Against populist programs

Against populist programs

Thirty-four economists from the University of Indonesia expressed great concern last week over what they saw as the unrealistic economic visions and programs promoted by the five presidential candidates over the past month of campaigning.

The economists said most of the economic programs put forward by the candidates were short-term populist measures that could damage the long-term foundation of the economy.

The last month was indeed a busy time for the five presidential candidates as they roamed the country, jumping from one province to another and making many sweet promises to garner voter support.

One of the candidates promised to create almost 13 million jobs within the next five years. Another candidate promised free education up to high school for all students and generous subsidies for small enterprises and farmers. Still another candidate committed to creating millions of jobs through labor- intensive projects such as the building of low-cost public housing.

These promises are obviously unrealistic and almost impossible to deliver given the severe restraints within the state budget. One may wonder how the candidates could be so ignorant about the sorry state of public sector finances.

The reality is that almost one-third of total state revenues expected in the current fiscal year must be allocated to just two expenditure items: domestic and foreign debt interest payments, and fuel subsidies.

These items are also the most sensitive to market fluctuations in interest rates, exchange rates and international oil prices, which have of late been on a steep upward trend. And yet more worrisome is that these severe budget limitations will persist at least until 2010, when domestic and foreign debts are cut sharply to as little as 40 percent of gross domestic product through amortization.

The economists warned that there was simply no room for the next president to distribute political goodies, reminding any new government of the steep challenges that lie ahead.

They recommended six basic policy frameworks as guideposts for economic development over the next six to eight years, covering: investment promotion, poverty alleviation and a more equitable distribution of income, a clear blueprint for the development of natural resources, the enhancement of good governance, and better coordination between the central government and regional administrations in making policy.

The most realistic and effective way of generating jobs is through the promotion of private investment, as recommended by the economists, because it is businesses, whether small, medium or large, that create jobs.

What is meant by jobs here is not temporary work generated by labor-intensive projects, but productive jobs in the formal sector where workers receive the full benefits and protection of labor laws. Job creation is also the most effective means of reducing poverty and enhancing a more equitable distribution of income.

Job creation therefore requires a vibrant private sector with companies making investments and introducing new technology. But private investors, either local or foreign, will only be willing to put up capital if the overall investment atmosphere allows for a reasonable calculation of business risks. This requires a higher pace of reform in such vital areas as taxation, customs, financial industry, law enforcement and labor standards.

Clear-cut blueprints, similar to the Indonesian Banking Architecture (2004-2014) that was introduced by the central bank earlier this year, are needed to provide long-term direction and to create policy predictability for the development of natural resources-based areas of the economy such as energy, agriculture, mining, turning them into competitive and efficient drivers of growth.

Not all of the policy recommendations by the economists are completely new. In fact, most of the recommendations are similar to the reform agenda included in the White Paper released last September. That document outlined, though not in as great as detail as the economists in their 86-page report, almost all of the reform measures needed to reinvigorate the investment climate.

Given the government's huge debt burdens and the restrictions it faces in increasing tax revenue due to weak economic recovery, the new government will have no other alternative but to zero in on bolstering private investment to drive economic growth, create jobs and increase purchasing power for the market of 230 million people.