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.