Wed, 30 Apr 2003

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.