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.