As with any other country, Indonesia's economy cannot grow at higher speed and in a sustainable manner if the economy is not firing on all three cylinders.
Well no wonder the economy's fucked, turns out it's one of those lameass Daihatsu Charades.
Wed, 17 Jun 2009
JAKCHAT/Managing the economy: Grasping the notion of `Neorealism'
Any government that gets elected to office will eventually have to deal with the realities of today. Debates about neoliberalism are futile; the relevant issue is: "neorealism".
Watching Indonesia's presidential campaigns can be entertaining. One can't help but notice that throughout the past several months, each candidate has been accusing the other of neoliberalism.
Most of the electorate has little understanding of what neoliberalism is, so the competing teams have been coming up with their own creative definitions of it, ranging from "pro-IMF" to "constantly talking about the markets".
For many who are blessed with common sense, however, the ongoing witch-hunt for the neoliberalist is irrelevant.
Instead, a concept that all the presidential candidates should start grasping is "neorealism".
This refers to the fact that anyone who gets elected to office must face the realities of today, in terms of how the Indonesian economy, and also the world, actually works.
Perhaps the first lesson on "neo-realism" should involve acknowledging the concept of broad-based economic growth.
As with any other country, Indonesia's economy cannot grow at higher speed and in a sustainable manner if the economy is not firing on all three cylinders.
There are basically three sectors of the economy: the primary sector which produces raw materials (agriculture and mining), the secondary sector which produces processed goods (manufacturing and construction), and finally the tertiary sector which produces non-tangible services.
Ever since the financial crisis of 1998, Indonesia's economy has had one cylinder down. Due to a variety of problems, growth in the manufacturing sector has not been satisfactory. Manufacturing grew on average by 5 percent per annum in the 5 years prior to the 2008 crisis, which is only half the average rate it grew at before the crisis of 1998.
This dent in the economy causes a myriad of problems and to some extent explains why we haven't been able to achieve seven percent growth, as we did in the heyday of President Soeharto.
When other sectors grow while manufacturing is stagnant, imports tend to rise faster than otherwise would be the case. This leads to trade imbalances which eventually suppress economic growth.
In this regard, promising double-digit economic growth with emphasis on agriculture is one thing, but delivering it is another. One needs to explain how such a target could be achieved with the manufacturing sector still in a shambles.
To make double digit growth rates possible, one must first prioritize resolving the long-overdue problems in the manufacturing sector; i.e. issues such as labor market rigidity, deficiencies in human capital, regulatory uncertainties-all of which even the incumbent administration has yet to satisfactorily tackle.
The second lesson on "neorealism" involves acknowledging Indonesia's linkage with the global economy, particularly in terms of capital flows. Government budget deficits are nowadays financed (partly)through financial markets.
Over the past 5 years, the emergence of a well-functioning domestic bond market has enabled the government to break free and gain some "independence" from official bilateral and multilateral loans-which are often complicated by any political strings attached.
Accordingly financial market fund flows have become a significant component in the balance of payments and greatly affect movements of the exchange rate and economic stability. The reality is that markets are allergic to inflation and higher budget deficits. Therefore prudential macroeconomic policies should remain at the top of any elected government's priority list.
Fortunately none of the candidates intend to renege on debt repayments. But concerning what's left of our official debt, which is still a staggering US$60 billion, one must carefully consider what is to be achieved by "rescheduling" it.
Debt forgiveness for war-torn African countries is one thing, but extraordinary effort is needed to convince creditor countries to have mercy on an economy expected to grow at 4 percent this year; especially while the creditors themselves, who have made loans available, face economic contractions as high as 12 percent (as in Japan).
If "rescheduling" only succeeds to delay the repayment of principal without any debt forgiveness, then the end result would only be the preservation of the alleged political leverage that foreign governments have on Indonesia. In a sense this defeats the nationalist argument for rescheduling, in the first place.
And one might as well be more nationalistic by repaying the debt and replacing it commensurately with market-based financing!
There are many more lessons on *neorealism' to add to the list, although for now we'll have to leave it to other readers to contribute. Basically the fundamental idea on neorealism involves the virtues of balance and continuity.
There are no hidden treasures which we can exploit to achieve instant welfare. And any new government must be able to maintain the delicate balance between pro-growth policies and prudential macroeconomic policies.
One will not be able to choose one over the other, although saying otherwise during campaigns could put on a good show for the electorate. The writer is an economist at Bank Danamon; the views expressed herein are personal
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