Part 1 of 2 Discarding mediocrity for the economic fast track
Part 1 of 2 Discarding mediocrity for the economic fast track
Djisman S. Simandjuntak, Executive Director, Prasetiya Mulya Business School,
Jakarta
We do have different views on how the Indonesian economy has
performed in recent months. The disagreement was clearly
reflected in The Jakarta Post's anniversary edition last Friday.
On the one hand there is some good news. Annual inflation rates
have fallen to less than 9 percent, though the decline is
certainly not a spectacular one considering the worldwide threat
of deflation in recent years. Time deposit rates have declined to
the vicinity of 10 percent, though lending rates persist at the
level of 18 percent, pointing to a continued perception of
lending as a highly risky undertaking.
The fall of interest rates to a ridiculously low level in some
economies has reverberated to Indonesia to a limited extent. The
clearest sign of durable stability is perhaps the appreciation of
the rupiah, against the U.S. dollar, by more than 20 percent in
the course of 2002 and 2003, even though this development, too,
is partly attributable to a weakening dollar. Other indicators of
stability include the budget deficit, which is below an
internationally accepted threshold of 3 percent of GDP, a
debt-to-GDP ratio that is below 80 percent, and an increase in
foreign exchange reserves. In a nutshell, Indonesia appears to be
on track as far as economic recovery is concerned as Minister of
Finance Boediono said in his interview with the Post.
However, I would like to focus on the compelling reasons for
arguing that shifting gears to a much faster track of economic
recovery is imperative for Indonesia. Six years since the
eruption of the Asian financial crisis, Indonesia's population
living in absolute poverty has risen by 15 million or by 7.5
percent while total GDP is yet to return to the 1997 level. On a
per capita basis, output in 2002 was roughly 9 percent below
1997.
Investment also has shown some alarming signs of shrinkage and
stagnation. Gross fixed capital formation in 2002 was 31 percent
smaller than in 1997. In the period of 1997 -- 2002, annual
approvals of private investment fell to 21 percent in the case of
domestic investment and 29 percent in the case of foreign direct
investment, showing unmistakably that Indonesia is disappearing
from the "global investment radar".
Trailing now even behind Thailand, Indonesia is being shrunken
into a "trade dwarf", suffering from exports that have hardly
changed in six years and imports that have decreased by almost
one-third. Unemployment must have deteriorated severely, though
it failed to surface in official statistics. Indonesia's "misery
index" -- the sum of the inflation rate and unemployment rate --
must have soared to one of the highest in the world. So, we see
that even the celebrated signs of macroeconomic stability are
deceiving to some extent.
A lower debt-to-GDP ratio cannot obscure the problems of
excessive indebtedness that forced the government to seek a
rescheduling from the Paris Club (donor countries) and the
reprofiling of domestic debts. Success in keeping budget deficits
below the threshold of 3 percent is, in a way, a trade-off with
worrying underinvestment in infrastructure, including social
infrastructure, as well as gross underpayment of government
employees -- civilians and military personnel. In the meantime,
the relative peace of the post-Cold War era is over.
The global environment has lately become very disorderly,
following the terrorist attack against the United States in 2001,
the bombings that were targeted at travelers in Bali in 2002, the
Iraq war and last week's bombing in Jakarta. These shocking
events, combined with SARS, form an even more scary environment.
Most recent projections on economic growth for 2003 and 2004 by
Project Link and the International Monetary Fund have been
corrected downward. Indonesia is thus faced with an additional
downside risk to its already meager growth.
High economic growth is admittedly not a panacea to the
blights that have afflicted Indonesia since before the crisis. In
its absence, however, the very existence of a poor nation is put
to a serious test. With the loss of development momentum, the
glue that kept the "imagined community" of Indonesia alive has
been diluted. As distance to more advanced societies increases,
even within a limited geographical scope, the feeling of being
pushed to the brink of evolutionary irrelevance is bound to be
increasingly haunting.
After all, the state, or the commonwealth in Hobbesian terms,
is founded as a way of creating and multiplying beneficial non-
zero interactions between people who otherwise would engage in
wars involving everyone against everyone else. Citizens expect
from the state and its government a positive contribution to
their fitness and a chance of coming out victoriously, however
slightly, in the relentless and at times merciless global
competition for a larger share in the global pool of genes or the
pool of survival-enhancing fundamental cultures. The calm in
which Indonesian political leaders succumb to the forces of low
growth is hard to comprehend.
Ideally speaking, it should be the people who have the say on
where to go from the current quandary, and at what pace. However,
"referendum democracy" is only possible, if a number of strict
assumptions are fulfilled. To enable people to make an informed
choice, agents need to develop options. As far as I am concerned,
a quick return to a high-growth path is an urgency for Indonesia.
I suspect a growth rate of 3 percent to 4 percent a year for an
extended period is simply inadequate to keep the already strained
republic united.
Indonesians should aspire to grow at 8 percent or even faster.
China experienced such growth for over two decades. Denying such
opportunities to other countries would mean discarding the very
nature of economic development.
Stage one of the high-growth path will require massive factor
utilization. Assuming a given level of productivity, growing at 8
percent a year would necessitate an investment-to-GDP ratio of
perhaps 38 percent or 16 percentage points higher than its
current level. In nominal terms the annual investment needed
would be as huge as Rp 600 trillion (about US$68 billion).
Needless to say, such factor dependence can be ameliorated
with the help of a better utilization of factors. Shifting to
low-cost sources of capital goods, as China did, can also help
economize on limited resources.
The article was condensed from the economist's paper,
presented during The Jakarta Post's seminar on Strategy for
Indonesia's Economic Development on Monday.