Facts and foretelling: Unemployment and the reform package
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.