Baird hopeful on RI economy, urges continued reform

Baird hopeful on RI economy, urges continued reform

World Bank outgoing country director for Indonesia Mark Baird
assumed the position in 1999 when the country was still
struggling from a deep economic crisis, making him one of the few
people intimately familiar with the country's economic
development. Marking the end of his tenure, Baird shared his
views on Indonesia's economy with The Jakarta Post's Reiner
Simanjuntak and Dadan Wijaksana on Tuesday. The following is an
excerpt of the interview.

Question: In your opinion, how would you describe the current
state of the economy?

Answer: Well, it's always a matter of perspective ... every day
there are ups and downs ... but if we take a long perspective,
there has been genuine progress over the years.

Since I arrived in early 1999, there has been significant
progress in reducing inflation, bringing (Bank Indonesia's)
interest rate down, stabilizing the exchange rate, (pushing) the
budget deficit down and reducing the ratio of the government's
debts to gross domestic product (GDP). We've also seen a recovery
in economic growth of about 3 percent to 4 percent per annum, not
adequate by any means, but probably better than we might have
expected 3 years to 4 years ago, because the economy had
contracted by about 13 percent in 1998.

Perhaps the best news is that we've seen a significant
reduction in poverty since the height of the crisis. Not only
because of the growth -- economic growth has been slow -- but
perhaps more importantly because of the stabilization of prices,
especially the price of rice. This means people have been able to
get access to basic commodities, relatively cheaply. We've seen
also some increases in minimum wages and growth as well. That
combination of factors has caused (a decline in) poverty, which
is now pretty close to where it was in precrisis times, quite a
remarkable achievement.

There is, of course, suffering in some kampongs here in
Jakarta and also in other parts of the country, but in general
there is improvement, which gives us cause for optimism in the
future.

Q: What about progress in structural reform ?

A: That's been the area where perhaps the most disappointment
lies, but perhaps we should have realized that the reform would
take time, given all of the constraints that these (post-
Soeharto) administrations have inherited. There are also very
strong vested interests opposed to reform and very weak
institutions ... some have even suggested that it will take a
generation for reform to be achieved properly.

But the key is not to become despondent and give up on
reform, but to find the way to keep it moving forward.

Our job is to encourage the government to move faster, so
let's hope that in the future this will be possible.

Q: Is corruption getting worse here?

A: I think corruption remains a core concern for Indonesia. I do
not know whether corruption has got better or worse over the time
I've been here. However, I think that corruption has become more
damaging to development; it's much harder to know now whom to pay
and for what benefit.

We have now got transparency but we also need to have
accountability, and it can only come -- in my view -- through a
stronger justice system. That's probably a reform that will take
a long time but it's the key to achieving genuine progress and
commitment.

Q: Has the government delivered on these fronts?

A: The real issue is a systemic reform of the whole justice system,
and for that the government needs a clear framework, a clear
commitment and needs action ... I haven't seen that framework
yet.

Q: What does it take for the country to be able to attract more
foreign direct investment (FDI)?

A: Not just FDI, but domestic investment as well. I think there
is lot of potential from domestic investors.

Well, we should not underestimate the importance of what has
been achieved in terms of macroeconomic development; that's, of
course, definite progress.

But investors also need a greater degree of certainty. They
know that's going to take some time, but they want to see
progress and want to see clearer government policies and
regulations.

There are five things that the government can do to improve
the investment climate:

- Improve tax and customs administration. The need to raise
revenue to finance the state budget should be done in such a way
as not to deter investment decisions.

- Create balanced labor market policies. Balancing the concerns
of workers with those of investors is the major challenge here.

- Decentralization. This has generally been going better than we
feared, but there's still a risk that local governments will
start to impose taxes and regulations that will deter investors.

- IBRA's asset sales and privatization. While it's important for
the budget, it's also important to get the assets back into the
hands of the private sector.

- Improve the regulatory framework for investment, especially in
the infrastructure sector, because the country needs substantial
investment in infrastructure such as in telecommunications and
power (generation and supply).

With those five things, I'm very confident that you can
attract the investment needed to grow at 5 percent to 6 percent.

Q: The privatization program has so far moved very slowly; what's
really the problem?

A: Well, I do not think that legislators are convinced that
privatization is necessarily good for Indonesia, and I think the
government must do a better job in explaining what it means. It
should not be perceived merely as a way of funding the budget but
should really be seen as a way of getting these assets into good
management, so that they can grow and generate jobs in the
future.

So, (I think it important) to explain the rationale of having
a program and targets in the right areas and a clear schedule for
taking them forward; that sort of masterplan, I think, is needed
to convince legislators and the public that privatization makes
sense for Indonesia.

Q: So it's not an issue of weak investor appetite?

A: Not at all. There is a lot of interest in Indonesian assets.
Of course, the prices may not be what some people would like.

I think politicians and the government need to be
comfortable that selling assets now at a lower price is better
than holding on to them because prices will continue to
deteriorate unless (the assets) are returned to good asset
management.