Achievements and dilemmas of RI economy

Achievements and dilemmas of RI economy

By Didik J. Rachbini

JAKARTA (JP): In the past few decades Indonesia's economy has
grown quickly, with rapidly changing economic indicators.
Agriculture, industry and trade have developed fast, followed by
a significant transformation which reduced the portion of the
primary sector in the national economy. There are bigger roles
for the secondary and tertiary sectors, which means that the role
of industry and trade is also bigger.

The monetary sector -- both money market and capital market --
has also developed rapidly, which shows that Indonesia's economy
has entered the rank of modern economies of the Asia-Pacific
region. Even though it is not as big as in other ASEAN countries,
the capital market in Indonesia is growing impressively because
Indonesian companies are considered good bets. Meanwhile,
deposits in banks and credits are also growing at a two-digit
rate.

But behind this success, implicit in the above macroeconomic
indicators, Indonesia's economy is unhappily facing various
structural problems and has a tendency to become overheated
quickly when growth goes above a moderate level. This means that
there is still something wrong in the internal structure of
Indonesia's economy.

So far, Indonesia's economy is at a safe level because the
macroindicators still show an adequate control rate. Income per
capita is relatively good, and is expected to reach up to US$920.
Many people have an income of above $3,000, meaning that there is
a big market in Indonesia. Foreign exchange reserves are still
large enough at around $13 billion. That means that there is a
limited reserve to import necessary staple foods and capital
goods.

Despite all this, there are two macroeconomic indicators which
we should not lose sight of. These are the negative current
account balance and the foreign debt, both reaching levels which
provoke a sense of unease. The current account deficit has in the
past reached up to $3.9 billion, with deficits being accumulated
in services, especially in transportation and insurance. But the
situation has deteriorated, with deficits of up to $7.9 billion
being run up more recently. Even though our export growth is
impressive, with a growth rate into two digits, transportation
for export and import in Indonesian waters is dominated by
foreign companies.

Our foreign debt is relatively large: US$100 billion. The debt
ratio to Gross Domestic Product is very high, about 80 or 90
percent, with a Debt Service Ratio high above the red line.
Compared to other ASEAN countries, this debt is enormous, twice
as big as the Philippines' debt and five times bigger than
Malaysia's. Along with Mexico and Brazil, Indonesia has one of
the largest foreign debts in the world.

Decision makers need to find ways to solve this problem, not
just by rescheduling the debts, looking for debts which can be
easily cashed in, or finding other monetary techniques.

Economic diplomacy for discounts, swaps and the sale of state-
owned companies' shares could be considered.

Many people are worried that Indonesia's economy will be
trapped in a crisis like that of Mexico last year. Indonesia's
economic indicators are different to Mexico's even though the
accumulated foreign debts don't differ much in relative terms.
What should be noted is the dependency of Mexico on the United
States' economy. Therefore, when the U.S. faces prolonged
economic problems, the effects are felt in Mexico, directly and
indirectly. In the recent past, going back to past few years, the
economy in the U.S. has been facing various problems, especially
in its trade account and current account.

The main cause of the Mexican crisis was, among others, its
current account deficit of $28.0 billion. As a result, the flow
of money from Mexico out of the country was very fast. This took
out all of the money which could have been spent to finance the
economic development in the country. This was aggravated by the
foreign exchange reserves which had become smaller and smaller,
causing difficulties in the import of basic materials and capital
goods. Inflation also increased to two-digits, which influenced
the investment climate and hampered economic development.

Deregulation policies in the real sector are more difficult to
control than those in the monetary sector. The main reason is not
the level of complexity and the difficulties of implementation,
but that these policies are more of a political problem and
involve interest groups. The slackening of the pace of
deregulation in the real sector has much to do with political and
economic problems. Deregulation of the real sector means
implementing political and economic policies in which the
political process and policy have much to do with business
transaction.

Yet deregulation in the real sector is necessary, a rational
policy choice which must be taken if Indonesia's economy is to
compete in the regional and international arena. There is
evidence that the economy can not develop optimally because of
protection, special licenses for certain groups, and a difficult
exit-entry mechanism. The government will probably take this
rational choice, even though this might be considered late, so
the business community will be forced to become more efficient.

The level of efficiency is the best guide to the future
development of a company. These ties in with the outward looking
strategy of the economic development, which has been successfully
implemented in East Asia. The basis of this strategy is the
competition for international market share, through the promotion
of exports, supported by the efficiency of economic structure
inside the country. The key to a successful national strategy is
efficiency at company organization level.

Theoretically, comparative advantages for various commodities
are the ground to win the international market competition. But
industrial countries in East Asia do not depend on stark theory
alone. What is necessary is the willingness to develop an
efficient industry from what is available (skills, innovation,
technology, and other economic sources).

Based on this idea -- starting from the simplest thing -- the
Koreans have found a comparative advantage, which had earlier
been considered irrational, to develop its industries. Korea's
electronic goods, automobiles and computers were thought
uncompetitive in international markets compared to those of
Germany and the United States, which dominated the market at the
time. But with the right climate and incentives from the
government, Korea was able to create comparative advantage in
many commodities.

It seems that Indonesia's macroeconomy is impressive, but the
structure behind the success shows a troubling lack of substance.
Even though deregulations in the real sector have been
implemented in the past few years and will be strengthened again,
there are still corners of privileges which offend against the
principles of healthy competition and are not good for the
national economy. In many real sectors, there is horizontal
concentration, such as in cement, poultry, paper, glass and
others. Vertical integration also happens as the level of
production, distribution and other chains of trade regulation are
controlled by the same group.

There is not only a lack of perceived "bite" of the
deregulations in the real sector, but also a lack of proper
economic law, needed to ensure a good market mechanism and
healthy competition. In the future, such patterns and practices
will not last long in the face of demands for the implementation
of a more efficient system through economic rationalization or
the demand for greater economic democracy.

Another characteristic of the real sector is the high rate of
economic concentration. Experience shows that an industry which
has such a high concentration has a low export orientation. Such
businesses only work in local markets and don't really support
government policy, which is export-oriented. High concentration
is found in industries of non-metal goods, chemicals, paper,
various kinds of food and plenty of others. High concentration
like this will bring problems to economic agents, especially
small-sale and middle-scale traders. Export-oriented industries
are less concentrated.

Table of Distortion

Distortion Commodity
--------------------------------------------------------------
Vertical integration cement, chemicals
Horizontal integration (cartel) cement, poultry, glass, paper
Special license poultry
Exit-entry market control plywood, automotive

Dr. Didik J. Rachbini is Director at the Institute for
Development of Economics and Finance, Jakarta.