Don't cry for me Indonesia

Sjahrir, Economist, Chairman, Alliance for a New Indonesia

Part 1 of 2

The title of that legendary song is, of course, "Don't Cry for Me Argentina." And I can recall Ernest Hemingway's For whom the bell tolls, which stated cryptically, "Don't ask for whom the bell tolls," because, "the bell tolls for you."

Needless to say, there are plenty of differences between Argentina, with its population of only 37 million, and Indonesia, whose population totals well over 200 million.

Its foreign exchange is also completely different. Indonesia uses a free exchange system while Argentina ties its peso to the U.S. dollar at the fixed rate of one-to-one.

Likewise, Argentina's economy has traditionally functioned at a higher level.

Per capita income was over US$7,500, with a large portion of the economy comprising the services sector, while agriculture only made up 5 percent of the Gross Domestic Product (GDP). In Indonesia, we are still talking about a per capita income far below $1,000, with agriculture contributing a fairly large share, at 18 percent of GDP.

But what is happening in Argentina is truly scary. We can refer to other economic statistics which show more similar features in common with Indonesia.

The degree of foreign debt and capital flow is, alarmingly, quite similar. The absolute figure of foreign debt of the two countries are similar but, compared to GDP, the Indonesian government's private debt is bigger, at around 100 percent, while Argentina's stands at about 50 percent.

Likewise, the capital flow displayed by creditors and foreign investors in both countries are equally worrisome -- although Argentina in 1999 and 2000 still experienced foreign investment reaching sums far larger than its spending, which did not occur in Indonesia since 1999, according World Bank statistics.

The most striking similarity between the two countries in relation to its people, however, lies in the state budget. The size of the budget, compared from revenue to GDP, is not quite different between the two countries, at around 20 percent.

However, another similarity is the deficit of both budgets.

Indonesia and Argentina are both experiencing a deficit. What is more terrifying, though, is that neither Argentina nor Indonesia can use the budget as an instrument to expand their economies any longer.

This is because of the highly negative growth (minus 13 percent) -- experienced by Argentina since 1999, and by Indonesia since 1998. In both countries, this condition cannot be compensated for by fiscal expansion.

This is because Indonesia's deficit was largely caused by having to pay interests on its government debt. Argentina has also had to pay large sums of foreign debt.

We, therefore, need to closely review macroeconomic factors to avoid comparisons, without checking into other aspects which lead to a far from easy understanding of the microeconomic factors.

In Argentina, inflation continued at a low degree and there has been even deflation since 1999. In Indonesia, meanwhile, inflation has been quite high, and will grow into the double digits this year -- although this is not necessarily always a bad thing for a country's economy.

Even if inflation were 11 percent this year, growth would be sufficiently high above 3 percent, mainly due to consumption, which is a main part of growth. If cabinet members are so eager to say how the high growth shows the high degree of consumption by households, they are not entirely wrong.

If they say a healthy economy has resumed, however, such a conclusion is not that solid.

The most important instrument in economic policy which directly relates to the people is the budget. This is where we find so many areas of concern in Indonesia, which are strongly similar to those of Argentina.

First, policies regarding subsidy of electricity and fuel -- both subsidies must be reduced to help overcome the deficit. This will immediately affect people; Indonesians will pay higher bills for their electricity next month, and more for fuel shortly after.

Second, the deficit in both budgets has not occurred because of more government spending that could lead to a multiplier effect; instead, it has been caused by high payments on interests for domestic and foreign debt in the case of Indonesia, and because of high interest rates and foreign debt installments in the case of Argentina.

Third, the deficit in both budgets cannot be compensated for by the provision of more credit, because both countries have strictly limited the amount of money in circulation. The sum of the circulation of primary (base) and kuasi money requires the prior agreement of the International Monetary Fund, so that hoping for credit to expand the economy is near to impossible.

In the absence of the bank's role as an institution of intermediation, Indonesia cannot even hope for a meaningful increase in credit next year.

The fourth aspect relates to foreign exchange, which has direct relation to the budget. Assumptions in the Indonesian state budget have been changed due to the differences between the value of the rupiah and that of the dollar.

All this affects expectations of tax revenues from fuel exports, subsidies and payment of interests in the dollar currency. In Argentina, the one-to-one ratio of the peso to the dollar significantly influences inflation, which is virtually zero -- but it has also raised the crucial role of the budget for the economy's expansion.

Once subsidies were lifted, the people went on a rampage, which reminds us all too well of what Indonesia was like in May of 1998. Can we be sure that Indonesia will not undergo what Argentina is experiencing?