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.