procedures, weak legal enforcement and political
\ninterference with the influential groups are still with us,
\ndespite attempts to make progress.<\/p>\n
Therefore, while it appears we have moved ahead compared with
\nthe situation at the height of the crisis -- most would agree we
\nhave still some way to go. This government continues to send
\nambivalent signals and despite hopes for change under a reform-
\nminded government, blatant cases of political interference in
\neconomic decisions also persist.<\/p>\n
The most formidable challenge remains for the government to
\nrestore confidence by providing a clear direction in policy and,
\nmost importantly, implementing the policy.<\/p>\n
Without a clear signal that necessary actions will be taken
\nsuch as addressing corruption, taking debtors to task, asset
\nrecovery and privatization, completing bank restructuring and
\nupholding rule of law, it is difficult to see a sustained
\nrestoration of confidence and that the much needed investments
\nwill flow back.<\/p>\n
The Future<\/p>\n
The statement above sounds familiar. It is not dissimilar to
\nones made under the Habibie government. The hopeful statements
\nmade at the end of last year and into the first few months of
\n2000 have gone; the tune has increasingly changed to the familiar
\none we concluded on above.<\/p>\n
It is distressing that we are still faced with many of the
\nsame problems and challenges, indicating the slow progress. The
\nmain problems as noted above, for sustained economic recovery
\nremains that growth is important for all aspects of the recovery
\nprogram, ranging from bank restructuring, fiscal sustainability
\nand poverty reduction.<\/p>\n
The cost of slower growth is all too evident, especially for
\nthe poor and vulnerable. Furthermore, effectiveness of one part
\nof the recovery program hinges on progress in other parts of the
\nrecovery program. For instance, corporate restructuring is
\nimportant for bank restructuring and vice versa and so on. This
\nof course emphasizes the importance of coordination and a
\ncomprehensive approach, which has sorely been lacking.<\/p>\n
The lack of progress as we all know is not for lack of knowing
\nwhat to do. The litany of recommendations of how to move forward
\nis also by now too familiar: speed up reforms; accelerate the
\nsale of assets and divestment of government ownership of banks
\nand corporations; strengthen institutions; good governance;
\ntransparency and address corruption; rule of law and so the list
\ngoes.<\/p>\n
Sadly we also come to the same old conclusion. Lack of
\nimplementation is still the crucial bottleneck and we should not
\nbe so naive as to ignore the political realities; inadequacies of
\nthe political, social and legal institutions of our new democracy
\nto address many divisive issues that tend to slow down or even
\nblock implementation; and that the real changes can only happen
\nin the longer term.<\/p>\n
Given these considerations, economic recovery and the
\nrequisite policy and institutional changes to sustain recovery is
\nmost likely to progress at its current slow and muddling pace.
\nSix months back most would still agree that this was acceptable.
\nThe solution was not to revert back to a strong government or
\nperson scenario under the pretext of restoring confidence and
\norder.<\/p>\n
Most of us still felt that the muddling through solution was
\nstill the one that would safeguard democracy, and to some extent
\nworth the social and economic costs once one took a long-term
\nview of a better outcome in the future. The hope is that
\neventually, the present leadership and government shape up and
\nshould be pressured to do so, and if still found wanting, then we
\nhave the option to change the leadership and government.<\/p>\n
At present, it is unclear how many still support the muddling
\nthrough scenario. Furthermore, the situation has become more
\ncomplicated than anticipated. While we have the ability to change
\nthe leadership and government when they are found wanting, we are
\nunfortunately still experimenting with the process so that
\nwhatever happens it seems that we are in for a rough ride --
\nwhich can be expected to last some time. Again, this is not a new
\nconclusion, yet it unfortunately still holds.<\/p>\n
How should we then reflect on the future? In the spirit of the
\nnew millennium we should not throw up our hands in despair. I do
\nnot want to end on a gloomy note, so let me reflect on some
\npriorities on the economic front of what can then be done in the
\nmeantime, to at least prevent a worsening of the situation and
\nprepare for the time when change and action can really begin to
\nbe meaningful. I would prioritize the following.<\/p>\n
First focus on what is working in the economy and ensure that
\nthey can continue to function and facilitate their growth. This
\ncomprises the less indebted small- and medium-sized corporations,
\nmany of which are involved in exporting or producing basic
\nconsumer goods, which have successfully substituted for the
\nunaffordable imports.<\/p>\n
For example, the steps taken ranges from ensuring minimum
\ngovernment intervention, facilitating removal of bottlenecks
\nwherever they are, such as access to credit and administrative or
\nother barriers associated with exports or the functioning of
\ntheir business.<\/p>\n
The natural resources sector should also be safeguarded to
\nyield much needed government and export revenues, and national
\npolicies, investment and the decentralization process must be
\nmutually supportive to prevent any serious disruption to this
