Facts and foretelling: Unemployment and the reform package

By Omar Halim

This is the second of two articles examining Indonesia's economy in the light of the signing of a reinforced economic reform agreement mid this month by President Soeharto and International Monetary Fund Managing Director Michel Camdessus.

JAKARTA (JP): According to the International Monetary Fund prescription, government expenditure should be significantly reduced.

This is usually an automatic requirement in cases where government budgets are in substantial deficit. But it was not the case in Indonesia. The IMF demanded, and the government accepted, that major non-priority projects be abandoned.

This was the correct decision, particularly since many of the large projects are not only nonessential in this difficult time, but also because there was no transparency or competitive bidding the awarding of the projects.

But with consumer demand, investment and government expenditure significantly down, the rate of economic growth will, as the IMF model determined, crash to zero. It may even be negative. We are seeing bankruptcies, increasing unemployment and other dislocations cropping up everywhere.

The new unemployed, because of Lebaran, are returning to their places of origin, and they will be spread across the country.

Under this scenario, with exports possibly starting to increase during the second half of the year and low consumer demand and investment, total demand will remain very low. The job and income prospects of the lower-income members of the community will remain dismal.

Social unrest could become a real possibility even under the current optimistic scenario in which major reforms are being undertaken. The fragile financial and political stability -- made possible by the political change presented earlier -- will no doubt be shattered by the restlessness of the many unemployed scattered throughout the archipelago.

The government's insistence on having a budget deficit -- and the IMF agreed to a 1 percent of GDP -- was also correct. What can the government spend on? It is imperative, during 1998, to focus on the unemployed through extensive public works programs throughout the country.

This is a very good opportunity to construct and improve on infrastructure in the regions, particularly in small towns and rural areas. This would be the single most important source of economic growth, at least during the first year of the IMF program. But the budget deficit requirements might amount to more than one percent of GDP.

Since low income earners would also consume higher in the present of labor projects, the multiplier effect for the economy would also be high. The result might even be a positive, albeit lower than normal, growth rate during the first year. It is also imperative that the government ensure that prices of basic commodities are within the reach of the majority of the lower- income Indonesians, if necessary by resorting to imports. Social unrest and chaos, if it happened, would destroy chances of growth resuming and inflation decreasing as projected by IMF.

Once it is clear that major reform measures are being implemented or initiated, confidence will definitely increase further during the second and third years of the IMF program.

Interest rate policy could more freely be used to stimulate domestic demand -- consumption and investment. One could expect much increased capital inflow, national as well as foreign; increase in consumption demand and increased investment.

Exports could also be expanding very rapidly because of the increased competitiveness due to a lower (but not excessively so) rupiah rate and the structural reforms that have been implemented. Employment would increase significantly. The significantly more efficient and competitive Indonesian economy could then be on its way to a rapid resumption of its high-growth path.

It is not clear how the IMF, World Bank, Asian Development Bank and the bilateral funds, pledged in support of the IMF program, are to be used. But it is argued here that some of the US$43 billion should be used to finance the public works program of the first year; imports of essential commodities (to maintain stable prices), if necessary; and even to tide over, in the form of non-interest loans, the servicing of legitimate corporate debts.

This scenario is heavily based on crucial major reforms to be undertaken by Indonesia. What kind of reforms are required?

There are at least four kinds of reform: (1) immediate restructuring of the banking sector to enable it to rationally and efficiently channel financial resources into priority sectors; (2) elimination of monopolies, oligopolies and other restrictive business practices, which have up to now been used to provide privileges to select groups of people; (3) political reform which will enable potential leaders, especially among civilians, who truly reflect the choices of the people to emerge and take over leadership in accordance with the constitutionally and legally prescribed procedures.

The reform measures should also include the independent relationship between the executive and legislative bodies; and (4) reform of the judicial system by which the judiciary could perform its functions independently of political considerations.

Economic reforms have to be initiated immediately and should have the aim of making the Indonesian economy lean and efficient. This is particularly important if we are to succeed in meeting the requirements of the ASEAN Free Trade Area (AFTA) in 2003 and the APEC target of 2020.

Otherwise, we will be foreigners' coolies on our own soil. This should be done, as Dr. Sumitro said, by eliminating, or at least significantly diminishing, extensive corruption; collusion between officials and business: monopolies, oligopolies and other restrictive business practices; and excessive protectionism.

Government policies should encourage the required backward- and forward-linkage processes in order to diminish the phenomenon of excessive import content in Indonesian production, especially those for exports.

Furthermore, the sustained economic growth process attained during the last three decades -- as admirable as it may be -- has produced sharp discrepancies between the income and wealth of regions and groups.

This has to be corrected. Decentralization, which would enable people in the regions -- in the context of the overall objectives of the nation -- to formulate, implement, and benefit fully from these programs and projects should be instituted.

In addition to the redistribution of income among regions and groups, serious efforts to foster conciliation among regions and groups should be made. This is imperative if we are to preserve and foster the Indonesian nation.

Some words could be said of the required political reform. Reform of the political system would be needed to enable potential leaders from among the civilians to rise through the ranks and assume their rightful place within the political system. Dr. Juwono Sudarsono said that there were no civilian leaders capable of assuming leadership who would be acceptable to the various relevant groups.

Now is the time to reform the system to make it possible for potential leaders to do so. The dependency of the legislative bodies, MPR/DPR, on the executive branch of government has to be eliminated. MPR/DPR should also be more active in determining the overall direction, monitoring and supervising the performance of the executive branch of government in formulating and implementing policies, programs and projects.

Relatively smaller changes need also to be made. For example, the election system has to be changed in order to make sure that political parties (some question whether Golkar is a political party) are not only able to present their ideas of how to bring the country forward; but are also able to do so without constraints that make the system completely unfair. The people are the ones who become frustrated, as was evident in the last election.

What is the alternative to the above scenario? A projection of the future under the present situation could show deepening economic problems, which could lead to serious political problems -- perhaps to the point of extensive disorder -- that in turn would make recovery from economic hardship impossible. In this case, the IMF package would fail.

The writer is research fellow at the Center for Strategic and International Studies. He retired from the United Nations two years ago.