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.