Leadership urgent to rescue economy

Hadi Soesastro, Economist, Centre for Strategic International Studies, Jakarta

The Indonesian economy, the recovery of which has been weak and fragile, is being threatened by external and internal developments. The world economy is rapidly slowing down with the possibility of entering into recession. The U.S. economy, which has been an important locomotive for the world economy, began to show a slowing down at the beginning of this year.

Some believed that this would happen earlier because it could not continue to expand at a rate of growth that was near full employment for as long as it did. The third quarter of this year saw negative growth.

The Sept. 11 terrorist attacks on the heart of the U.S. financial center may send the U.S. economy into a recession, that is, experiencing negative growth in, at least, two quarters in a row. Early prediction suggests that by the second semester of 2002 the U.S. economy could take off again. The recession in the U.S. may not be deep as the government will pour liquidity into the economy, in part to finance the "war" against international terrorism.

Can the Indonesian economy wait for the U.S. economy to pull up the world economy again? Under the most favorable conditions this would mean that we would have to wait a whole year before the external environment again became favorable. East Asian economies would be severely affected by this downturn. They were helped greatly in 1999 and 2000 in overcoming the crisis by the strong growth of the world economy led by the U.S. economy.

Thailand and Korea were able to come out of the crisis because of this favorable external environment. Now, they and others will be negatively affected by this development. Even Singapore is currently experiencing negative growth of more than 5 percent. Many other regional economies that depend heavily on exports to the U.S. market, including Malaysia, are already feeling the pinch. Indonesian exports will definitely be hit, even though perhaps not as hard as its neighbors.

Various exporters, in particular of labor-intensive manufactured products, have stated that their exports will drop by between 20 percent and 40 percent. In fact, a major portion of this decline may be accounted for by either the cancellation of orders or as a consequence of a relocation of production, in large extent due to increased domestic uncertainties.

These internal factors have added severely to the effects of the global slowdown. The concern is that when the world economy recovers these internal disturbances will remain. Investors, the markets and the informed public have thus far failed to see clear, coherent and firm policies on the part of the government to deal with these problems.

These domestic problems are reflected in the high-risk premium, which currently reaches somewhere in the order of 13 percent to 15 percent. With such a high risk premium there is no way the central bank can lower interest rates without resulting in destabilizing outflows of money and capital and a further weakening of the rupiah.

It is therefore very clear that to rescue the economy would require, in the first instance, concerted and serious efforts to reduce the country's risk premium. In fact, these efforts are a prerequisite to economic recovery. The weak and fragile recovery of the economy is caused by the continued high risk premium.

To reduce this means, among other things, that the country's security and political stability must be steadily improved. They cannot be changed overnight, but visible progress is all that investors, the markets and the informed public expect. Equally important is steady improvements in the rule of law and the legal system. Another critical factor is the handling of labor problems. This in itself is a tall order, but a serious beginning in resolving those problems has to be made.

Our rescue agenda is not different from the agenda for recovery. In fact, the rescue agenda is substantially an acceleration of efforts to tackle the most important items in the recovery agenda. No new recipe is required. There is no need to look for radical, alternative measures. There are no quick fixes.

A breakthrough will be obtained only through hard work and determination to accelerate and strengthen the implementation of our recovery agenda. These require in the first instance political will and leadership. This will then have to be translated in decision-making mechanisms, such as in relation to corporate and debt restructuring. In this area, decisions have been extremely slow and bad.

In the very short term, asset disposal and privatization of some state enterprises that are already in the pipeline should be executed without further delay. The government needs successful cases quickly before the little confidence that is still left is totally lost. Without these measures, the economy cannot be stimulated.

To be sure, reducing interest rates may help the budget and save the banking system from a possible collapse, but it will not stimulate investment. The budget is already in a critical stage. It cannot be expected to fuel the economy by means of a fiscal expansion.

In the view of the business community, rescuing the economy means both stimulating the economy through fiscal and monetary means as well as to protect domestic industries from external competition. Protectionist pressures are on the rise. If the government fails to undertake the essential rescue efforts, namely to accelerate the implementation of the recovery agenda, the country and the economy will fall into an even deeper pit.

The end result would be a greater incidence of poverty and increased unemployment and a spiraling down of the economy into a state of misery. It is a big puzzle as to why some groups in society care less about this real problem affecting a large portion of the population than religious solidarity. It would be an even a bigger puzzle if the government allowed itself to be captured by such misguided interest and aspirations.