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.