Investment key to economic recovery

Investment key to economic recovery

Dewi Anggraeni, Contributor, Melbourne

Dr Howard Dick, Associate Professor in the Australian Centre
for International Business at the University of Melbourne, sees
improving the investment climate as the key to speeding up
Indonesia's economic recovery. Dick, one of the university's
Indonesianists who has written numerous books on the region, the
latest being Surabaya: City of Work: A Socioeconomic History,
1900-2000, The Emergence of a National Economy: An economic
history of Indonesia, 1800-2000, and Corruption in Asia shares
his thoughts with Dewi Anggraeni in an interview in Melbourne.

Question: The draft budget is out now. To boost the economic
growth, the government seems to rely on export, increase in taxes
and domestic consumption, and it is expecting 5 percent growth.
Do you think it is realistic?

Answer: The economy can sustain growth of 3 or 4 percent. At
the moment it is like a six-cylinder motor car using only 4
cylinders. These 4 cylinders are consumption and exports. At this
rate you can reach a certain speed, but if you want to achieve 5,
6 or 7 percent, you need the other two cylinders, which are
domestic and foreign investment. Those two cylinders are not
working at the moment.

Q: You don't think investment is going to pick up?

A: There is no reason for it to pick up, because investors are
being frightened away. The Manulife case has been a complete
disaster for Indonesia. It has been very widely publicized around
the world and crystallized all the fears that foreign investors
have about investment in Indonesia. In the background, you have
the difficulties that resource companies are having in the other
islands because of decentralization and various forms of strife.
Nowhere are property rights secure at law.

Domestic investors are also penalized. Those who withdrew
their capital at the time of the Asian crisis have little
incentive to repatriate their offshore interests and every
incentive to continue siphoning part of their local profits
offshore. Many apparently domestic firms now discreetly run their
operations from more secure offshore bases such as Singapore.
This is a re-run of what happened during the economic instability
of the 1950s and 1960s.

There was a chance after May 1998 for reconciliation, but that
opportunity is now lost. While Indonesian Chinese now have more
rights and are better accepted, the underlying problem of
discrimination remains. Private business is therefore hamstrung
and ever vulnerable to rent-seeking by the political elite.
Indonesia will have to survive on a very modest private
investment for quite some time.

Q: You don't think that the increase in taxes is a factor that
will frighten away investors?

A: No. The effective tax rate is still extremely low. It is not
the high tax rate that scares away investors, but the high risks,
which involve general insecurity of property rights and
discrimination against the ethnic Chinese.

Q: You see the ethnic Chinese business still essential for the
growth of the economy?

A: Certainly the pribumi (indigenous) sector is bigger than it
used to be but it is still the minor part of the private business
sector. The problem is that Indonesia has not moved far from the
1950s view that the way to achieve progress for the pribumi
sector is to discriminate against the non indigenous sector.
Malaysia tried that in the 1970s, but it has moved on. Mahathir
realized that the best way to stimulate bumiputera business is to
improve the investment climate for the whole business sector, not
just for the minor part. You cannot boost private investment by
discriminating against the major part of the business sector.

Q: How about the government's foreign debt problems?

A: The foreign debt is not in itself a big problem. It is a lot
of money, but with some ongoing rescheduling Indonesia has the
export capability to service that debt. Where it bites is the
loss of economic sovereignty. A high foreign debt, a poor
investment climate and slow growth restrict the political and
economic options and extend the period of IMF supervision.

The domestic debt is a more pressing problem. It was a debt
incurred to recapitalize the banking system, which still does not
meet the liquidity target. This is a heavy mortgage on
Indonesia's future, to pay for past mistakes and gross
corruption. Because bondholders are paid out of taxes, it is also
a substantial diversion of government revenue. On the financial
side, the bonds are a dead weight on the financial market.

Q: Do you see the likelihood of the resource-rich regions
enforcing their own policies, thus increasing the existing fiscal
burden on the central government?

A: That certainly is a problem. It was predictable that the
resource-rich regions would use autonomy for their own benefit.
Resource-poor regions may not actually become poorer but
relatively they will more and more be left behind. The central
government has a fiscal transfer mechanism to balance this but it
is too early to say how effective it will be. If Indonesia is
going to hold together, regional imbalances will have to be
managed.

However, the immediate problem that flows from
decentralization is the worsening investment climate. Projects in
the regions are very dependent on the goodwill of the local and
provincial governments. The problems of Kaltim Prima coal miner
are well known. Other mining projects are being held to ransom by
rapacious local interests. Each case does further damage to
Indonesia's international reputation and its investment climate.

Q: What is your view about the House of Representatives' role?

A: This is part of a settling down process. The technocrats no
longer have a free hand in economic policy. They along with the
rest of the government are being held accountable, and that is
the essence of democracy. The question is, when are they held
accountable, and by what process? No one would argue that some
parliamentary interventions have been very opportunistic, or that
some policies require more time to become effective. However the
principle of accountability is a good one. There has to be
continuing negotiation to work out the best ways to achieve it.

Q: How about growing sentiment against the International Monetary
Fund?

A: The IMF has become an influential player in internal
Indonesian politics. Though wary of the dangers, the IMF can not
avoid some involvement. It has to work closely with the
government. On occasions it has also lobbied parliament for and
against certain policies. After five years there can be observed
a kind of moral hazard. It is too easy for parliamentarians,
politicians, bureaucrats and members of the public, including the
media, to expect the IMF to deliver miracle cures, and attack it
as a scapegoat when it fails to do so. Eventually the Indonesian
government and parliament have to accept responsibility for
economic policy. Now is a good time for that to happen. I'm not
sure that it would be healthy for the IMF to continue its role
through to the next election in 2004.