Living with another lean year

Living with another lean year

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

The bombing, however tragic, is not the only humiliation that
the government is forced to swallow. Through the Binjai shooting
the absurd rivalry between the armed forces and the police for
commercialized protection was revealed shamelessly.

The 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 high
places was jailed in 2002 for corruption. The government is
unable to remove from office politicians whom the court has found
guilty. While new laws are written and existing ones amended,
enforcement shows no credible signs of progress. What is more no
one in the government feels responsible for what has happened or
failed to happen. No high official resigned or was fired for
instance after the Bali bombing.

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

A strong growth of consumption, revival of certain segments of
construction, persistent high growth in electricity generation
and telecommunication services and rampant black economy such as
illegal logging and mining suggest that statistics have failed to
capture recent changes in the economy.

Inflation has been decelerating throughout 2002, though it
becomes less impressive against the background of a worldwide
disinflation. The rupiah has appreciated strongly against US
dollar and Singaporean dollar, making the servicing of
international debts less burdensome. IBRA has managed to
accelerate the disposal of its assets, though different
stakeholders received the announcement with dismay. Spatial
competition has been enlivened in the economy.

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 high-growth
path at the earliest point in time. In spite of a careless
depletion its relative endowment has remained favorable. What is
more, a high growth is needed to reduce unemployment, the
seriousness of which is puzzlingly 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 business
location has fallen to 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 GDP fell to the range of 20 percent. Gross Fixed
Capital Formation in the first quarter of 2002 was one third
smaller than in the same period of 1997. In real terms it shrunk
in the first semester of 2002 over the same period in 2001. Since
its deep fall in 1998 import of capital goods has remained at a
small fraction of import of the same category in 1997.

Outstanding bank loans in a year ending July 2002 increased by
only 11 percent or by zero percent in real terms. Investment
approval in 2001 was as small as 27 percent for foreign
investment and 47 percent for domestic investment compared to
1997, and approval 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,
uncoupling Indonesia farther away from the global production
system.

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

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

Labyrinthine policy and bad practices of governance
exacerbated the situation. When ministers of the same government
adhere to contradicting policies businesses are bound to flee
away 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 contractive impacts of the Bali Bombing
and a projected hesitant recovery in the world economy the
government and the parliament have agreed on a budget, which is
slightly more expansionary than originally conceived.

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

Shifting servicing obligations to the future as the government
has done through the Paris Club and re-profiling is not a
solution. Monetary policy is faced with paralyzing handicaps as
well. Indonesian banks are reluctant to lend lest doing so erodes
their capita base. From a business perspective the current
strategy of investing in government bonds and Bank Indonesia's
promissory notes at a 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 interest of political
change they expect to see a New Indonesia where the government is
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 just left difficult issues untouched. To recover in 2003 under
a weak global upturn Indonesia needs an awaken government.

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