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.