Living through another lean year

Living through another lean year

Djisman Simanjuntak

Indonesia is going to add another pale year to its post-Soeharto
era. Its already tarnished image as a state was severely damaged
again after the Bali bombing, which demonstrated undeniably how
vulnerable Indonesia had become to acts of terrorism.

The bombing, however tragic, is not the only humiliation that
the government was forced to swallow. In the Binjai shooting the
absurd rivalry between the Military and Police over protection
rackets was embarrassingly revealed.

Domestic insecurity is impossible to hide. Equally humiliating
is the lack of progress in the war against corruption. Along with
the redistribution and decentralization of power, corruption has
permeated all crevices. Government offices are ostensibly bribing
each other to quicken the speed of transactions.

Culprits do not have to worry about punishment. No one in a
high place was jailed in 2002 for corruption. The government was
unable to remove from office politicians whom the court had found
guilty. While new laws are written and existing ones amended,
enforcement showed no credible signs of progress. What is more,
no one in the government felt responsible for what happened or
failed to happen. No high official resigned or was fired, for
instance, after the Bali bombing.

Within this highly frustrating political environment Indonesia
did manage to produce some good news. In spite of the combination
of a global economic slowdown and the implication of Indonesia in
international terrorism the economy grew at 3 percent to 4
percent.

Strong consumption growth, revival of certain segments of
construction, persistent high growth in electricity generation
and telecommunications services and a thriving black economy,
including illegal logging and mining, suggest that statistics
have failed to portray recent changes in the economy.

Inflation decelerated throughout 2002, though it became less
impressive against the background of worldwide recession. The
rupiah appreciated strongly against the U.S. dollar and
Singaporean dollar, making the servicing of international debt
less burdensome. The Indonesian Bank Restructuring Agency
managed to accelerate the disposal of its assets, though
different stakeholders received the announcement with dismay.

Complaints about myopic local governments are mounting. The
learning process may proceed at the speed of a snail.
Nevertheless, decentralization is perhaps the most promising
change in the entire post-Soeharto period, followed by a maturing
civil society.

Indonesia has some compelling reasons to return to a high-
growth path at the earliest opportunity. In spite of careless
depletion of natural resources, its relative natural endowment
has remained favorable. What is more, high growth is needed to
reduce unemployment, the seriousness of which is strangely
overlooked by politicians.

Given the new starting conditions, productivity improvement is
not a realistic choice for Indonesia to boost growth. High growth
in the new future will have to come from more labor and capital.

The problem is that Indonesia's attractiveness as a business
location has fallen into an abyss, except for investors in rent-
intensive businesses.

Investment indicators have signaled a deeply worrying trend
since the financial crisis of 1997. Gross fixed capital formation
as a fraction of gross domestic product fell to the 20 percent
level. Gross fixed capital formation in the first quarter of 2002
was one-third smaller than in the same period in 1997. In real
terms it shrunk in the first semester of 2002 compared with the
same period in 2001. Since its deep fall in 1998 imports of
capital goods have remained a small fraction of what imports in
the same category were in 1997.

Outstanding bank loans in year ending July 2002 increased by
only 11 percent, or by zero percent in real terms. Investment
approvals in 2001 were as low as 27 percent for foreign
investment and 47 percent for domestic investment compared with
1997, and approvals in the first half of 2002 fell again by 52
percent for foreign investment and by 68 percent for domestic
investment over the same period in 2001. Worst of all, some
foreign companies have moved some of their activities abroad
because of frustration with an increasingly hostile environment,
shifting Indonesia even further away from the global production
system.

If this trend continues for another year, Indonesia will get
stranded on the periphery of world trade and investment, where
earning a cent is harder than a dollar at the center.

The miserable, postcrisis investment performance is no
mystery. Considering that output in most industries has yet to
return to its 1997 level, weak demand for new assets is almost
self-explanatory.

Labyrinthine policy and bad governance exacerbated the
situation. When ministers of the same government promote
contradictory policies, businesses are bound to flee to more
reasonable hosts, of which there is abundance around Indonesia.
The billion-dollar question is, how does one get out of the
petrified policy mess?

Bearing in mind the negative impact of the Bali bombing and a
projected hesitant recovery of the world economy, the government
and legislature have agreed on a budget that is slightly more
expansionary than originally conceived.

However, one should not expect too much from macroeconomic
stimulation under current economic conditions. The huge
government debt does not allow substantial new borrowing.

Putting off servicing obligations to the future, as the
government has done via the Paris Club, and reprofiling, are not
the solution. Monetary policy is faced with paralyzing handicaps
as well. Indonesian banks are reluctant to lend lest doing so
erodes their capital base. From a business perspective the
current strategy of investing in government bonds and Bank
Indonesia promissory notes at given rates and passing any decline
in policy interest rates on to depositors is a superior choice.
In short, tinkering with macroeconomic policies is unlikely to
cure structural weaknesses.

When people risked their life in the interests of political
change they expected to see a new Indonesia where the government
was determined to confront the issues of human rights, poverty,
corruption, demilitarization of politics and many other basic
issues. So far, the government has been beating around the bush
or simply left difficult issues untouched. To recover in 2003
under a weak global upturn Indonesia needs an awakened
government.

Unfortunately 2003 is a preelection year. Parliamentarians
will be preoccupied with reelection. The contest for the
presidency will become more heated. Can miraculous changes occur
in the coming six months or so? If not, Indonesia will have to
live with weak growth, with all the bitter implications that has
for unemployment and poverty.