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.