Slight economic growth spurt faces head wind<\/p>\n
Muhammad Chatib Basri<\/p>\n
I was sitting in a small coffee shop in Jakarta when a friend
\nof mine, a foreign economist, asked me how we reconcile the good
\nmacroeconomic indicators on the one hand with various structural
\nproblems in trade and industry on the other.<\/p>\n
This is not an easy question. Over the last couple of years,
\nwe have been haunted by the decoupling of macroeconomic and
\nindustry performance in trade and manufacturing.<\/p>\n
Look at the macroeconomic performance: The economy grew by 3.7
\npercent from the first to the third quarter of 2003; the rupiah
\nhas stabilized at around Rp 8,500; inflation has been
\ndecelerating and it is predicted to hit below 5 percent by the
\nend of 2003.<\/p>\n
Parallel with this, the Bank Indonesia interest rate continues
\nto decline. In addition, the debt ratio to gross domestic product
\n(GDP) is steadily declining and the fiscal deficit shows a
\nsimilar trend as well.<\/p>\n
I think even the most cynical observer of the Indonesian
\neconomy would admit that macroeconomic performance has shown
\nimprovement. In spite of the global conditions that have been
\naffected by the threat of terrorism, the U.S. invasion of Iraq
\nand health issues such as SARS, most of Indonesia's macroeconomic
\nindicators improved during 2003.<\/p>\n
However, in contrast, little has been achieved in the trade
\nand investment sector, particularly in manufacturing. Trade and
\ninvestment are the main medium-term issues for the Indonesian
\neconomy.<\/p>\n
Although there has been improvement in the non-oil and gas
\nexport growth -- 3.4 percent from January to October -- compared
\nto 2002, it is still modest and far from the pre-crisis growth.
\nIt is worth noting that despite various concerns about growing
\nimport competition from China, Indonesia's growth in non-oil
\nexports to China is the highest among other destination
\ncountries.<\/p>\n
What is the economic prospect for 2004? Economic growth
\ncontinues to rely largely on consumption, while investment is
\nstill lagging and exports remains modest. Food consumption is
\nexpected to continue to increase in 2004 due to positive impacts
\nof the 2004 elections. In the last elections in 1999, strong
\nconsumption growth was evident, of which food consumption growth
\nreached around 5 percent.<\/p>\n
While economic growth is expected to accelerate slightly next
\nyear, it does not bode much progress in reducing unemployment,
\npoverty and social conflicts in the near future. Investments and
\nexports remain slow, showing that serious problems persist in the
\nmanufacturing sector.<\/p>\n
The non-oil manufacturing sector only grew 2.3 percent in the
\nfirst three quarters. An annual survey conducted by the Central
\nStatistics Agency (BPS) illustrates the poor condition of the
\nmanufacturing sector, particularly in textile, garments and
\nfootwear. Meanwhile, the percentage of manufacturing firms that
\ndownsized and closed down continued to increase from 2000 to
\n2002. As a result, the job absorption rate in these sectors also
\ndeclined.<\/p>\n
On the export front, Indonesia seems to have been shifting
\ninto resource-intensive products since 1995, whereas the
\ncompetitiveness of manufacturing is in decline. A study carried
\nout by Basri and Syahrial from the School of Economics at the
\nUniversity of Indonesia shows that from 1985 to 1995, most
\nmanufacturing products experienced a rise in competitiveness.<\/p>\n
Nevertheless, from 1995 to 2001, the competitiveness of some
\nof these products -- including plywood, textiles, footwear and
\ngarments -- showed a declining trend. These findings suggest that
\nexport growth was mainly driven by the supply side, or
\ncompetitiveness, rather than the demand side from 1985 to 1995,
\nbut not from 1995 to 2001.<\/p>\n
To make things worse, the declining competitiveness of
\nIndonesian exports is combined with creeping protectionism.
\nProtectionism is not the answer to the hindrances to making
\nprogress at the multilateral level, such as the World Trade
\nOrganization, and does not provide a sustainable basis for
\ngrowth.<\/p>\n
While there is no conclusive relationship between trade
\nopenness and growth in many countries, there is also no evidence
\nthat trade protection is systematically associated with high
\neconomic growth. This is particularly true for Indonesia. A
\nprotectionist policy will undermine the current open trade regime
\nthat has served the country so well in the past. The continuing
\nsigns of increasing protectionism imply that the government has
\ntried to overcome inefficiency on the supply side through trade
\npolicy.<\/p>\n
But the government does not address the problem of lagging
\nproductivity through increasing efficiency. Instead, it tends to
\ndefend inefficient industries by increasing protectionism, thus
\ncoming out with various ad hoc trade policies.<\/p>\n
Since 2001, the protectionist trend has continued to increase,
\nas evident in the increase in tariffs on wheat flour and trade
\nregulations, or tata niaga, on textiles, steel, sugar and clove.<\/p>\n
More in-depth observation shows that the negative growth of
\ninvestment was mainly caused by foreign events, whereas domestic
\ninvestment growth remained positive.<\/p>\n
One of the possible explanations as to why domestic investment
\nand foreign investment recorded inverse growth is the
\nappreciation of the rupiah, which caused imported capital goods
\nto become more expensive and led foreign investment to decline.<\/p>\n
It is true that there is a trend of capital inflow as
\nreflected by the strengthening of the rupiah, but it is limited
\nto portfolio investment. As a result, short-term capital inflow
\ndoes not have significant impact on investment in the real
\nsector.<\/p>\n
In fact, the government should be aware of the possibility of
\nreverse capital flow when there is an economic and\/or political
\nshock. It is worth noting, however, that thus far the government
\nhas been able to maintain political stability, and the currency
\nand capital market is becoming less sensitive to political issues
\n-- proven in the limited impact of the Bali blast and Marriott
\nbombing on the exchange rate and stock market.<\/p>\n
Looking at the severity of the economic crisis and the
\nshortcomings in institutional reform, immediate recovery is not
\nto be expected in the short term. In addition, other factors,
\nsuch as political uncertainty, have also hampered economic
\nrecovery during the last five years.<\/p>\n
The investment climate remains bleak due to various labor and
\ninstitutional problems. Looking at government performance and the
\nobstacles faced in implementing good governance, it certainly is
\ndifficult to expect that the climate will improve soon.<\/p>\n
The implication, therefore, is that foreign investment will
\nnot return unless significant reforms are made in politics as
\nwell as the judiciary. Coupled with business uncertainty, labor
\nproblems and local taxes, these factors will influence economic
\ngrowth during 2004. The University of Indonesia's School of
\nEconomics predicts that the economy will grow by an average 5
\npercent per annum until 2007. Under such conditions, the road to
\neconomic recovery is still long and bumpy, although it is not
\nunpromising.<\/p>",
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