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.