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.