Manila, Jakarta take action to boost growth

Manila, Jakarta take action to boost growth

Michael Richardson, The Straits Times/Asia News Network, Singapore

Economic recovery for any country must start with an effective
dose of self-help.

Singapore's Prime Minister Lee Hsien Loong made this clear
when he said at the end of a visit to Indonesia this week that if
the political climate was right and the investment environment
improves, more projects would be launched and trade and tourism
flows would grow.

Indonesia and the Philippines are the most populous countries
in Southeast Asia. Their progress would set a positive tone for
the region. Yet they are struggling with fractious political
elites, restive military establishments, and heavy debts and
budget deficits. They are weighed down by rising birth rates,
unemployment and poverty.

Indonesia, with a population now estimated at 223 million, is
the world's fourth largest nation. By 2025, it is projected to
have over 270 million people. The Philippines, with a population
of more than 81 million, is expected to have nearly 110 million
people by then.

However, both countries have leaders who appear to be
committed to recovery strategies. Indonesia's newly inaugurated
President Susilo Bambang Yudhoyono said in an interview in the
latest issue of Time magazine that he wants to improve the
investment climate, starting with political stability, improved
security, good taxation and economic policies, and legal
certainty including sanctity of contracts and fair systems for
settling disputes.

But the problems that Philippine President Gloria Macapagal
Arroyo is encountering with her tax reform program in Congress
suggest that Susilo, who is struggling to win firm majority
support in the Indonesian legislature, may also face an uphill
battle.

While Indonesia has made an impressive and rapid transition
from authoritarian rule to democracy in the last six years, the
financial and economic crisis of 1997-1998 that brought former
strongman Soeharto down and put Indonesia back on a democratic
path hit the country hard.

According to the National Development Planning Board, nearly
25 percent of the population is unemployed or only able to find
part-time work at very low rates of pay.

Annual economic growth of around 4 percent sounds impressive
but provides less than half the 2.5 million young Indonesians
entering the employment market each year with jobs. Poverty has
increased in the past few years and corruption is widespread.
State spending on basic development needs like health, education,
housing and family planning has fallen, because government
revenue has declined and about one-third of it is used to pay or
rollover debt accumulated in the past.

The United Nations Children's Fund reports that Indonesia has
the highest rate of elementary school dropouts in Southeast Asia.
Both government and Muslim religious schools need more funding
and better teacher training.

They need to develop a curriculum that offers students a
modern education, one in which they read widely, learn English
and other foreign languages, and acquire the knowledge and skills
that will enable them to find jobs.

Arroyo warned in August that the Philippines was in "fiscal
crisis" because it had been spending far more than it earned
since 1998. But Moody's Investors Service said on Tuesday that it
was disappointed that none of the eight tax proposals she
submitted to Congress had yet been passed.

Lawmakers are reluctant to back the higher taxes she wants.
They fear that such measures could hurt key political supporters
and campaign contributors. Legislators in the House of
Representatives recently approved a long-delayed Bill to raise
taxes on tobacco and alcohol -- but only by 20 percent, not the
30 percent sought by Arroyo.

And the tobacco and alcohol taxes in the Philippines, which
are among the lowest in the world, will not be indexed to
inflation. As a result, projected revenue from the tax hikes will
amount to about US$465 million (S$774 million) over the next
three years, instead of $750 million. Arroyo's eight tax increase
proposals were intended to raise at least $1.4 billion a year in
extra revenue -- the minimum needed to stop the debt growing.

Moody's and the other two main international credit-rating
agencies already rank the Philippines two notches below
investment grade and are considering a further downgrade because
of the revenue shortfall. This will raise the cost of borrowing
for a country with a budget deficit that is proportionately
larger than that of Argentina when its financial crisis struck in
2002.

An annual budget deficit, equivalent to as much as 5 percent
of the Philippines' economic output, led to a rapid build-up in
debt. It now amounts to 136 percent of Gross Domestic Product.
This is one of the highest levels of public sector debt in Asia.
Interest payments eat up one-third of government revenue.

A report earlier this year by a group of economics professors
at the University of the Philippines warned of an Argentina-like
default on loan repayments if there was surge in global interest
rates or a withdrawal by foreign lenders.

If the governments of Indonesia and the Philippines can
implement necessary changes, foreign investment, trade and other
economic support will rise.

But if Indonesia and the Philippines fail to quell
lawlessness, they will become poorer and criminality of all
kinds, including terrorism, will increase. There will be little
then that anyone outside those countries can effectively do to
help arrest the downward slide.

The writer is a visiting researcher at the Institute of
Southeast Asian Studies in Singapore. The views expressed here
are his own.