Economic recovery needs more than stability

Economic recovery needs more than stability

Hidayat Jati, Researcher, Jakarta

Indonesia is blessed recently by an onslaught of good news,
which may indicate early signs of economic recovery. These vary
from the currency's strong performance against the U.S. dollar,
the stock market's sharp gains in the fist three months and the
numerous successful bonds issuance by Indonesian companies, some
denominated in U.S. dollars and managed to receive better rating
than the sovereign debt.

Added to these are early signs of improvement in "real sector"
indicators such as increasing non-oil exports and strengthening
imports, which may sign a recovery in demand, that took place in
April.

The cheerleaders say these achievements are direct results of
President Megawati Soekarnoputri's emphasis on maintaining
stability. Her determination not to rock the overloaded boat of
the Indonesian polity has yielded real economic benefits -- at
least to this point and as reflected by very selective, and
mostly sentiment driven, variables.

Gone are the endless noisy battles with the legislature (DPR),
the quarrel with donor agencies and the muddled-peacenik stance
toward separatist groups that were characteristic of the
administration that preceded hers.

Conservatism and compromise are the pillars of this
administration. While stability and continuity are clearly
needed, especially in terms of the relationship with the IMF,
keeping a peaceful coexistence with DPR and freedom of the press,
further structural improvements in the economy requires major
political breakthroughs.

Ultimately President Megawati must do battle with the forces
that seek to harm string change. Ignoring this reality will
simply prevent further economic improvements and may even erode
gains made so far. Conservatism and conflict aversion, though
they bring remedies to the excesses of the previous
administration, have their limits of usefulness. Ultimately, what
is needed is leadership.

A monumental task is once-again to make Indonesia investment-
friendly. Without new investments, whether they are in the form
of green-field projects, capacity expansions, or mergers and
acquisitions facilitated by the Indonesian Bank Restructuring
Agency (IBRA), the economy will not grow fast enough to absorb
the ever-growing labor force.

The World Bank recently noted that a gross domestic growth of
around 5 percent is insufficient to alleviate poverty in this
country. Clearly, a consumer-led recovery will not take Indonesia
beyond 5 percent growth or even sustains the current momentum as
the dangers of double-digit inflation remain in the horizon.

While macro economy improvement, which yields concrete
benefits such as lower costs of capital -- as reflected by lower
interest rates, certainly helps to mitigate Indonesia's risk
profile, the real issue holding investors at bay is operational
environment. It is here that stability does not exist beyond
appearance.

The problem comes down to several key areas: Tax, customs,
labor and legal security. In all these areas there have not been
real progress at least since 1998 and the situation remains
chaotic, as far as businesses are concerned.

Each of those points is a complex problem in its own right and
deserves lengthy discussion. Significant progress cannot be
attained unless the administration is willing to step on a few
toes.

The government must overhaul, or alternatively, bypass the
customs, tax and judicial bureaucracies. The fiscal pressure
certainly requires greater collection from state levies. But all
indications strongly suggest that the current efforts resemble
more of a collective extortion and harassment on the existing
pool of taxpayers rather than reaching to new source of payments,
such as those retired civil servants or politicians who are now
private banking clients of major offshore banks.

Labor regulations and activities, obsessed with keeping
existing workers on the payroll regardless of anything else, have
clearly worked against those who are yet to find gainful
employment. The resulting extra costs for the companies' bottom
line will limit chances for expansions and thus constrain new
employment. There is a real bias against new job creation. Dead
woods prevail over fresh bloods.

The legal arena resembles a gallery of rogues, whereby
lawyers, prosecutors, policemen, judges and court clerks conspire
in a kleptocracy in which politicians and hugely indebted local
companies are also frequent players. The cost to society is
enormous. There is no sense of justice or any credible means of
conflict resolution, be they are commercial or of other nature.

The corrupt justice system affects not just that one
unfortunate Canadian life insurance company or many foreign
creditors, but also ultimately the Indonesian workers,
specifically those who are employed by Indonesian debtors who
refuse to settle with their creditors. These companies will
remain credit pariahs for a long time, limiting their options to
expand or even survive, unless they can turn to easily persuaded
bankers for new line of (questionable) funding.

There is no way to improve these areas by keeping a business-
as-usual approach. President Megawati must demonstrate assertive
leadership to address these issues. She could begin, for example,
by appointing respected and decisive outsiders as key senior
officers in charge of the institutions affecting the tax,
customs, labor and judicial issues.

President Megawati must of course take into account the
possible reactions of her political rivals and those affected by
her initiatives. At the same time, she must not repeat her
predecessors' mistakes by making too frequent changes over key
government personnel. But she must not shy away from initiating a
much-needed process.

We have seen that when she wanted to, she could demonstrate
remarkable leadership. She institutionalized the process to
reduce energy subsidies, replace the IBRA chairman and, most
courageously, defied the reactionaries by going to Timor Leste to
participate in the independence celebration of Indonesia's former
territory. President Megawati must be aware that there is a
difference between maintaining a facade of stability and the
status quo.