Downside risks in 2004

The verdict of most analysts is unanimous. Indonesia's economy will continue to expand next year, but only at a slightly higher rate than this year's moderate growth, which is estimated at around 4 percent, due to the extent of downside risks related to the 2004 elections and the end of the International Monetary Fund (IMF) program.

Indonesia's economic management will indeed enter a new phase next year when, for the first time since November, 1997, the country will implement its reform agenda without the punishment- and-reward mechanism of the IMF facility.

Fortunately, though, the world's economic powerhouses -- the United States, Japan and Europe -- are all predicted to post stronger growth next year and this could create additional external demand for Indonesian products, provided they remain competitive on the international market.

It is too early to judge whether the government will have the political will to maintain the pace of reform in view of the elections of House of Representatives members in April and the president and vice president in July.

An electoral period usually creates great temptations for the incumbent government to focus on its short-term interests of winning the ballots by introducing populist programs at the expense of the long-term good of the economy.

The improving macroeconomic stability over the last two years is seen as a strong foundation with which to weather the political turbulence and heightened political emotions. But delay in, let alone backtracking on, reform implementation could erode market confidence in the government's credibility and consequently the economic outlook.

The risks of isolated violence due to uncontrolled political emotions or protracted disputes over the interpretation of election rules cannot simply be brushed off, as most voters and even party leaders have yet to accustom themselves to the electoral rules and procedures, which are largely new.

However, it is of great comfort to know that none of the 24 political parties eligible to take part in the 2004 elections has any plans to drastically change the basic principles of the national economy. All are for a market economy based on fair, open competition with varying modifications and emphasis to reduce poverty and enhance a more equitable distribution of income.

One is nevertheless a bit nervous thinking about three rounds of elections, each with street campaign rallies, within a period of just five months and involving more than 140 million registered voters spread across one of the world's largest archipelagos, with both the most primitive and sophisticated of transportation and communications modes.

Many also worry about how the economy will fare or who will manage the economy when the executive and legislative branches of the government are preoccupied by the election agenda from March to September.

The government has set for itself an ambitious reform agenda, as stipulated in its White Paper, for implementation next year. Obviously, keeping the execution of the whole agenda on track won't be easy or even rather impossible.

It is therefore imperative for the government to focus its attention on the reform measures that are most crucial to enhancing good governance, as this is the most important issue within the structural reforms that are designed to stimulate investment, export and employment creation.

Business leader Aburizal Bakrie, chairman of the Indonesian Chamber of Commerce and Industry, reiterated the importance of good governance for the economy in his year-end review with the mass media last week.

He rightly argued that good governance is vital to improve the investment climate and consequently the overall competitiveness of the Indonesian economy. It is investment that creates jobs, which in turn generate wages and purchasing power to fuel market demand.

However, downside risks are not the only things one may think of in relation to the upcoming elections.

All agree that a successful election -- meaning the election is perceived to be fair and the elected government is seen as credible and strong enough to continue the reform process -- will be a great boon to the economy as domestic investment will be reinvigorated and foreign investors will return in droves to strengthen the virtuous circle of macroeconomic stability.

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