Indonesian growth outlook

Indonesian growth outlook

The Manila-based Asian Development Bank is bullish about the prospects of Indonesia's economic growth in the next two years, projecting Indonesia's gross domestic product to grow by at least seven percent a year. But the regional bank, Indonesia's largest multilateral creditor after the World Bank, has reservations about the long-term growth outlook.

The bank observes in the latest Asian Development Outlook -- the annual economic analysis issued by ADB with emphasis on Asian countries -- that Indonesian growth prospects may worsen if significant deregulation of the real sector does not continue and if competitive policies are not improved. The report also raises concern about persistent and strong inflationary pressure, which is partly from an increase in off-budget public spending undermining the fiscal discipline.

None of the ADB observations are new to us because they have often been expressed by private Indonesian economists as well as analysts from the World Bank. The report thus serves mostly as a third party endorsement of the warning often rung by domestic analysts. But we should note that the ADB, like the World Bank, is a seasoned analyst of Indonesia's economy.

The House of Representatives has often lobbied, but has so far failed, to have all government revenues, fees and spending accounted for in the state budget. Since off-budget spending, including the reforestation funds, has steadily increased, it has indeed adversely affected fiscal discipline.

The series of massive reform (deregulation) measures launched in 1985 achieved impressive results, as can be seen in the robust economic growth over the last decade. But, because most countries have also implemented similar economic reform packages, the pace of deregulation, which seemed quite massive and effective a few years ago, no longer adequately meets the keener competition of the increasingly globalized economy.

In so far as Indonesia is concerned, however, the problems are causing much greater concern. We get the impression that the government, instead of accelerating the pace of its reforms, has tended to resort to what economists see as "stop-and-go" policies. No wonder ADB states that the pace of real sector deregulation in Indonesia has flagged over the past three years.

The diminishing open market competition in several vital segments of industry, including basic infrastructure, is of great concern. It can affect the whole economy. The privatization of several sectors previously monopolized by the government was at first applauded, but is now seen as inimical to long-term economic growth because the move tends to create private monopolies or oligopolies. This has been partly caused by the extreme lack of transparency in the awarding of major contracts in basic infrastructure and the formation of joint ventures between state firms and a small group of businesses.

The absence of anti-trust laws and regulations on unfair business competition allows some companies to strengthen their domination of particular industries and become oligopolies. These oligopolies may render a deregulation measure ineffective by erecting barriers to entrants into their domain. The latest heated debate over barriers to entering the cement industry is simply one instance of how a theoretically open market is actually a closed market.

The next package of deregulation measures, expected to be issued in June or July, should therefore be very substantial in order to increase Indonesia's economic competitiveness and sustain high growth in the long-term.