The good news and the major economic risks<\/p>\n
Mark Baird, World Bank, Country Director for Indonesia, Jakarta<\/p>\n
At the heart of the structural agenda is restoring the
\nintegrity and credibility of public institutions, especially in
\nthe civil service and justice sector. Problems of corruption,
\ncollusion and nepotism are now much more visible. But
\nimprovements in accountability have not kept pace.<\/p>\n
This credibility gap between transparency and accountability
\ngenerates much frustration. Some would like to go back to the
\ngood old days -- when you knew who to pay, with well defined
\ncosts and benefits. But this is inconsistent with the new
\ndemocratic ideals, and incompatible with the demands of a more
\nopen and competitive global economy.<\/p>\n
Indonesia will have to reform its public institutions -- to
\nserve its people and to improve the investment climate.<\/p>\n
I would highlight five items for the coming years:<\/p>\n
o Improve tax and customs administration. The government needs
\nto raise revenues to finance its budget, in a way that doesn't
\ndistort or deter investment decisions. The recent establishment
\nof a large taxpayer office in Jakarta is a promising start.<\/p>\n
o Develop balanced labor market policies. Private investors
\ncomplain about the negative impact of recent sharp increases in
\nminimum wages, generous severance packages for workers, and
\ngrowing labor disputes. To some extent, these trends reflect the
\nemerging power of labor within a more open and society.<\/p>\n
The challenge will be to find ways to balance workers' rights
\nand investor interests, while the institutions for arbitration
\nand settlement of disputes are being developed. No one gains when
\nfactories shut down and investment moves to other countries.<\/p>\n
o Avoid excesses of decentralization. It has not led to the
\nbreakdown in public services. But it has created added
\nuncertainties and risks for private investors (in the mining
\nsector, for example). New taxes and regulations are adding to the
\ncosts of business and, in some cases, restricting the free
\nmovement of goods around the country.<\/p>\n
Local government demands for ownership and management control
\nof enterprises are often at odds with national policies (and
\ncommon sense). The central government has the authority to step
\nin and nullify conflicting policies and illegal rulings by local
\ngovernments. This authority should be exercised more forcefully.<\/p>\n
o Push ahead with IBRA asset sales and privatization. These
\nare important to finance the budget deficit and to put productive
\nassets back into the private sector. Because of the crisis,
\nIndonesia has one of the world's largest public sector. In some
\nareas, this may be justified.<\/p>\n
But there is no justification for keeping many manufacturing
\nfirms, banks, hotels and shops under public control. Progress on
\nIBRA asset sales is encouraging. But privatization of state owned
\nenterprises continues to be very slow. A return to the masterplan
\nof several years ago could revitalize privatization.<\/p>\n
o Improve the regulatory framework for investment. Substantial
\ninvestment in infrastructure such as power and telecommunications
\nwill be needed over the next few years. However, the scope for
\npublic investment is limited.<\/p>\n
Efforts to attract private investment paid too little
\nattention to sound market structures and regulatory arrangements;
\nmany of these projects had to be shelved or renegotiated. This
\ncontributed to the drying up of investment flows. Progress on
\nthese policy and regulatory issues would help attract the private
\ninvestment needed to support infrastructure development and
\nstronger economic growth in the future.<\/p>\n
With progress in these areas, macroeconomic stability and a
\ncredible start on institutional reforms, Indonesia can attract
\nthe investment needed to sustain growth rates of at least 5
\npercent to 6 percent per annum. This would be good to reduce
\ndebt, create jobs and lift people out of poverty more quickly.<\/p>\n
But what if this doesn't happen? Will Indonesia continue to
\nmuddle through at 3 percent to 4 percent growth? This is
\npossible, provided the macroeconomic situation stays under
\ncontrol. But this might not happen, as pressures to stimulate the
\neconomy build up before the election. I don't expect a blow-out
\nin budget spending. But I do fear growing pressures for more
\ntrade protection and less privatization.<\/p>\n
