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.