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.