New Order government needs revitalization

New Order government needs revitalization

By Anwar Nasution

HELSINKI (JP): No one can deny that the 30-year-old New Order government has managed to modernize and expand the productive base of the national economy. At the same time, the national economic development is also directed to the effort to fight poverty. Indonesia, which became a "laughing-stock" of economic development experts in the period of 1950s and 1960s, has been hailed by the international world for its success in economic development.

Indonesia has gained an average of 6 percent annual growth in its national economy in the past 30 years. This is possible only because of big investment, which is more than one fourth of the annual Gross Domestic Product. The investment is used to add to the stock of capital goods and to improve human resources. The improvement of human resources quality has contributed not only to the increase of the growth, but also to the distribution program.

Investment for the need of development is mainly financed by the mobilization of national savings. The budget of national development does not depend much on foreign aid, foreign loans and foreign investors. It was easier to be independent when there was an increase in the oil prices within the decade of between 1973 and 1982.

Unlike other oil and gas producing countries, which spent the money to buy weapons, Indonesia spent it to finance economic development. The government's attention to maintain the independency of the development budget is also reflected in its efforts to make economic deregulation and reformation to increase national savings and rationalize the allocation of economic sources.

Following the success in the past 30 years, the New Order government has to revitalize itself so that it will be able to face the globalization era of economics. There is an erosion of quality in the national policy, which has resulted in an overheating of the national economy in the past six years. The overheating is reflected in the high inflation and deficit of the current account of the balance of the foreign payment, which is becoming bigger, too.

The economy is overheating because of the combination of several things.

First, the economic deregulation process gets stuck. Economic deregulation has not touched various sectors which are strategic to improve the efficiency and reduce production cost. With the exception of PT Indosat and PT Telkom, whose shares and activities have been partly transferred to private sectors, the government's strategy on state-owned companies is not clear. Why can't the state-owned companies, like Garuda, the national flag carrier, and the Indonesian Development Bank (Bapindo) compete with state-owned companies of other countries, like Singapore Airlines and Bank of Singapore?

In various ways, deregulation and privatization in Indonesia simply means transferring the special rights from state-owned companies to private companies which have political backing. The private companies which take over the state-owned companies might practice monopoly and or oligopoly and need more protection and facilities than the state-owned companies. In this case, the deregulation reduces the efficiency of the national economics.

The second factor is the increase of the use of national savings and foreign aid to finance activities which are less rational and do not contribute to the national economy in the world market. Such economic activities include the development of strategic industries under the Agency for the Assessment and Application of Technology and nontraded sectors.

The later includes real and industrial estates, infrastructure projects (electricity and telephones) and other mega projects whose activities are not always more efficient than those of the state-owned companies.

The current foreign loans of the private sectors, such as those obtained through the build-operate-and-transfer schemes, can jeopardize future national economics. Implicitly, the risk (such as the change of the foreign exchange and the interest rate) of private foreign loans is "guaranteed" by the government. Apart from that, the government also gives additional incentive to attract the loans, such as the ease in tax and import cost.

The third factor is the lack of government policies to balance the expansion of the expenditure as a the result of economic deregulations. In fact, economic deregulations such as those in the fields of importing and investment, directly increases the expenditure in the fields of aggregate and importing. The government should have stopped the expansion of the spending through two ways.

First, curbing the expansion of the state budget. Second, strengthening the prudent regulations and their implementation. This needs improvement in the social system, at least in the legal system and the accounting system. The development of a social system should be part of the second phase of economic deregulation.

In reality, it is the government itself which weakens the prudent regulations it made. Because the government did not have enough money to strengthen the capital of state banks and to reduce bad debts, Bank Indonesia, the central bank, lowered the standard of the prudent regulations to allow the credit expansion.

It seems that the way the New Order government selected the leaders of the state, state-owned companies and business people, has changed, from the "what you know" principles, which are rational, to the "who you know" principles, which are irrational.

Minister of Finance Mar'ie Muhammad, in his speech at the anniversary of the Association of Moslem Students on Feb.5, said that such people will not be able to give vision. With leaders who have such quality, we will surely not be able to compete even in the ASEAN level. The Bapindo case involving PT Golden Key Group and the settlement of the case reflected the weak legal and political system, and the low quality of human resources.

Dr. Anwar Nasution is a professor of economics at the School of Economics, University of Indonesia. Presently he is the Sasakawa Distinguished Professor for the Chair in Development Policy at the United Nations University, World Institute for Development Economics Research, in Helsinki, for the 1995/1996 academic year.