Economic reforms show mixed results in fight against poverty
Economic reforms show mixed results in fight against poverty
Berni K. Moestafa, The Jakarta Post, Jakarta
Behind all the talk about economic reforms, the one thing that
often slips our attention is how they affect the poor.
Growth in the economy means more money for the government to
help the socially disadvantaged and more jobs for them to escape
poverty.
Looking back on this year, Indonesia's economic reforms
program has performed with mixed results in how it produces that
growth.
Following the 1997 economic crisis, Indonesia entered into a
deal with the International Monetary Fund (IMF) to reform its
economy in return for receiving financial aid.
The government hopes to rekindle economic growth back to the
level before the crisis when Indonesia boasted one of the world's
fasted poverty reduction rates.
The number of poor surged to 37.1 million in 2001 from 22.5
million in 1996, according to the government, quoting data from
the Central Bureau of Statistics (BPS).
Based on World Bank estimates, at least 30 million Indonesians
live below the poverty line, which means they live on less than
US$1 a day.
It said that more than half of Indonesia's population of about
210 million lives on less than $2 a day, which makes them
vulnerable to slipping below the poverty line if the economy were
to take another downturn.
Although the IMF's reform program is not tailored to reducing
poverty, its targets provide a basis for that end.
Called the Letter of Intent (LoI), the reform's underlying
goal is to generate economic growth and to do so in a sustainable
way.
With some 40 million unemployed people in the country, the
economy has to expand by at least 5 percent to 7 percent to
produce enough jobs to effectively cut poverty. Growth has become
even more important considering the country is heavily indebted
and that much of the government's revenue is tied to debt
repayment.
So when pundits predict this year's economy to grow by just
3.5 percent, Indonesia might see poverty rise rather than fall.
It isn't all the government's fault, not after the Sept. 11
terrorist attack and the Oct. 12 Bali bombings. Both tragedies
have dealt a severe blow to the economy.
Indonesia's macroeconomy absorbed these shocks relatively
well. Economic reforms are on track, according to the IMF.
The reform program under the present LoI basically deals with
macroeconomic policies and structural reforms.
Assuming political stability, a healthy macroeconomy is the
precursor to tackling the poverty issue.
It starts with the rupiah's exchange rate. The rupiah's
performance against the U.S. dollar reflects the state of the
nation's economy, or at least how people expect it to be.
Throughout most of the year, the currency managed to keep away
from the level of Rp 10,000 to the dollar, unlike in 2001. This
is good news, as its performance not only affects the overall
economy but also has an immediate impact on people's purchasing
power.
The rupiah is the biggest inflation trigger. Called imported
inflation, a drop in the currency increases the cost of importing
raw materials and consequently the price of products sold here.
Inflation, the rise in the consumer price index, weakens
people's purchasing power. Given that one in every two
Indonesians lives on less than $2 a day, inflation is a serious
threat to them.
And not only does it have the ability to push half of
Indonesia's population below the poverty line, high inflation
also puts a strain on economic growth.
Domestic consumption accounts for about 70 percent of growth
in the economy, while net exports revenue and investments make up
the balance. The less that people spend as inflation soars, the
slower the economy becomes and the fewer the jobs that are
generated.
In the first 11 months of this year, the annual inflation rate
stood at 10.48 percent. Since the figure came just a month after
the initial shock had settled from the Bali bombings, this too is
seen as a positive sign, thanks to the relatively sturdy rupiah.
The official inflation target is set between 9 percent and 10
percent.
In comparison, last year's inflation hit 12.55 percent as the
rupiah reeled under months of political turmoil preceding the
ouster of then president Abdurrahman Wahid.
With inflation in check, Bank Indonesia has been able to lower
its benchmark rates, giving companies a reprieve from the choking
interest rates that banks had charged them last year on loans.
Since early this year, benchmark rates have fallen by about four
percentage points to 13 percent. This makes it cheaper for firms
to seek loans for investment, which eventually creates jobs.
The macroeconomy has improved over the year, but the expected
upturn in investment has not come.
Banks have slashed interest rates on loans but have seen only
a modest increase in their loan portfolio. The outlook is also
dim. Data from the Investment Coordinating Board (BKPM) shows
that domestic investment approvals have fallen by 70 percent in
the first semester compared to the same period last year. Foreign
direct investment has plunged by 42 percent.
When investment slackens, poverty can hardly improve. This is
where structural reforms should have helped.
They are aimed at strengthening the overall economy by
improving the infrastructure that runs it: banks, government
institutions and regulations to name a few.
In the end, investors can expect a better business climate
once maladies, such as corruption and erratic regulations, are
stamped out of the system.
The IMF reform targets cover, among other things, the sale of
nationalized banks and state firms, the establishment of an
anticorruption commission and reforms in the customs and excise
office.
Progress on structural reforms has been slow, albeit steady.
Then why does investment spending seem to be declining?
The gloomy investment outlook presented by BKPM's data signals
that something is amiss between Indonesia's reforms program and
the way that investors respond to it.
Despite four years of reforms, doing business here remains as
unpredictable as ever, which this year's near bankruptcy ruling
on a major Canadian insurance firm only seems to confirm. Worse
still, more investment capital continues to flow out of this
country than what is coming in.
But when investment drops, so does the chance for the millions
of Indonesians to escape poverty.
The economy alone is simply not enough to help the poor.
Indonesia's economic reforms take place as the country
undergoes a shaky transition into a better democracy.
This not only means that political instability is a risk to
the economy, but that the root of poverty is inseparable from the
political context in which it was found.
Here, the absence of a strong civil society has attributed
much to the present unequal distribution of wealth.
Even if reforms can spur the economy to grow at double digit
rates, the question of how that extra money will be spent on the
poor is a political one.
So how are political reforms progressing? If one was to ask a
political analyst, the answer would be certainly not fast enough.