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.