Govt financial discipline eroded, says economist
JAKARTA (JP): Economist Anwar Nasution says the increasing shift of capital flows to Indonesia to short-term and commercial borrowings as well as short-term funds should be blamed partly on the erosion of private and public sector financial discipline.
Anwar observed four patterns in capital flows to Indonesia between 1980 and 1995 in an oration he delivered before being installed yesterday as professor of economics at the School of Economics at the University of Indonesia.
One tendency was a higher rate of increase in private capital flows than the official rate, he pointed out in his 86-page oration entitled Capital flows and Monetary Policy in an open economy.
The other tendencies, according to Anwar, are:
* The steep increase in short-term private capital flows either through the banking sector (borrowings) or capital market (portfolio investment);
* The increasing shift in private and public sector borrowings from long-term, concessional loans to short-term, commercial ones;
* The sharp increase in the amount of floating-rate loans to as large as 30 percent of the total foreign borrowings.
Official figures put Indonesia's foreign debt at about US$ 100 billion as of April, of which $40 billion was owed by the private sector and the other $60 billion by the government.
"The increase in the amount of capital flows and the change in their composition reflects the erosion of the financial discipline on the part of the private and public sectors," said Anwar.
Anwar cited the widening domestic savings-investment gap and the sharp increase in government spending outside the state budget account (off-state budget) as examples of declining financial discipline.
"The erosion of financial discipline also can be noted in the sales (privatization) of state assets or state companies through a closed (not transparent) mechanism and at below market prices," 53-year-old Anwar said.
He noted that off-state budget expenditures went to financing strategic industries, subsidizing the price of natural gas sold to petrochemical, power and cement companies, and bailing out some state and private companies.
He also considered the use of funds from state pension funds to buy the shares of state and private companies through private placement or through the capital market as off-state budget spending.
Anwar traced the erosion of financial discipline to the erosion of economic considerations in the economic policy-making bureaucracy.
He pointed out that the conservative technocrats who had in the past succeeded in capping the public budget deficit at a manageable level had been sidelined from the center stage of policy making.
The influence and power of those technocrats has been transferred to non-economist ministers and lobbyists, according to Anwar.
Anwar will leave later this week to assume his new one-year posting as the Sasakawa Distinguished Professor for the Chair in Development Policy at the United Nations University-World Institute for Development Economics Research in Helsinki, Finland.
"The non-economist group consists not only of technologists, as many have assumed so far, but also businesspeople, rent- seekers and structuralists," he added.
He acknowledged that the differences in economic development concepts or economic schools of thought between economists and non-economists is common not only in Indonesia but also other developing and developed countries.
"The problem in Indonesia is that the differences in opinion have immediately resulted in the weakening of the financial discipline, the slow down in the pace of deregulation and decrease in policy coordination," Anwar noted. (vin)