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.