\nsector.<\/p>\n
Second, the non-oil export boom currently experienced should
\nnot be seen as sustainable. This is not just an issue of the need
\nfor new investment. The export boom currently experienced is a
\n\"catch-up\" due to the improved competitiveness provided by the
\nreal exchange rate depreciation. The high growth rates will come
\ndown and more normal growth rates will resume.<\/p>\n
More importantly, the issues of competitiveness of exports
\nfaced precrisis will soon emerge again, such as moving out of the
\nunskilled labor intensive exports to more semi skilled and human
\ncapital intensive exports; the need to have a competitive supply
\nof inputs and increase added value; and to be part of the
\nregional production networks which have come about and continue
\nto develop.<\/p>\n
To be competitive in exports, countries need to be flexible in
\nproduct and factor markets to continuously respond and change to
\nexternal and internal changes. This will involve the usual
\npolicies of openness to trade and foreign investment, flexible
\nfactor markets, efficient supporting services and infrastructure;
\nbut increasingly it must involve human capital development and
\nformation in anticipation of changing comparative advantage and
\ntechnology.<\/p>\n
The crucial policy is education policy in the widest sense;
\nsomething that has not been integrated well with our development
\npolicy and which has focused too much on universal primary
\neducation. The policy has served the first stage of unskilled
\nlabor intensive exports well; but it will not take us to the next
\nstage without further skill development of our labor force.<\/p>\n
Enhancing human capital is important not only for export
\ncompetitiveness, but is also crucial to address poverty and
\nequity by creating assets for people to be employable and
\nupwardly mobile. Since education and training impacts on the
\nlabor force with a lag, we have to begin to focus now on an
\neducation policy with a long-term vision which focuses not just
\non quantity but on quality, creativity, development of specific
\nskills and anticipates future needs.<\/p>\n
Third, rebuild national consensus with an open and informed
\ndebate on the contentious issues which continue to plague major
\nresolutions of our economic problems, especially with regard to
\nasset sales, privatization and bank restructuring. The necessity
\nto go toward an open market system, with the requisite laws,
\nregulations and institutions to ensure fair competition and
\nprotection of consumers and so on is explicit in the
\nInternational Monetary Fund program which the government has
\nsigned on to.<\/p>\n
However, we know from the slow progress on economic
\nrestructuring, the polemic which has developed, and the more
\ndispersed decision-making process due to decentralization, that a
\nnumber of basic issues have to be revisited and reformulated.<\/p>\n
These include issues such as the role of the state versus the
\nprivate sector in general as well as in particular sectors such
\nas banking, natural resources and public goods. Since the state
\nowns around 80 percent of the banking sector and private sector
\ncorporations through the debts of bank owners, this is not a
\ntrivial debate.<\/p>\n
Furthermore, the debate is not confined to the issue of state
\nversus private ownership, but also how much the state should
\nintervene in industrial structure or restructuring as the case
\nmay be. There is also a revival of nationalism and the role of
\nforeign investment in the economy. Finally there is the issue of
\nthe structure of ownership within the domestic private sector,
\nwhether it is between big corporations versus medium- and small-
\nsized corporations or between ethnic groups.<\/p>\n
One cannot and should not easily dismiss the polemic as
\nideological baggage, perceptions not based on fact and
\npolitically motivated to respond to popular pressure. It is
\nimperative that the issues are addressed in a sensible and open
\nway; otherwise in fact they will be politicized or utilized to
\nsuit different needs.<\/p>\n
It is easy to stir up nationalist fervor to divert attention
\nfrom our real problems, but it really does not get us anywhere.
\nThere must be an open and sensible debate involving all the
\nstakeholders and a national consensus on these issues forged.<\/p>\n
At the end of the day this may mean slower progress on some
\nareas of reforms, and it could also mean special policies will be
\nneeded for specific groups or areas in the economy which either
\nneed to be compensated for change or boosted to balance
\ninequities which are destabilizing.<\/p>\n
Special policies are acceptable as long as we learn from our
\npast mistakes. That is they should be limited to specific
\ntargeted groups, policies are designed to meet the target group
\nas directly as possible, are implemented in a transparent and
\nobjective way, subject to good governance, supported by capable
\ninstitutions and are phased out over a clear time period.<\/p>\n
At the end of the day, the most important thing to do is
\nperhaps not to be too preoccupied with speed, but to keep the
\nmomentum of change going and ensure that it at least moves in the
\nright direction by focusing on a number of priorities. It will
\nthen still be up to all of us to ensure that we do not lose this
\nfocus.<\/p>\n
The writer is an economist at the Jakarta-based Centre for
\nStrategic and International Studies.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/seize-momentum-ensure-change-in-right-direction-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}