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