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.