Adequate food and business confidence a must

Adequate food and business confidence a must

By Howard Dick

MELBOURNE (JP): Flying an aircraft is much easier than
piloting an economy. The vectors of aircraft speed, wind speed
and turbulence can be precisely calculated to determine actual
direction and speed over the ground.

By contrast, the economy is much more like a hot air balloon
that is highly vulnerable to turbulence. This is the situation of
the Indonesian economy in the middle of krismon (economic
crisis). Economists and policymakers are confused as to how best
to set a steady course.

As is well-known, the root of the problem is the collapse in
value of the rupiah, which has opened up a huge gap between
domestic and international price levels. Extreme shifts in costs
of production and debt service, combined with political
instability, have destroyed business confidence and led to
millions of job layoffs. The outcome is a highly unusual case of
stagflation: rapid inflation combined with falling income and
worsening unemployment.

In this very uncertain situation, high priority must be given
to minimizing economic and political turbulence and identifying a
clear adjustment path.

Economics and politics are completely intertwined. In the run-
up to the 1999 election, there is no way that economic policy-
making can be separated from political pressures and constraints.

From the viewpoint of political economy, two issues stand out
as absolutely fundamental. First, the people of Indonesia must be
reassured that their basic needs will be met despite inflation
and unemployment. This means, above all, a guaranteed supply of
foodstuffs at affordable prices. Second, confidence must be
restored in the domestic business community. These two issues are
closely connected and should be addressed simultaneously.

Food policy is presently being compromised by tremendous and
unnecessary market turbulence. Government initiatives to supply
cheap rice at about half the current market price are well-
intended but counterproductive. The inability to supply
sufficient rice at about Rp 2,000/kilogram (16 U.S. cents) merely
reinforces belief in shortages and escalating prices, thereby
boosting expectations of future inflation.

People would be much better served a policy which sought to
eliminate market turbulence by guaranteeing an adequate supply of
rice at something like the current urban price of Rp 4,000 per
kilogram. This might be accompanied by sales in poor areas of
cheaper low-grade rice at perhaps Rp 3,500 through what Dr. Anne
Booth recently referred to as "fair price shops".

Validating the current market price would reduce inflationary
expectations, relieve incentives for hoarding and smuggling,
improve farm gate prices for rice growers and facilitate rational
calculation of the profitability of other food crops such as corn
and cassava. All this would meet the objective of setting a clear
adjustment path. It would also ease the fiscal deficit by
reducing ad hoc and ill-targeted food subsidies.

Economic recovery is impossible without restoration of
business confidence. Until confidence returns, jobs in the modern
sector will continue to melt away. A good deal of attention has
been directed toward restoring international business confidence
through implementation of various IMF rescue packages. Given the
level of Indonesia's international debt, such a strategy can
hardly be avoided. Nevertheless, even in the medium-term, foreign
aid and investment alone are unlikely to reach a level that will
both refinance existing debt and stimulate even modest economic
growth.

Despite the importance of foreign funds to some sectors, the
Indonesian economy depends heavily upon domestic investment. The
reality is that much of the private domestic sector comprises
firms owned by ethnic Chinese. Chinese businesspeople now have
very good reasons to be wary of investing in the local economy.

The massive riots and violence in May 1998 have shaken the
faith of Chinese-Indonesians that they have a future as citizens
of Indonesia. Certainly the President has formally apologized.
But senior members of his government are giving conflicting
signals. There is widespread belief among Chinese-Indonesians
that the government is not seeking proper investigation of
responsibility for the violence. These conflicting signals create
further political turbulence that saps the lifeblood of the
economy.

The fundamental question that needs to be answered is whether
Chinese-Indonesians can enjoy their rights under the Constitution
as equal citizens of Indonesia. In other words, does the concept
of national unity extend to the Chinese-Indonesians? And if so,
on what terms? The dialogs and negotiations needed to answer
these questions may also need to address such matters as business
ethics and social responsibility.

Despite positive statements from some political leaders,
middle-class Indonesians seem reluctant to confront this
unfinished business, which is seen as somehow peripheral to the
economic and political crisis. The most likely political choice
is to do next to nothing.

If so, the economic price may be very high. As long as the
business community is encouraged to invest outside the country,
and discouraged from bringing capital back onshore, the value of
the rupiah will remain well below its feasible value, compounding
the problems of debt service and stagflation. The effectiveness
of all other policies will thereby be compromised.

Guaranteeing supply of basic needs and restoring domestic
business confidence are two sides of the same coin. With less
fear of food shortages, people will be less inclined to seek --
or be manipulated to seek -- scapegoats in the Chinese.

And assuring the ethnic Chinese of their future in a new
Indonesia will contribute far more to a higher value of the
rupiah and recovery in investment and employment than any IMF
package. Everyone except agitators and corrupt elements stands to
benefit from a more stable and revitalized economy.

The writer,formerly of the Australian National University, is
an associate professor at the Department of Management
at the University of Melbourne. He has been carrying out research
on Indonesia since 1972 and is best known for his work on
interisland shipping and regional development in East Java.

Window: In this very uncertain situation, high priority must be given
to minimizing economic and political turbulence and identifying a
clear adjustment path.