~Drawing up the balance sheet of Indonesian economic performance

~Drawing up the balance sheet of Indonesian economic performance
is a discouraging job. How can it be otherwise when we hear
incessant complaints and cynical comments on the sorry state
affairs.
For five years we have been mired in economic crisis, our
fortunes rising or falling in concert with the rupiah. Although
the rupiah has strengthened to around Rp 8,800 to the U.S.
dollar, the debt/GDP ratio has declined from 90 percent in 2001
to 72 percent in 2002 and consumption growth is still robust, the
economy has not recovered yet.
Problems lie ahead of us, and we are haunted by the continuing
question: When will we begin to emerge from this crisis?
We have been muddling through with the economy since 1998. It is
true that in 2000 we reached 4.8 percent economic growth, but
since then the economy only grew by 3-4 percent. This rate of
economic growth is far from adequate to sufficiently open up
employment opportunities. The employment elasticity estimate
shows that to recruit 2.5 million new employees in the formal
sector, economic growth between 5 percent to 6 percent is
required.
While there are continuing indications that a global recovery is
well underway, the details show that the economic recovery is
likely to be weaker than anticipated due to the U.S. war in Iraq
and, in particular, repercussions from the outbreak of Severe
Acute Respiratory Syndrome (SARS).
The pace of recovery in the United States is now expected to be
slower than earlier forecast. In Europe, projections have also
been curtailed, with domestic demand likely to take longer to
increase than expected. In Japan, domestic demand remains weak.
The direct effects of a slow world economic recovery will
obviously impact Indonesia through trade. In these circumstances,
growth will be highly dependent on two major components: private
consumption and the government budget. In a situation in which
the government budget is dominated by repayment of domestic and
foreign debts, it is difficult to expect a budget expansion that
can stimulate the domestic economy and alleviate poverty.
As a result, a fiscal adjustment program will be needed. In
trying to deal effectively with all of these problems, it's
useful to examine several related issues.
First, the legislature has already asked the government not to
extend the International Monetary Fund (IMF) program after the
end of 2003. There is lingering concern about how the exit
strategy will proceed and how far the fiscal consolidation
program has been prepared to anticipate such a decision.
The exit strategy should take into account two major issues:
policy credibility and financing gap. The main prerequisite for
economic recovery is to resolutely implement government policies
and fiscal discipline. Like it or not, amid competing political
interests and wildly diversified economic interests, external
pressure is needed to remind the government of its target of
economic recovery.
Unfortunately, much to many people's chagrin, so far the debate
on the IMF program has focused entirely issue on whether we need
the IMF, not on an action plan to convince of future fiscal
sustainability.
Debt rescheduling through the Paris Club is unlikely to happen
without the extension of the IMF program. It means we have to
anticipate the possibility of a $3 billion fiscal shortfall and
an attendant balance of payments problem. It is true that we can
increase revenue from taxation and optimize our potential
revenue, but the question is whether it can be done in such a
short period, with just eight months left before the end of the
IMF program.
Thus, the nature of the exit program is crucial, and we have to
embark on it immediately. Without a solid and comprehensive
program, the market will react badly, engendering even more
troubles for the economy. Unfortunately, the government has been
silent on the matter.
Second, as mentioned earlier, it is difficult to expect there
will be budget expansion that can stimulate the domestic economy.
As a result, we have no other resort than to increase investment,
a complex issue in itself.
In the context of the cost of doing business in Indonesia, for
example, a study by the Institute for Economic and Social
Research at the University of Indonesia (LPEM-FEUI) shows that
bribery alone is no longer an efficient means to cut transaction
costs in connection with the bureaucracy. At present, in line
with the distribution of power, corruption has also become more
evenly distributed.
It's hard to imagine that foreign investors will flock to these
shores amid the prevailing business uncertainty, rampant
smuggling and widespread labor problems. The LPEM-FEUI study
indicates that political instability, labor issues and the
imposition of new local taxes could increase the cost of doing
business in Indonesia. Thus it is imperative for the government
to resolve political stability problems and settle labor and
local tax matters.
If one looks at government performance and the obstacles faced in
implementing good governance, it certainly is difficult to expect
that the cost of doing business will decline in the near future.
The implication is that foreign investment will not return unless
significant reforms are made in law and order. Perhaps we must
prepare ourselves to live without foreign investment for the next
two to three years.