Leadership urgent to rescue economy

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.