'Market needs govt intervention'

By Vincent Lingga and Prapti Widinugraheni

MEDAN, North Sumatra (JP): Minister of Finance Mar'ie Muhammad asserted here yesterday the need for government intervention in a managed market economy, but underlined that it should be rule- based, transparent and aimed at the public's interest.

Government intervention, he insisted, should be undertaken first and foremost to protect and improve the lives of those who are still outside the economic mainstream and the most backward group in society.

Mar'ie said government intervention in a market-driven economy -- which has been proven to be the prime option for most developing countries -- will always be needed because of weaknesses in the system itself.

"Although a market economy system is better (than communism)... it often lacks the assumptions needed to make it work perfectly which, in reality, are difficult to find," he told the opening session of the 13th Congress of the Indonesian Economists Association (ISEI).

These assumptions include equal access to market information and differences in technological skills and in capital resources, all of which are required to allow perfect market competition, he said.

The three-day congress, attended by around 800 ISEI members from throughout the country, will be discussing various topics related to the challenges faced by a managed market economy in entering the 21st century.

Mar'ie warned, however, that despite the occasional need to intervene in the market, excessive government involvement would be harmful.

"Excessive intervention is more likely to produce a negative impact rather than a positive one," he cautioned.

It is for this reason that continued deregulatory and de- bureaucratic measures are needed, he said.

Indonesia's most senior economist, Sumitro Djojohadikusumo, agreed that the market economy is always in need of government intervention.

"The basic question though is how and in whose interests the intervention should be conducted," Sumitro commented to The Jakarta Post.

ISEI Chairman Marzuki Usman noted that the managed market economy should be based on a structural precondition and a national economic process of getting prices right and choosing the right support institutions.

Price formation

"Getting prices right means that the price formation supports the objectives of sustaining economic growth, enhancing equitable distribution of income and maintaining an overall stability," Marzuki added.

He added, however, that getting prices right is not enough. The institutions also should be the right ones in order to control transaction and agency costs, thereby facilitating a fair and efficient economic process.

Didik Rachbini, an economist from Jakarta, welcomed Mar'ie's emphasis on the rules and transparency by which market intervention should be executed.

"Without these factors, intervention may cause or is susceptible to favoritism, nepotism and various other forms of market distortions," added Rachbini, chairman of the Institute for the Development of Economics and Finance.

He conceded that government market intervention in the country had not always been based on clear-cut rules and on transparent methods.

Mar'ie added that although the private sector plays the key role in a market-driven economy, the government has an important role as well.

He said the government is also needed as a neutral referee in conflicts among private sector players which, in turn, may cause disadvantages to consumers or result in a high-cost economy.

"But in order to perform this role properly, the government must free itself of conflicting interests and interest groups," he said.

Lately, he added, there has been an increasing trend to include morals and ethics in economic and business activities. Such fundamental values have also been included in assessing the government, which has led to the demand for good governance and fair business practices, Mar'ie added.

"These issues have become so important that Harvard University's School of Economics has a course on the moral perspectives on economic growth," he added.

Mar'ie considered that economists should not merely study theories. They should instead expand their knowledge to more complex fields outside economics and be visionary at all levels.

"The challenge (of economics) is the inescapable requirement that economics must come to regard itself as discipline much more closely allied with the imprecise knowledge of political, psychological and anthropological insights than with the precise scientific knowledge of the physical sciences," he said, quoting economic scientists Robert Heilbroner and William Milberg.

Mar'ie, in his speech last night, also touched on the declining role of exports relative to the country's gross domestic product (GDP), warning that recent developments show that Indonesia has shifted from an export-led economy to a consumption-driven economy.

In 1987, the ratio between total exports and the GDP was 22.6 percent and continued to increase until it reached its peak in 1992, when the ratio reached 26.5 percent. In 1993, however, the figure dropped to 23.3 percent, declining to 22.8 percent in 1994 and 22.6 percent last year.

A similar trend can be seen in the ratio of non-oil and gas exports relative to the GDP: in 1987, the ratio was 14.8 percent and continued rising to 22 percent in 1992. But the figure dropped to 19.7 percent in 1993, 19.4 percent in 1994 and remained at 19.4 percent in 1995.

He blamed the situation on the decline in Indonesia's national competitiveness, which was ranked by the Lausanne, Switzerland- based International Institute for Management Development at 41st place out of 45 countries this year, down from 33rd place last year.

Mar'ie said Indonesia now has no choice but to gear up because the free trade era was closing in.