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.