The economy: Between muddling through and a strong recovery<\/p>\n
By Vincent Lingga,
\nSenior Editor<\/p>\n
Optimists are looking forward to a more democratic
\nIndonesia built on a stronger, better local autonomy five years
\ndown the road. In their hopeful vision, provinces will compete
\nwith each other to woo investment, with new businesses creating
\njobs which will pay wages to generate consumer demand and propel
\nthe production machineries of goods and services.
\nThis process will develop new major economic centers in the outer
\nislands, notably Sumatra, Kalimantan, Sulawesi, Riau archipelago
\nand Papua, and provide local administrations with broader and
\nbigger sources of tax revenues to enable them to expand and
\nimprove public services and public welfare as well.
\nAre these optimists simply dreaming?
\nThe pessimists think so: Their various versions of doomsday
\nscenarios for the years ahead have been shaped by the daily
\nturmoil of events during the learning process of democracy and
\nlocal autonomy.
\nThey are nervous about the first experiment with the direct
\nelection of the president and vice president next year, seemingly
\nhopeless about any significant improvement in the quality of
\ngovernance and national leadership with the new crop of political
\nleaders emerging from the 2004 elections likely to be as bad as
\ntheir predecessors.
\nAn air of pessimism seems unavoidable in view of the steady
\nincrease in unemployment and under-employment that is now
\nestimated at more than 40 million. Even though the incidence of
\nabsolute poverty has declined to about 15 percent from as high as
\n27 percent in 2002, the almost 50 percent of the population
\nhovering on the verge of poverty are still highly vulnerable to
\nthe slightest decline in the economy.
\nWorse still, the political transition and turmoil have left many
\nfeeling uncertain about the future direction of the nation,
\nespecially as law enforcement against corruption is perceived to
\nbe extremely lacking.
\nBut, given the problems inherited from the previous regime and
\nthe achievements made over the past years, the best course for
\nassessing the economic outlook within three to five years is
\nneither inordinate pessimism nor blind optimism, but cautious
\nconfidence.
\nIt may be cold comfort for the pessimists to be reminded of how
\nthe nation has often flirted with disasters over the past five
\nturbulent years, only for common sense to prevail.
\nMacroeconomic stability has been strengthening with a stabilizing
\nrupiah exchange rate (although still losing more than 60 percent
\nof its 1997 value), inflation under control, interest rates
\nfalling steadily and the government's debt ratio to gross
\ndomestic product down from more than 100 percent to 70 percent at
\npresent.
\nThese gains are no reason for undue complacence as the overall
\ncondition is still fragile because many structural reforms --
\nvital to fuel sustainable, strong growth -- have yet to be
\nimplemented.
\nThere are several major factors that will determine whether the
\neconomy will continue to muddle through at annual growth of 3-4
\npercent or will be able to expand at the pre-1997 crisis level of
\n6-7 percent.
\nThe first risk is related to the government's ability to keep up
\nthe pace of its reform programs this year and to resist political
\npressures for populist, yet misguided, policies in the run up to
\nthe 2004 election.
\nFailure in this area would erode the little confidence the
\ninternational market still has in the economy and undermine the
\nfoundations of a sustainable recovery.
\nBleaker still would be the prospects if opponents of the
\nInternational Monetary Fund-supervised reform program win their
\ncampaign against any extension of the IMF facility after its
\nexpiration later this year, while the government possesses no
\ncredibility nor discipline to push through structural reforms.
\n Even now under the tight supervision of the IMF and the World
\nBank, in their capacity as the opinion leaders among Indonesia's
\ninternational creditors, the reform drive has often floundered
\nunder resistance from entrenched vested interests.
\n Macroeconomic stability, though very important, is not by itself
\nsufficient to fuel robust recovery. A long agenda of structural
\nreforms has yet to be implemented to make the economy more
\nefficient and competitive.
\nThe formidable challenge is that state institutions have yet to
\nbuild up adequate competence and credibility to facilitate a
\nself-sustaining reform drive, while institution-capacity building
\nis a long-time process as improvement is incremental at best.
\nThen there is the sovereign risk related to the government's
\ncapability in reducing the service burdens of its almost Rp 650
\ntrillion (US$72 billion) in domestic debts through refinancing
\nwith the placement of treasury bonds, debt buy-back or bond
\nreprofiling.
\nAll these debt-reduction measures will depend on the strength of
\nthe macroeconomic condition, which in turn is highly influenced
\nby the pace of structural reforms and fiscal consolidation.
\nThe government will risk derailing its fiscal consolidation if
\nits reform-agreement with the IMF is not extended after this year
\nbecause the rescheduling of foreign debts to sovereign creditors
\nwill have to be negotiated on a bilateral basis outside the
\nauspices of the Paris Club.
\nThe quality of the 2004 elections of the president and vice
\npresident and members of the House and regional assemblies will
\nalso make or break market confidence in the economy.
\nIf the polls are seen as fair and credible the democratic
\nexercise will reinvigorate investor confidence. But the economy
\nwill continue to plod along if the quality of the national
\nleadership in the government and legislative branch remains as
\nmediocre as it is now.
\nObviously, the country cannot afford to continue the low growth
\n(below 4 percent) course as it did in 2001 and 2002 without
\nrisking huge unemployment exploding into massive social unrest
\nand the incidence of poverty rising at the expense of political
\nstability.
\nAnd muddling through will remain the economy's course if growth
\ncontinues to depend mainly on domestic consumer demand, now
\nincreasingly losing steam.
\nInvestment has to be reinvigorated to generate higher growth.
\nAnalysts estimate investment should increase from around 18
\npercent of GDP now to at least 30 percent to generate 6 percent
\ngrowth.
\nInvestment, especially foreign, is unlikely to materialize unless
\npolitical stability strengthens and legal and regulatory
\ncertainty improves.
\nInvestors fully realize that many of the structural reforms,
\nespecially those in the judicial sector and civil service (good
\ngovernance), will take a long time. They simply want to see a
\nfirm commitment to reform, supported by concrete and consistent
\nmeasures to allow for a reasonable calculation of business risks.
\nThe government is actually aware of the importance of restoring
\ninvestor confidence, as can be noted from the high priority that
\nhas been given to areas of greatest concern to businesses:
\nimproving tax and customs service, creating more conducive labor-
\nmarket policies, minimizing the excesses of decentralization,
\nspeeding up asset disposal and divestment of nationalized banks.
\nAchievements in these areas have not only been very slow but also
\nhave often been reversed by policy inconsistencies caused in part
\nby adversarial relations between the government and the House of
\nRepresentatives.
\nProgress in these reforms could be quicker and more consistent to
\naccelerate the process of regaining investor confidence, provided
\nthe government demonstrates a stronger and more effective
\nleadership, and the government and the legislative branch are
\nunited in a stronger determination to push ahead with the reform
\nagenda.
\nBut it is almost impossible to create these preconditions in the
\nrun up to the 2004 election. President Megawati Soekarnoputri
\nseems to be preoccupied with her political ambition to win the
\n2004 presidential election and the House seems too divided by
\nfactional interests.
\n Nevertheless, politicians would be well advised to realize that
\nthey share common interests in restoring strong growth. Whoever
\ntakes over the government must be aware that their days in power
\nwill be numbered if adverse economic conditions persist.<\/p>\n
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