High-cost economy increases inflation, derails growth

High-cost economy increases inflation, derails growth

Rendi A. Witular, The Jakarta Post, Jakarta

The prevailing high-cost economy produced by corruption is
playing a key role in helping accelerate inflationary pressures,
besides fundamental factors such as the rupiah exchange rate, and
the supply of money and goods.

In addition to the effects of the recent oil-based fuel hikes,
the rampant illegal fees extorted from businesses often forces
them to increase the prices of their goods and services, State
Minister for National Development Planning Sri Mulyani Indrawati
said on Wednesday.

"The high-cost economy is a major trigger for inflation. I
believe that it has also had a considerable impact on the recent
(high) inflation rate," said Sri Mulyani at the Presidential
Palace.

However, she said she was not sure of the precise extent of
its contribution to inflation.

During the first nine months of this year, cumulative
inflation stood at 6.39 percent, excluding the impacts of the
fuel price increases on Oct. 1.

Sri Mulyani said that high inflation -- estimated to reach 12
percent for the full year -- would derail household consumption,
which has been the country's main economic driving force since
the late 1997 Asian financial crisis.

"Household consumption and investment are the two main factors
that will determine the country's economic growth this year.
However, we are concerned that consumption is currently being
adversely affected by high inflation."

Although economic growth in the revised state budget is set at
6 percent, several economics ministers have cut the estimate to
around 5.7 percent due to higher fuel prices and the recent
terrorist attacks on Bali.

"The 5.7 percent growth figure can be achieved if consumption
and investment growth until the end of this year remain above 3
percent and 12 percent respectively. I hope consumption will not
be hurt much by the current high-inflation environment," she
added.

Consumption has been contributing some 70 percent to the
country's economic growth, which stood at 5.86 percent during
this year's first half. Last year, the economy grew by 5.4
percent.

In a recent economics discussion, Bank Indonesia deputy
governor Hartadi A. Sarwono said that inflation would not be so
high if the government managed to reduce or eliminate illegal
fees extorted from businesses.

He argued that the country should have more or less similar
inflation levels as neighboring countries, such as Thailand and
Malaysia, which recorded year-on-year inflation of below 5.5
percent in the third quarter of this year.

If corruption remained widespread, Hartadi said there would be
continuing inflationary pressures in the future, which could
further severely hurt the economy.

Based on a recent report from the Berlin-based Transparency
International, the level of corruption in Malaysia and Thailand
is much less than that in Indonesia, with the two neighboring
states being ranked 39th and 59th respectively as compared to
Indonesia at 137th.

The country's powerful business lobby group, the Indonesian
Chamber of Commerce and Industry (Kadin), has criticized the
government for its failure to immediately address the high costs
of doing business here resulting from corruption within the
bureaucracy.