Economic efficiency
Economic efficiency
The reaffirmation by the Governor of Bank Indonesia (central
bank), J. Soedradjad Djiwandono, of the urgent need for Indonesia
to improve the efficiency of its economy may sound like a cliche,
especially now when most of us are in a festive mood about being
able to celebrate the 50th anniversary of our nation's
independence with a very impressive record of economic
achievements.
But the strong warning Soedradjad apparently wanted to make at
the eighth plenary meeting of the Association of Indonesian
Economists is that unless our economy becomes more efficient, our
development may not be sustainable in an increasingly borderless
world.
The most obvious reflection of our economic inefficiency is
the high incremental capital output ratio (ICOR) or the ratio
between the amount of capital required to generate a unit of
output. Various surveys show that the ICOR in Indonesia,
estimated at four, is the highest among the ASEAN countries.
The implication is that we need a larger amount of capital
stock than most other countries to produce the same volume of
output. That is really worrisome because our investment-savings
gap is also among the widest in the region, thereby forcing us to
rely largely on foreign capital to finance our economic
development.
Foreign capital is not much of a problem if it comes in the
form of foreign direct investment and portfolio capital because
such capital flows reflect international confidence in the
prospects of our economy.
What is potentially dangerous is foreign capital which we
acquire through loans. We may be proud of the recent vote of
confidence by our creditor group which pledged US$5.36 billion in
new loans. But we must also remember that our country is now the
fourth largest debtor among the least developed countries.
Although we could take consolation in the fact that quite a
portion of the loans is in the form of concessional credits with
low interest rates and long maturity periods, the blunt fact is
the debt burdens are quite large, by whatever ratio they may be
measured. No wonder, as Soedradjad said, Indonesia has come under
tougher scrutiny by its creditors. That also goes to show that we
are treading a very slippery path in maintaining the internal and
external balances of our economy.
The government should be commended for the consistency of its
prudent macro-economic management through a high level of fiscal
discipline and a sound monetary policy which is aimed at
maintaining a comfortable balance of payments position. Sectoral
policies also have been improved through massive deregulation
packages.
But the effectiveness and even the existence of impressive
macro-economic management, along with sound sectoral policies,
has been threatened by ad hoc measures, which often depart from
sound economic and sectoral management. Worse still, the
deviations and distortions are most often dictated by short-term
objectives whose worth is questionable.
It came as a big surprise to learn, for example, that now, 10
years after massive deregulation, many participants at the
economists' conference are continuing to complain loudly about
the arduous licensing procedures. So difficult and, sometimes, so
time-consuming and expensive it is to obtain a business license
that a license seems to have become one of the most valuable
among what economic theorists consider the factors of production.
Since most of the deviations and distortions seem to be
derived from the bureaucratic machinery itself, it may not be
exaggerating to say that the deregulation packages may remain
largely cosmetic unless the pace of bureaucratic reform is
accelerated. That calls for the improvement of the efficiency and
effectiveness of the government bureaucratic units in creating a
conducive climate for sound economic activities. Only sound,
efficient economic activities will be able to spur the growth of
our income and only with steady, significant income growth can we
increase our domestic savings and consequently reduce our
dependence on foreign borrowings.