Economy needs massive reforms, says economists

JAKARTA (JP): Total reformation requires changes from both the government and the business sector to prevent another economic crisis in the future, economists from the University of Indonesia said here Thursday.

Sri Adiningsih said business players and bureaucrats had to change their attitudes to ensure they would create a healthy business environment.

"The government and the business sector seem to resist rapid economic changes, but they have to adapt to these changes," Adiningsih told a seminar on Indonesia's future economy, hosted by the Indonesian Economists' Association.

"Businessmen, for example, still demand that the business environment be like it was before the crisis," she said.

She said this kind of attitude was not acceptable anymore, because the economy would never return to the way it was before the currency crisis, when local businesses were "like living in an incubator".

Rapid changes are part of the dynamics of an economy, she added.

She said changing the bureaucracy's attitude might take time, but in the long run it would only improve the economy.

Sri Mulyani Indrawati, deputy chairperson of the Center for Economic and Social Studies at the university, said without significant changes in the economic, governmental and political system, there would be no guarantee that the financial crisis end anytime soon.

Mulyani said political aspects had hampered the government from making clear and firm decisions.

She said the government was still weak in making its policies applicable and in foreseeing their possible outcome.

In coping with the currency crisis, which reduced the rupiah's value against the US dollar by around 35 percent since July, the government had not clearly indicated its first priority.

The August decision to free-float the rupiah in the market when the market was not ready caused the currency to further depreciate, she said.

The government even made a blunder by over-tightening liquidity and increasing interest rates by three times to 30 percent for the one-month benchmark Bank Indonesia Certificate (SBI).

The blunder resulted in corporate bankruptcies and banking failures.

"It seems the government thinks that they can outsmart the market, but the market always ends up outsmarting the government," she said.

"The government should be the first to learn, but it seemed to always distance itself from the economic laboratory," she added.

She said the government again misjudged the market by pursuing reforms on the macroeconomic level with the help of the International Monetary Fund.

But what the country needed was something to boost market confidence, she said.

"It was a wrong answer to the wrong question," she said.

The misjudgment actually started back in the early 1980s when the government began liberalizing the finance sector, she said.

"The conventional wisdom -- as in any economic theory -- is that a country must first liberalize its real sector before the financial sector, but it was the other way around here," she said.

As a result, many banks were established, accumulating capital, but there was nowhere to channel the funds, as the real sector was yet to be liberalized, she said.

The banks then allocated the funds for nonperforming sectors, giving short-term loans to projects with long-term investment, such as properties, she said.

In the same time, the government was heavily developing the country's physical infrastructure to create many jobs, but it failed to develop a soft infrastructure such as human resources, she said.

To get out of the current crisis, the president of the state- owned Bank Negara Indonesia, Widigdo Sukarman, suggested the government help tackle private offshore debts.

For instance, the government could help establish a company which would secure foreign loans held by the private sector.

"We could establish a new company which would buy commercial papers and other debt instruments unpayable by private companies," Widigdo said.

The company would then issue other commercial papers and instruments and offer them to investors with a higher rating, he said. (das)b