Structural reform lagging<\/p>\n
Indonesia has come a long way in reforming its economy, which has
\nbeen battered since 1998 by the multidimensional crisis amid the
\ntransition from a centralized, authoritarian government to a
\ndecentralized, more democratic one.<\/p>\n
A more consistent implementation of reforms has been
\nstrengthening macroeconomic stability, as can be seen from the
\nsteady decline in both interest rates and inflation. Fiscal
\nconsolidation is continuing and the ratio of government debts to
\ngross domestic product was down to as low as 72 percent from more
\nthan 105 percent in 2001, plus the rupiah has kept its strength
\nagainst the American dollar.<\/p>\n
The economy has reduced its vulnerability to both domestic and
\nexternal shocks, such as the terrorist bombings in Bali last
\nOctober and the recent war in Iraq. Banks have been decreasing
\ntheir nonperforming loans, while financial restructuring has cut
\ndown the gearing ratios in business enterprises.<\/p>\n
Unfortunately, though, there are few signs that the stronger
\nmacroeconomic stability has been fueling higher growth. In fact,
\ngrowth this year is widely predicted to be less than 4 percent,
\nas it was in 2001 and 2002. This is way below the minimum 6
\npercent expansion needed to absorb the estimated 2.5 million new
\njob seekers entering the labor market annually, let alone the
\nmillions of others who lost their jobs at the height of the
\ncrisis in 1998 and 1999.<\/p>\n
Moreover, most people do not have strong confidence in the
\nlong-term outlook of the economy and are concerned that the
\ncurrent stability is still fragile. Just witness how almost 50
\npercent of the Rp 833.4 trillion (US$93.6 billion) in private
\nsavings in the banking system as of March consisted of time
\ndeposits of one- to three-month duration, and almost all of the
\ncapital that has begun to flow in was portfolio investment that
\ncould immediately fly out simply at the first hint of any
\ntrouble.<\/p>\n
What fundamentally went wrong?<\/p>\n
Analysts and businesspeople blame the persistently low growth
\non the long backlog in structural and legal reforms that has kept
\nthe environment inimical to new investment, while private
\nconsumption, which has been the main locomotive of the economy
\nsince 2000, has been losing steam due to lack of savings and
\nmounting consumer debts.<\/p>\n
Most structural reform has largely been behind schedule due to
\na combination of strong resistance from vested interest groups
\nwithin the government, poor leadership within the executive
\nbranch, adversary relations between the executive and legislative
\nbranches and inadequate institutional capacity to execute reform.<\/p>\n
Most damaging is the miserable failure in corporate
\nrestructuring due mainly to the bombed-out system of bankruptcy
\nproceedings under the prevailing Bankruptcy Law.<\/p>\n
Unreliable bankruptcy proceedings have distorted market
\ncompetition as errant firms that have simply stopped servicing
\ntheir debts have an advantage over those that painstakingly
\nendeavor to service their debts.<\/p>\n
Yet more damaging to the long-term foundation of sound
\neconomic growth is the loss of opportunity created by the
\neconomic crisis to clean up the corporate sector from the
\ninefficient businesses that in the past thrived mostly on the
\nbenefits of corruption or collusion and nepotism.<\/p>\n
Consequently, most banks remain highly averse to new lending,
\nwhich is badly needed to fuel a higher pace of economic
\nactivities.<\/p>\n
The political environment for making decisions about the
\nremaining reform measures has become increasingly tough as the
\nHouse of Representatives has always insisted on delving into the
\nnitty-gritty of every executive action. This is actually expected
\nin a democratic and decentralized Indonesia. Gone are the days
\nwhen policies could simply be decreed and implemented under the
\nsole command of the president. Decision- and policy-making should
\nnow be based on a national political consensus. That is what
\ndemocracy is all about.<\/p>\n
The problem though is that a balancing act is badly needed to
\naccelerate the pace of structural measures to stimulate
\ninvestment, because the nation cannot afford a few more years of
\nlow growth without risking the huge unemployment figure exploding
\ninto social and political instability and the incidence of
\npoverty rising again.<\/p>\n
The next 18 months will be even more challenging insofar as
\ngovernment discipline and leadership to implement structural
\nreform are concerned.<\/p>\n
First, because most of the remaining reform measures are much
\nmore difficult as they involve institutional-capacity building in
\ntaxation, customs service, the legal system, local autonomy and
\nother components of good governance that all require the
\ntransformation of old minds, culture, work habits.<\/p>\n
Second, because the government will no longer have a reward-
\npunishment mechanism for its reform program with the scheduled
\ntermination of the International Monetary Fund extended facility
\nlater this year.<\/p>\n
Third, because during the 2004 election year, both the
\nexecutive and legislative branches will tend to favor populist
\nmeasures at the expense of the long-term good of the economy.
\nIt is therefore most imperative for both the executive and
\nlegislative branches of government to realize that without
\nsteady, significant progress in structural reform the economy
\nwill never return to the path of high growth, but will instead
\nbecome highly vulnerable to a new bout of crisis.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/structural-reform-lagging-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}