Thu, 25 Dec 2003

Good governance or perish

Djisman S. Simanjuntak Executive Director Prasetiya Mulya Business School Jakarta

Most Indonesians are undoubtedly grateful for the consolidation of macroeconomic stability they experienced in 2003.

At a time when the growth rate accelerated slightly, inflation was tamed at an annualized rate of less than 6 percent. The rupiah gained strongly against the U.S. dollar, although it lost heftily against the Australian dollar and Euro.

In spite of a diminishing current account, surplus foreign exchange reserves continued to increase thanks to the resumption of capital inflow, which in turn pushed stock prices substantially up.

Notwithstanding the planned exit from IMF's Extended Fund Facility (EFF), confidence in macroeconomic policy strengthened, partly because of the credibility of the policy package that the government adopted to replace the IMF-backed Letter of Intent (LOI).

The fact that global disinflation and the depreciating U.S. dollar served as a tailwind to Indonesia's stabilization program provides no reason to trivialize the accomplishment. However, there is much more to economic success than the combination of moderate growth, low inflation, exchange rate gain and a modest increase in foreign exchange reserve. Besides the early part of the 21st century is unique in recent history, in that it is blessed with macroeconomic stability of a virtually global coverage.

Indonesians who are trapped in poverty or are forced to survive without a permanent job, or who are even jobless, may find the song of improved performance and the relative indifference of politicians toward unemployment increasingly strange and saddening.

Witnessing Indonesia's share in global output, trade in goods and services and stock of foreign investment suffering from erosion is worrying to those who derive national pride from global competitiveness in interactions, that constitute the core of human civilization. Only isolationists watch with schadenfreude Japanese, European and American investors and traders flocking to China, Vietnam, India and East Europe reducing their Indonesian presence at the same time.

Infrastructure bottlenecks aggravate the problems of competitiveness in industries, where tough global competition prevails. Even the macroeconomic stability has not been as solid as flow figures suggest.

Against the backdrop of the huge debt of the government, the dominant role of government bonds and Bank Indonesia's promissory notes in the earning assets of commercial banks, and dependence of banks on blanket guarantees in dealing with risks, the result of the consolidation loses much of its lustre.

The slight acceleration of 2003 is expected to continue in 2004. While the domestic environment is going to get more heated, in the wake of campaign rhetoric and show of force, no amok is expected to erupt.

The risk associated with terrorism seems to have abated following the capture of some of its leading operators.

The consumption-driven growth will most likely continue. Even investment and export are likely to rise in spite of deeply petrified obstacles: Lack of legal certainty, rampant corruption, weakened commitment among politicians and bureaucrats to service excellence, high cost of doing business, myopic unions, rent seeking among investors and traders, and the perennial shortage of entrepreneurs.

However, singing the same song of modest performance improvement will eventually cease to please the ears -- even among the privileged wealthy minority who witness Indonesia drifting farther away, behind the economies it aspires to catch up with.

The post-EFF policy package is largely silent on structural issues. Conventional approaches are doomed to fail in attacking "hypocritical legalism" and shameful corruption. It would be the greatest irony of history, if the enemies of reform managed to hide safely in the jungle of an unattended legal system.

The trillions of rupiah that are bound to be sunk in the elections 2004 would be a sheer waste, if they are contested among reform-phobic politicians. While craving votes, political parties should inform people unambiguously of the order of priorities of their political agenda, and how they intend to address the core issues.

An economic performance similar to the one Indonesia was enjoying in 2003, and probably repeats in 2004, is insufficient to create the number and diversity of jobs that Indonesians are badly in need of. Major increase in investment and trade is indispensable for a performance that would help reignite the realistic hope for a rewarding toilsome wait.

A wide variety of ingredients is needed to fuel such a surge in investment and trade. They include a new economic architecture, which is able to unleash the entrepreneurial potential of Indonesians in business, politics and civil societies.

Needless to say, drawing such architecture is a political process with consensus as its crown. It is painstaking, but easily compared to another indispensable ingredient: concrete progress in law enforcement and in good governance.

Even a modest reform program looks utopian in the absence of a consistently enforced law and that of a clean government. A nation can compensate inadequacy of competence with hard work, but for a state where corruption rages unchecked, extinction is a sure destiny. Therefore, crafting concrete progress in good governance is as important to Indonesia's survival as the consolidation of macroeconomic stability. Should elections 2004 fail to give birth to a coalition that ranks such progress highest as its short-term program, the current acceleration of growth may soon etiolate.