Tricky test for recovery<\/p>\n
Ari A. Perdana, Centre for Strategic and International Studies,
\nJakarta<\/p>\n
An economics student was walking with his professor when he
\nsaw a US$100 bill on the sidewalk. As he reached down for it, the
\nprofessor held him back. \"Don't take it, it's fake! If the bill
\nwas real, somebody would have taken it already,\" he said.<\/p>\n
The story epitomizes the market mechanism which, according to
\nneoclassical economists, will eliminate opportunities for
\nexcessive profits. Big bills aren't dropped on the sidewalk. If
\nthey are, they are picked up very quickly.<\/p>\n
Much of the literature on economic growth and development
\ninfers that excess capital in developed countries will be
\ntransferred to the developing ones, to seek promising returns.
\nHence the latter will catch up with the developed ones. However,
\nthe reality is different. There are things that prevent the big
\nbills from being picked up.<\/p>\n
The late Mancur Olson argued that one underlying reason for a
\ncountry being unable to pick up the big bills is government
\npolicies and institutions. These factors are important where a
\nperfect market mechanism does not always exist.<\/p>\n
Good policies and institutions provide incentives for
\nefficiency and lower transaction costs, and fixes market
\nfailures, such as the gap in information.<\/p>\n
The quality of the economic policies and institutions of a
\ncountry also influences expected returns on investment, hence
\nthey affect investment decisions. Inconsistent policies
\ndiscourage investment since they create business uncertainties.<\/p>\n
Investment climates are also harmed by weak and corrupt
\ninstitutions. Security problems, bureaucratic lack of
\ntransparency, a high level of rent-seeking, and poor legal
\nprotection and enforcement are institutional problems that raise
\ntransaction costs, which may exceed potential benefits.<\/p>\n
Indonesia still needs foreign capital to foster recovery. High
\nand sustainable economic growth cannot rely only on consumption.
\nThe country cannot expect fiscal stimuli from the state budget
\neither. Given the limited capacity of domestic capital formation,
\nforeign investment is the pragmatic solution.<\/p>\n
The prospect of global economic growth of 2.2 percent this
\nyear is good news for capital inflows. The recent stock market
\nperformance may indicate the return of global investors'
\nconfidence in the domestic economy. There is also a high level of
\ninterest among international investors in the domestic assets
\nthat are set to be sold or privatized.<\/p>\n
The big bills are now on the sidewalk. But are we are able to
\npick them up? This all depends on how our investment policies and
\ninstitutions provide incentives. A tricky test will be how the
\ngovernment manages the privatization and asset sales processes.<\/p>\n
The government faces an urgent need to privatize some state-
\nowned enterprises (SOEs) and sell the assets managed by the
\nIndonesian Bank Restructuring Agency to cover the budget deficit.
\nThe 2002 state budget targets the deficit at 2.5 percent of gross
\ndomestic product, or around Rp 43 trillion. Privatization and
\nasset sales are expected to generate some Rp 25.4 trillion to
\nfinance the deficit.<\/p>\n
But the processes, especially those that involve foreign
\ninvestors, face an emerging trend of opposition. The opponents
\nare the employees and managements of the companies involved, who
\nthen receive political support from politicians. They then raise
\nthe nationalism issue, arguing that foreign ownership of domestic
\nassets would bring a new form of colonialism into the country.<\/p>\n
Such nationalistic sentiments may lose their relevance. The
\ncompanies are still the subject of domestic laws after being sold
\nto foreign investors. As long as the companies contribute to the
\ndomestic economy through taxes, providing quality services to
\nlocal consumers and respect the rights of employees, ownership is
\nnot the issue that matters.<\/p>\n
It is more likely that the opposition reflects the view of
\nexisting employees and managements, who consider the change of
\nownership as threat to their jobs. It becomes more complicated
\nwhen it involves broader interests. Ownership transfer may
\nterminate patron-client relationships, and reduce or even
\neliminate the opportunities for rent-seeking activities.<\/p>\n
While the opposition's voice should also be taken into
\naccount, delaying or canceling privatization will only incur
\nhigher social economic costs. Fiscal sustainability will be the
\nfirst thing to be affected, as the government will lose some of
\nits sources for deficit financing. Consequently, the government
\nwill have to reduce its expenditure, including that on
\ndevelopment and welfare. As a corrolary, it will have to be more
\naggressive in collecting tax.<\/p>\n
Delays will also harm market confidence in the country's
\ninvestment climate, which is a negative factor for economic
\nrecovery. It should also be understood that the long-term
\nprivatization objective is to bring better corporate governance
\nand improved efficiency to public sector firms. Improved
\nefficiency will benefit consumers through quality services and
\nlower prices.<\/p>\n
What is now needed is a strong political commitment on the
\npart of the government to continuing with the privatization
\nagenda. This means that the government must also remove itself
\nfrom short-term political interests which oppose the agenda. But
\nit also needs to ensure that the new owners are committed to
\nprotecting workers' and consumers' rights, and to minimizing the
\npain. No less important, the government must be more serious in
\nexplaining the need for and the benefits of privatization to the
\npublic, especially to those opposing it.<\/p>",
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