Macro stability alone cannot save RI: Morgan Stanley

Macro stability alone cannot save RI: Morgan Stanley

Dadan Wijaksana, The Jakarta Post, Singapore

The economy will fare much better if the government applies
new development strategies that focus not only on sustaining the
country's macroeconomic stability, said U.S.-based investment
bank Morgan Stanley.

The need for adopting such policies should become clearer as
global economic growth, including Indonesia's, is hampered by the
ongoing war in Iraq, Daniel Lian -- the bank's senior Southeast
Asia economist -- told a number of reporters here last week.

"Indonesia's cyclical growth momentum of 3 percent to 4
percent will neither raise living standards nor lower
unemployment. Only a higher level of growth will avert a
permanent debt trap, alleviate poverty and solve social and
unemployment problems," Daniel said.

The current relatively mediocre economic performance was
mostly due to the government's current policies centering on
fiscal and monetary prudence and stability. Central pillars of
these included a significant reduction in government subsidies,
privatization and divestment programs, and reductions in domestic
debt.

Despite having been able to achieve a stronger rupiah, a
controllable inflation rate and a hefty decrease in the central
bank's interest rates, this was not enough to generate sufficient
economic growth to reduce poverty and unemployment, Daniel said.

According to one estimate, currently around 16 percent of the
country's 210 million population live in poverty.

Daniel said that for the economy to grow at around 5 percent
to 6 percent in the long run, several initiatives were available
to the government.

They were: promoting skill-and resource-driven small and
medium enterprises (SMEs) so as not to rely solely on the mass-
production manufacturing sector, and developing infrastructure to
kick-start and support growth in domestic private investment.

A complementary relationship with newly-emerging economic
giant China should also be pursued.

Given its low wage structure, Indonesia could take advantage
of the rise in China's wage structure by inviting investors to
manufacture low-end products here whose production in China had
become less economic.

Other steps that Indonesia should take to promote higher
growth were accelerating labor exports and leveraging neighboring
country Singapore.

In terms of population, Indonesia should be able to
significantly increase its labor exports, which today only stood
at around one million people, far less than the Philippines,
which has more than seven million people working overseas.

As for Singapore, Daniel said Indonesia should start setting
its sights on the neighboring country as a potential investor
amid decreasing foreign direct investment (FDI) from other
countries.

"Singapore could become a major investor in Indonesia as it
was to a degree before 1998 (the crisis)," he said.

Based on the company's estimate, Singapore has built an
external economy worth some US$200 billion and could spend a
further $10 billion to $15 billion a year over the next 12 to 15
years.

"Capturing a fat slice of that FDI outflow would go a long way
to making up investment shortfalls in Indonesia," Daniel said.

Macroeconomic forecast for Indonesia*

-----------------------------------------------------
(%) 2002 2003 2004
-----------------------------------------------------
GDP growth 3.7 3.2 3.8
Inflation 11.9 9.0 8.0
Export growth 0.8 6.6 7.6
Import growth 0.8 8.0 8.2
Budget deficit 2.5 1.8 1.5
-----------------------------------------------------
Source: Morgan Stanley Research Forecasts

* The forecasts were made before the Iraq war erupted