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.