Such populist measures are likely to further erode investor
\nconfidence. Hence the importance of pushing the reform agenda, so
\nthat policies can be locked in and results achieved; before the
\npolitical pressures become too great.<\/p>\n
(Meanwhile) at the World Bank we have had to confront our own
\nlegacy problems, while trying to readjust to the rapidly changing
\nand uncertain realities. Our new Country Assistance Strategy
\n(CAS), released in early 2001, is based on the assumption that
\nIndonesia will slowly recover, with macroeconomic stability but
\nhalting progress on economic reforms. But just because we were
\nright, doesn't mean we're satisfied.<\/p>\n
We have tried to keep the reform agenda before the government
\nand the public, working closely with the IMF on budget and
\nbanking issues, while stressing on more basic structural and
\nlegal reforms. We have also continued to open up to public
\nscrutiny. Much of our policy advice is on our website, along with
\nthe proceedings of the Consultative Group for Indonesia.<\/p>\n
What we haven't done is provide a lot of financial assistance
\nover this period. New commitments from the Bank have averaged
\nonly $310 million per annum over the past three years -- less
\nthan a quarter of the levels of the previous decade. More than
\none third of this new assistance has been on highly concessional
\nIDA (International Development Association) terms, mostly used to
\nfinance social services and basic infrastructure for the poor.<\/p>\n
This lending program is consistent with the base case program
\nlaid out in our CAS -- and Indonesia's capacity to service debt.
\nWe could do more, if there is more rapid progress on improving
\npublic resource management and developing a new poverty reduction
\nstrategy. Developments are encouraging. But the government will
\nhave to decide how much it wants to borrow -- taking into account
\ndebt levels, the cost of funds from alternative sources, and the
\nneed to maintain basic expenditures on social services and anti-
\npoverty programs.<\/p>\n
Our biggest challenge over the past three years has been
\ncorruption. Having learnt that we cannot isolate projects
\nfinanced by the World Bank from systemic corruption, we have
\nconcentrated our anti-corruption efforts on working with the
\ngovernment to put in place better procurement and financial
\nmanagement systems.<\/p>\n
However, we have also stepped up efforts to improve the design
\nand supervision of our projects. Complaints about corruption are
\nnow investigated by experts from our Institutional Integrity
\nDepartment in Washington. Firms proven to have participated in
\ncorrupt practices will be barred from future contracts financed
\nby the World Bank.<\/p>\n
We have also started to be more pro-active at looking for
\ncorruption in Bank-financed projects through our own supervision
\nefforts. The results of the first review, on the Sulawesi Urban
\nDevelopment Project, are now available on our website. The sample
\nof contracts was small, yet we found compelling evidence of
\ncollusion among bidders and inadequate project oversight.<\/p>\n
Our Institutional Integrity Department has launched
\ninvestigations and the government has indicated that it will ask
\nus to cancel the balance of unused funds. We have also agreed to
\nprepare a joint action plan to address these problems -- before
\nwe move ahead with any new lending in the urban sector.<\/p>\n
The biggest challenge here will be decentralization. Past
\nproblems will be even more difficult to manage when working with
\nmore than 350 local governments. But by channeling our money to
\nreform-minded local governments, we can help reinforce commitment
\nto good economic policies, the proper use of public funds and
\npoverty reduction.<\/p>\n
Ultimately, this is how most aid money should be allocated.
\nThe central government has to use its general grants (DAU) to
\ngive every region the means to provide minimum public services --
\nwhich means reducing the large fiscal inequities in Indonesia.<\/p>\n
But the center can use its special grants (DAK) in much the
\nsame performance-based way as aid should be allocated. In this
\nway, we can help build a better environment for private
\ninvestment, more responsive and accountable local governments,
\nand more effective anti-poverty programs.<\/p>\n
The above article is abridged from the writer's address to the
\nJakarta Foreign Correspondents Club on Aug. 27.<\/p>",
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