Investment and growth

Most analysts see the government's estimate of 5 percent economic growth for 2003 as too optimistic because consumer spending, thus far one of the biggest locomotives of economic expansion, besides exports, is expected to slacken as a result of the contractile fiscal policy, while foreign investment will likely remain moribund.

Private spending will decrease along with the decline in consumers' disposable incomes as the government will extract more than what it will inject into the economy through a vigorous tax collection, the addition of services subject to value added tax and higher property tax rates.

But the government seems nevertheless confident that the favorable macroeconomic condition, supported by the stronger political stability, will be conducive to bolstering exports and investment to offset any decline in the contribution of consumer spending to growth generation.

This confidence can be seen from the budget projection which more than doubles the target of export growth to 7 percent next year from an estimated 3 percent increase this year.

However, this projection looks too high as the latest economic indicators in the world's economic powerhouses, the United States, Japan and Europe, portend a lower economic expansion next year.

Moreover, the increasingly radical labor movement has made many importers overseas worried about the ability of Indonesian companies to deliver such fashion-sensitive goods as footwear, textiles and garments, consequently shifting their operations to other countries.

Worse still, the manufacturing sector could encounter keener competition from imports as more goods from neighboring countries such as Thailand, Malaysia and the Philippines may inundate the domestic market under the ASEAN Free Trade Area beginning in January.

Investment spending, expected to be the third source of fuel for growth, is not promising either. Government investment (development spending) not only will decrease 5 percent in real terms. It will not provide much stimulus for private investment because only a very small portion of the spending will go to the development or maintenance of physical infrastructures. The bulk of the public sector's investment will be allocated to poverty alleviation and public-welfare programs such as education, health and housing.

Certainly, most foreign investors will most likely remain on the sidelines, waiting for significant improvements in law enforcement, a business-friendly stance on the part of regional administrations and less rigid labor regulations

Moreover, the manufacturing sector does not provide much opportunity for green-field investment projects as it still operates below designed capacity. Resource-based ventures such as mining, fisheries, plantations and other agro-based industries, supposed to be the most lucrative businesses, are rendered unfeasible due to an inimical regulatory environment caused by the excesses of the start-up process of regional autonomy.

Domestic investment is out of the question because many businesses remain hostage to bad debts, the condition of the banking industry is still fragile and interest rates are persistently high.

The budget estimates the central bank's benchmark interest rate at an average 13 percent, compared to 16 percent this year. This means lending rates will range from 18 percent to 20 percent because national banks are still inefficient with intermediation costs varying from 5 percent to 7 percent.

Is the prospect for higher growth really so hopelessly grim?

Not necessarily, if the government and regional administrations are fully aware of the exigency of the situation and accordingly set the right priority and improve cooperation and coordination.

Domestic investment, for example, is still commercially feasible and is in fact badly needed to modernize plant machinery and equipment in order to diversify products into higher value- added goods and improve competitiveness. But this will be possible only if the resource-based businesses such as wood, fisheries, mining and plantations are released from the prison of their debts to reopen their access to new credit lines.

Likewise, foreign investors are till attracted to come in but through the acquisition of business assets currently managed by the Indonesian Bank Restructuring Agency and of certain state companies.

Most important, though, is for the president or chief economics minister to provide effective leadership for the top- priority programs that are most influential to bolstering export and investment.

The national political leadership also need to go all out, through effective communications, to convince regional administrations of how vital a business-friendly environment is to attract investment, without which their regional economy will never expand to improve the welfare of their people.