Elections crucial turning point for RI economy

Elections crucial turning point for RI economy

David Jay Green, Jakarta

As Indonesia moves through national elections, its economic
picture has taken a turn for the worse in some respects -- the
exchange rate, stock market and demand for government bonds all
have fallen recently. Such movements are not unnatural in an
election period, and international events also contribute to some
unease in Jakarta.

But over a longer term, Indonesia's economy has performed
rather well. The stock exchange rose more than 60 percent in
2003. At the same time, interest rates fell: Bank Indonesia's key
one-month interest rate fell by nearly one-third last year.

Official grading institutions such as Standard & Poor's,
Fitch, and Moody's, have taken note of the longer-term
performance and have steadily given the economy better reviews.

The positive indicators last year were partly a rebound from
poor performance immediately after the crisis in the late 1990s.
In that period, Indonesia's exchange rate, inflation figures and
other economic measures all suffered. Improved performance was to
some degree a matter of playing "catch-up" with regional
neighbors who had recovered from the crisis earlier than
Indonesia.

But part of it is simply good economic policy on the part of
the Indonesia government. In the area of fiscal policy, the
Minister of Finance has established a strong reputation for not
spending money he doesn't have.

In the area of monetary policy, the government over the last
year has managed to fight inflation without discouraging growth.
Inflation rates at 5 to 6 percent per year are a considerable
improvement over the double-digit figures seen during the crisis.

Wasteful public subsidies have been sharply lowered, from
nearly 6-1/2 percent of gross domestic policy in the 2000 budget
to about 1-1/3 percent of GDP currently. This involved raising
gasoline, diesel, and electricity prices well above the increases
in the general price levels. Over the past two years, for
instance, gasoline prices rose more than 80 percent, several
times faster than the consumer price index.

International financial institutions such as the Asian
Development Bank, the International Monetary Fund and the World
Bank supported these sound economic policies. But, not everyone
was in favor of these changes. President Soeharto's increases in
fuel prices were a catalyst to his overthrow. Despite that
history, over the last few years the Indonesian government has
been able to obtain enough support to allow for significant price
increases in highly visible commodities.

Government leaders were able to make these tough economic
decisions in part because the national debate has moved beyond
simple arguments in favor of more government spending, easy
money, and low prices. The argument has moved to a more
sophisticated appreciation of how the economy works.

Indonesian newspapers now remind the government of the
importance of restraints on spending in planning for a post-IMF
budget. Non-Government Organizations point out that the earlier
program of subsidized public services provided little help for
the poor and that there are better ways to use public funds.
Special interest groups have found it hard to win support for
programs that involve subsidies.

How was this national debate moved forward? Partly it is the
result of several years of intensive debate after the economic
crisis of the late 1990s that allowed democratic institutions,
including a free press, to support open discussion on political
issues. Partly the shock of the crisis forced a rethinking of
major policies.

This doesn't mean that the job is done. Indeed, the unfinished
reform agenda is daunting. Indonesia's leaders still need to
initiate civil service reform, reduce corruption, encourage
investment through more certainty in policy and regulation,
provide for infrastructure investment needs, restructure and
privatize state-owned enterprises, provide pro-poor budgeting to
encourage sustainable poverty reduction, and fight to preserve
Indonesia's rapidly degrading environmental resources.

Moreover, what consensus exists in favor of some good economic
policies may not be very deep. As we move away from the crisis,
the economy starts to look better and the government has some
increased fiscal freedom. And the end of the IMF program removes
formal support for some unpopular policies.

The ongoing elections may well usher in a government that has
less need to practice fiscal and monetary conservatism. More
spending may be a good idea if it reverses infrastructure
deterioration, or if it underwrites civil service reform and
strengthening of the judiciary.

But if it brings back wasteful subsidies, we'll have lost a
real opportunity for progress. As in all democracies, elections
are a wonderful opportunity to review past policies and recommit
to those that are useful. Let's hope we see that in Indonesia.

The writer is the Country Director of the Asian Development
Bank's Resident Mission in Indonesia. The article is his personal
opinion.