Govt financial discipline eroded, says economist

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)