A more robust year ahead

A more robust year ahead

An extremely long dry season, several natural disasters and the explosion of the US$450 million loan scandal at the state- owned Bank Bapindo notwithstanding, the Indonesian economy last year proved to be performing better than most projections.

As mentioned by President Soeharto on New Year's Eve, the economy grew by more than 6.2 percent, a figure deemed necessary for the first year of the Sixth Five-Year-Development Plan in order to sustain the ongoing economic development and accommodate the yearly 2.5 million new entrants into the job market as well.

The inflation rate was rather high, but was eventually held to below 10 percent. Non-oil exports were declining in the first few months, but recovered later on. Foreign exchange reserves grew to an amount adequate to sustaining five-months's worth of imports.

Looking ahead, the economy seems to be in for even more robust expansion, at least in the eyes of most economists setting out their views in this paper last week. Their estimates for the 1995 growth rate vary between a conservative 6.7 percent up to a bullish 8.0 percent.

There are several reasons to be optimistic.

There has been an economic turnaround in the United States, and the economies of Europe seem to be moving in the right direction. World economic recovery is gradually taking hold in all industrialized countries, lifting that group out of its worst recession in the last two decades.

With the United States holding to a relatively solid growth path of around 3.9 percent last year, followed closely by Canada and the United Kingdom, and the Japanese economy seeming to have passed the lowest point in its downturn, the Organization for Economic Cooperation and Development had strong reasons when it predicted last week that the economies of its 25 member countries would likely grow by an average of 3.0 percent this year, up slightly from an estimated 2.8 percent last year.

Despite some protectionist tendencies in the industrialized world, the fact that the Uruguay Round of the General Agreement on Tariffs and Trade was eventually ratified by most members last year, paving the way for the creation of the World Trade Organization which begins life this month, surely provides much stronger ground for a growing world market.

What makes the external economic conjunctures more encouraging for Indonesia is the fact that the world economy's center of gravity has shifted to Asia. There is an estimate that within the remaining years of this millennium, 40 percent of all the new purchasing power created in the world will be in East Asia. Even a small chunk of this potential, laid practically in front of our door, would be more than enough to sustain a respectable 7.0 percent growth rate for Indonesia this year.

Domestically, potential for a robust growth can be presumed first of all from the fact that the new tax laws, which go into effect with a lower rate this month, will mean a boost in disposable incomes. A resulting strong growth in fixed investments and consumerism should provide this country with a larger productive capacity to make for a lower cost per unit, benefiting domestic consumers, as well as making it more competitive in the world market.

Some economists expect the agricultural sector, which contributes around 18 percent to Indonesia's GDP, to recover strongly this year from a mere 1.5 percent growth last year. This should be supported by some expected significant improvements in the banking industry, after last year's loan scandals, and strong growth in several other sectors like manufacturing, mining, electricity and telecommunications.

In short, an overall higher growth rate for the country's economy this year is strongly probable.

Some words of caution are warranted though.

First, all of the potential cited above relies heavily on the role of the private sector. This is as should be expected because of the results of the ongoing restructuring of the Indonesian economy over the last decade: to make the economy less dependent on oil, to pursue an economic development with less reliance on foreign aid, and to build a competitive economy in this fast changing world.

And what this boils down to is a few but-seemingly-harder- to-get conditions: further deregulation measures and more substantial efforts to reduce the high-cost structure of the economy. Setting up new tariff and/or non-tariff barriers to protect certain industries certainly is not in line with those conditions. Neither is the maintaining of still so many monopolies and oligopolies, which are contradictory to our own commitment to free trade as signaled from Bogor last November.

Second, special attention is needed to protect the poor and underprivileged members of this country. Without any special treatment, they will be more helpless and disadvantaged in the increasingly competitive future.

Both aspects have been hinted at through last week's cabinet meeting. President Soeharto signaled an austere 1995-1996 state budget, which means among other things a greater contribution from the private sector to sustain Indonesia's economic development. At the same time he promised to increase spending for the underprivileged through programs like the Inpres Desa Tertinggal.

We have strong reasons to be optimistic, but on the other hand we need to follow up consistently in order to make it happen. With this commitment, we wish all of you a very happy New Year.