Fetishes obscure policy debates

Fetishes obscure policy debates

James Castle, President, American, Chamber of Commerce,
Jakarta Office

After years of following the economic debates in Indonesia and
other developing economies, I have become convinced that there
are a number of fetishes which obscure rational debate on several
important public policy issues. These issues are export policy,
currency strength and ownership control.

A fetish is defined in the Oxford dictionary as something that
is "irrationally reverenced" or, in psychological jargon, an
"abnormal stimulus".

Indeed, in discussions about Indonesia's economic development,
it seems as though most policy development debate both in
domestic form and in the rarified atmosphere of IMF and World
Bank sentence, exports are far and away the primary focus of
development efforts and policy targets.

Indeed, one will search in vain in the World Bank's recent
publication "East Asian Miracle Revisited" for any serious
discussions of the role domestic consumption can and should play
in the economic development of, not only the larger developing
economies like China, India and Indonesia, but also the high
income, medium population countries like Taiwan and Korea.

One side of the "export argument" is an undeniably useful.
This is a justification of regulatory reform to break down
protected markets on the grounds that economies must be
efficient, to compete globally.

The lowest cost inputs must be available to domestic
manufacturers to allow them to compete efficiently and
aggressively in the international arena. This is a absolute
principle of economic development and competitiveness. Lost in
the argument is that all industries, not just export industries,
must be efficient, otherwise the total economy cannot be
efficient. Why is competitiveness only good when its supports
exports ? Any distortion to support exports is a tax on domestic
consumers.

Surely moribund Japan is the best example of the ultimate
consequences of an excessive reliance on exports. Indeed, Japan
was a fabulous export machine for nearly 40 years. Ironically,
however, its improved living standards and high domestic per
capita income plateaued very rapidly into a high cost economy
which penalized individual Japanese, first as consumers, then as
savers.

Japanese consumers, of course, have been legendary in the
recent past both for their appetite for high-priced luxury brand
names and cramped apartments. Now that Japan has fallen into a
vicious deflationary cycle. Interest rates are near zero for
savers and the value of family real estate holdings have often
dropped far below their mortgage balances.

This is occurring at the same time Japan's highly efficient
and globally respected manufacturers are being pushed out of many
markets because of new competition from developing countries. The
manufacturers that are not destroyed by this competition are,
often, forced to move manufacturing offshore to remain
competitive.

This, in turn, serves to weaken the domestic industrial base
which is not being rebuilt by a modern service economy because of
the protected nature of domestic service, particularly, utilities
banking trade and distribution, or by consumer demand where
citizens rightly fear for the future and the value of their hard-
earned savings.

More broadly, the superficially logical but inherently
irrational drive to create selected sector export machines,
inevitably leads to the inefficient allocation of capital. The
danger of such policies and the benefits of "efficient allocation
of capital -- driven by consumers who borrow as well as save" was
recently pointed out and an excellent recent article by David
Roche in Forbes magazine.

As Roche notes, "the traditional economic model in Asia is
based on massive domestic saving rates and an even greater
investment rate -- 30 percent to 40 percent of gross domestic
product". This has resulted in "Asian consumers (living) in
bondage, saving lots and enjoying little."

Even worse, according to Roche, "huge slugs of household
savings were channeled by Asian, and foreign, bankers into crony
property companies. Or in the case of Korea, savings were plowed
into unprofitable ego investment in Chaebol (monopoly) industrial
assets. The result was that productivity of capital was zilch.
And the banks, acting as intermediaries between savers and
investors, were left with heaps of non-performing loans". Surely
this is an apt description of Indonesia. Unfortunately,
Indonesia's "corporate crony borrowers" have not become history.

Roche also notes that in a consumer-driven economies, capital
allocation will become more proficient, enabling these economies
to attract new investors. If the consumer drives the economy in
terms of what is being produced and what makes money, the market
can replace "the circle of bank, tycoon, Chaebol and government
as the allocator of resources".

And, as Roche also points out, capital becomes scarce and has
to be used productively in response to dictates of the markets,
which means that rates of return on capital will rise.

In a virtuous consumer-driven circle, "less capital has to
produce more things and sell them at lower margins, but at a
higher return on assets".

Indonesia is ideally placed to generate internal capital
investment because of its large affluent, urban consumer base
(perhaps as many as six million families containing 25 million to
30 million high and medium income consumers) and the export
revenue floor provided by its significant production of
internationally traded commodities like oil, natural gas, gold,
copra, tin, palm oil, etc.

Instead of bank-rolling well-connected cronies, Indonesia's
financial institutions would do better providing a broad range of
consumer lending and credit services, which generally offer much
better quality credits and better margins than "your average real
estate tycoon".

Even when consumer goods are imported from efficient
producers, be they in Boston, Beijing or Bombay, they provide
wide range of profitable domestic service activities and
production employment through distribution and retail trade,
whether or not the ultimate retail outlets are owned by
Carrefour, Walmart or Matahari.

The countries of Southeast Asia will recover over the next two
decades by taking advantage of a clear human resource edge in
various service industries from health to leisure. In resource-
poor areas like eastern Indonesia, sustainable wealth can be
generated not by government subsidies and projects, but by the
Asian vacationer. The new investment story in Indonesia is the
consumer story. The major flaw in Asia's old model is its
inability to allocate capital efficiently.

The drive to increase exports is a worthy goal. As a policy
instrument, however, its main benefit is to ensure rational
economic policies and the elimination of protection across all
industries which make the domestic economy more efficient whether
it is servicing the export manufacturer or the global tourist.