Economy wobbling
Economy wobbling
Declining inflation and interest rates seemed to be the only
encouraging news in the economic field that President Megawati
Soekarnoputri could show off in her first annual progress report
to the People's Consultative Assembly on Thursday as almost all
other key indicators pointed to a bleaker outlook.
Economic growth in terms of gross domestic product, on an
annual basis, was only 2.15 percent in the first quarter (the
latest figures available), much lower than 3.4 percent in 2001
and 4.8 percent in 2000. That was miserably far below the minimum
6 percent economic expansion needed to absorb the estimated 2.5
million new job-seekers who enter the labor market annually, not
to mention the 40 million currently unemployed or under-employed.
Consumer spending, one of the two main drivers of growth, is
decreasing as consumers became more pessimistic about the
economic outlook. For example, retail sales growth slackened to
15 percent in the first quarter from 32 percent a year earlier.
The latest reports paint a grimmer picture. Exports, the other
engine of growth, were down 6.73 percent in the first six months.
Investment remained depressed. Worse still, an increasing
number of manufacturing companies, including those around
Jakarta, have relocated to other countries which offer better
business environments.
President Megawati rightly cited the main causes of all these
economic woes: Legal uncertainty and policy inconsistency.
Certainly, businesspeople will not invest with uncertainty in
the law because a market economy cannot function properly and
property rights cannot be upheld without strong law enforcement.
After all, markets work on trust, knowing that every market
player plays by the same business rules. Policy inconsistency
raises business risks and transaction costs, thereby making
businesses uncompetitive and making the environment inimical to
sound banking operations.
Low-cost, abundant labor, one of the main attractions to
investment in the country, has now been turned into a hurdle for
business because of too rigid, anti-business labor regulations.
An increasing number of footwear and textile companies have cried
out about losing orders to other countries such as Vietnam,
China, India and Bangladesh.
Our abundant natural resources such as minerals, fisheries,
plantations and timber, which over the past three decades had
attracted billions of dollars of investment, are now in limbo due
to imbroglios caused by complications in the start-up
implementation of regional autonomy.
Worse still, political stability that had improved
significantly since last August is now in danger of plunging into
an abyss due to the uncertainty about the proposed constitutional
amendments in the Assembly.
Despite this bleak, overall outlook, the situation is by no
means hopeless, provided the three branches of government are
united and determined in managing this critical condition with a
high sense of urgency and the right set of priorities.
President Megawati, as chief of the executive branch, should
demonstrate strong leadership and her Cabinet should be able to
provide good management and coordination of all the reforms badly
needed to restore the economy to a sustainable level.
The government has set an appropriate scale of priorities in
economic, judicial and political reform. The only problem is
haphazard execution not only due to problems within the executive
branch but also because of the virtual absence of a sense of
crisis within the judicial and legislative branches of the
government.
They should realize that the government, weighed down by more
than US$135 billion of foreign and domestic debts or almost 100
percent as large as the gross domestic productthis means either
as large as... or twice as large as...., and debt service burdens
already taking more than one third of its operating budget,
cannot be expected to provide pump-priming for the economy.
Without the creation of new jobs, the huge pool of unemployed
and under-employed could explode into social anarchy, whereas
jobs can be generated only by new investment.
Therefore, without significant progress in bank and corporate
debt restructuring, the reform and privatization of state
companies and the recovery of assets currently managed by the
Indonesian Bank Restructuring Agency and legal and governance
reform the macroeconomic condition will remain fragile and the
recovery process will never gain a strong footing.
As we have often argued in this column, a faster pace of asset
recovery will reinvigorate thousands of companies through the
infusion of new capital and management by new investors (new
owners).
An accelerated process of debt restructuring will enable
thousands of businesses to regain access to new working capital
loans in order to increase their rate of production. Equally
positive impacts will accrue from the privatization of selected
state companies as new investors will improve their efficiency
and proceeds from the sales will help cover the budget deficit.
The Assembly members who are convening their annual meeting
should realize how critical the situation is now.