Accelerating recovery

Accelerating recovery

Despite the tumultuous debate about the proposed amendments to
the Constitution that are the main focus of the People's
Consultative Assembly (MPR) Annual Session, it is a relief to
know it has still spent some time reviewing economic issues.

Newspaper headlines and TV reports that have described the
suffering of hundreds of thousands of Indonesian workers during
their flight from Malaysia in the last two weeks seems to have
jolted the political leaders into realizing just how bad our
economic condition is.

The Assembly members should now realize that living conditions
in many provinces have been so miserable that it has forced
hundreds of thousands of rural people to leave the safety and
hospitality of their community and travel to a foreign land to
seek work. These people were willing to brave adverse, and often
exploitative, living and working environments, to make ends meet.

It was this painful realization that has apparently prompted
the Assembly to draft a strong recommendation that the government
accelerate the economic recovery.

The recommendation should not, however, overlap with the 2003
Annual Development Plan which the government and the Budget
Committee of the House of Representatives adopted in June as
policy directives for the 2003 State Budget as the third-stage
implementation of the Law on 2000-2004 National Development
Program.

The Assembly should instead focus its recommendations on the
most strategic and influential factors to speed up the pace of
recovery, such as structural reforms which urgently require
faster implementation to stimulate higher economic growth.

More robust economic growth, higher than the 3.5 percent
estimated for this year, is needed to create jobs for the huge
numbers of unemployed and under-employed people.

Private-sector analysts and government analysts agree that
annual growth of at least 6 percent is required just to absorb
the 2.5 million new job seekers entering the workforce annually,
not to mention the millions left unemployed by the impact of the
1997 economic crisis which is now in its fifth year.

But economic growth cannot be generated by decree, nor by
recommendations. It can only be created by investment and
consumption by the government and the private sector.

Investment and consumption cannot increase without a quicker
process to recover distressed assets, to restructure the many
billions of dollars of corporate debts currently managed by the
Indonesian Bank Restructuring Agency and to reform hundreds of
state companies.

These assets are business units that determine the speed of
economic recovery because they are the generators of jobs, the
source of tax revenues and the producers of goods for domestic
consumption and exports.

Moreover, the banking industry that provides fuel for economic
activities will never regain a stronger footing if most business
enterprises remain as unqualified for credit financing as they
are now because they are still shackled by bad debts.

But efforts to fuel a stronger recovery cannot be done by the
government alone. The economy, which had been severely damaged
for decades by the corruption and misguided policies of vested
interests, needs better rules of the market game from the
legislative branch. Economic players require law certainty
through vigorous law enforcement which is the responsibility of
the judicial branch.

Put another way, sound macroeconomic conditions, which is the
prerequisite to a stronger economic recovery, will never occur
without effective laws and stronger law enforcement. Strong law
enforcement is in turn a precondition to good governance, which
is the key requirement to attract new investments and gain the
support of creditors for debt-rescheduling.

It would, however, be entirely misguided for the Assembly to
demand the termination of the International Monetary Fund's (IMF)
role in the country ahead of its scheduled expiry in December,
2003. Such a recommendation would send the wrong signal to the
international market.

Witness the new wave of crisis currently engulfing the economy
in Brazil. Market confidence in that country suddenly plunged due
to the high probability that left-wing presidential candidates,
who are openly hostile to foreign creditors and the IMF, would
win October's elections.

It is worth recalling that our economic crisis was set off
not by any deterioration in our underlying economic assets but by
domestic and foreign investors and creditors who entirely lost
faith in the government and moved their liquid assets overseas.

It was the government in the first place that invited the IMF
in 1997 to help restore market confidence in the economy and put
in place a credible crisis management system.

The question now is whether the government has regained market
faith to manage the economy without the benefit of an
international endorsement from such a multilateral institution as
the IMF? The answer is a big No, as can be seen from the
creditors' insistence that any deal with Indonesia would be
possible only if the country remains under the IMF extended
facility.