Fri, 09 May 2003

Part 2 of 2 Rethinking development -- Pain or gain?

Yanuar Nugroho, Director, The Business Watch Indonesia, Surakarta,

A second lesson is that development must be sustainable and environmentally sound. If economic development destroys the earth's natural resource base in the process, it is self- defeating. But, this is what is happening.

The soil is being depleted, with nearly two million hectares of land worldwide eroded and some areas facing sharp losses in productivity. One-fifth of all tropical forests have been cleared, reaching a total loss of nearly 200 million hectares between 1980 and 1995.

One-third of all terrestrial biodiversity, accounting for 1.4 percent of the earth's surface, are in vulnerable hot spots and threatened with complete loss in the event of natural disasters or further human encroachment.

Fifty-eight percent of the world's coral reefs and 34 percent of fish species are at risk from human activities, 70 percent of the world's commercial fisheries are fully exploited or overexploited and experiencing declining yield, the World Bank found.

These calamities are happening because economic solutions are considered as the only way out for various problems affecting humankind. While it is true that there exists some or many successful economic approaches, it does not legitimate application in all other cases -- such as debt.

Since the economic crisis struck in 1997, the rupiah devalued by an actual 400 percent, making it impossible for the country to pay its debt. The debt has therefore been rescheduled through the groups of donors in the Paris Club and London Club.

Yet, one condition for rescheduling applies. It is the Letter of Intent (LoI) with the International Monetary Fund (IMF), which is also a precondition in getting support from other financial institutions like the Consultative Group on Indonesia (CGI), the Asian Development Bank and the World Bank.

Indonesia was thus registered for treatment with the International Development Association, with the obligation to follow IMF's prescription.

Together with the World Bank, the IMF embarked on a policy to structurally adjust the Third World by deflating economies and demanding a withdrawal of government, not only from public enterprise but also from compassionate support of the basic health and welfare of the most vulnerable. Exports to earn foreign exchange were privileged over basic necessities, food production and other goods for domestic use.

In 1986, the IMF set up its first formal Structural Adjustment Facility, which was followed by the World Bank in 1989 with contracted adjustment loans to 75 percent of the countries that already had similar IMF loans in place.

The bank's conditions both extended and reinforced the IMF prescription for financial liberalization and open markets. They included privatizing state-owned enterprises, massive public sector layoffs, cutting basic social services and subsidies on basic foodstuffs, and reducing trade barriers.

In Indonesia, one of the policies imposed by the IMF is a bailout for banks' debt, which transforms private debt into public debt under the responsibility of the government, which has to issue obligation letters.

This domestic debt, which is more than Rp 164.53 trillion, in addition to debt-guarantee certificates worth more than Rp 53.77 trillion, most of which has been corrupted, has to be paid annually. It is taken from an around 36 percent allocation of the state budget, or the people's money.

Further, graphs from the World Bank and JP Morgan show that the exchange rate of the rupiah fluctuates significantly, and that the effective currency rate of most Asian countries under IMF's control (e.g. Indonesia, Korea, the Philippines and Thailand) has decreased. The exception in the region is Malaysia, which is not under IMF supervision.

Rethinking development has long become urgent. Development is not top-down steps devised behind closed doors of decision makers. It must be comprehensive and holistic, in terms of: o Taking account of the interrelationships among the different elements of development strategies; o Inclusion and participation, based on bringing together all the shareholders in development -- civil society, local groups, NGOs, private sector and the poor themselves-in order to foster trust and sustainability; o Combine a long-term perspective with a sharp focus on getting early results on the ground; o Crucial involvement of comprehensive partnerships and coalitions for change.

Moreover, development should recognize that globalization and trade expansion are good for growth, but that we must pay careful attention to the social and societal effects of the transition to participation in international markets.

Trade expansion alone is not a panacea, but needs to be seen as a component of a wider development and poverty reduction strategy-a strategy that must foster better human capital, infrastructure and institutions if it is to pay off.

Let us look at following scenario of Indonesia in 2003, as predicted by Consensus Economics (CE). % change 2002* 2003+ 2004+ GDP 3.4 3.6 4.1 Private consumption 5.1 3.9 4.5 Fixed Investment -3.2 1.4 3.5 Industrial Production 3.8 4.1 5.1 Current account ($billion) 6.0 5.8 4.8 * Estimates + ForecastSource: Consensus Economics Inc.

CE expects that the Indonesian economy this year will grow by 3.6 percent, a little bit higher than last year's estimate of 3.4 percent, but still only about half the speed at which the economy needs to grow to keep apace with the new workers entering the labor market. As the world's fourth-most-populous country, Indonesia will not make much of a dent in poverty with this scenario.

Rethinking development must also to take into account the new challenges represented by our globalizing world. It is not only to act as a reminder about how globalization is transforming the world economy but also to focus on what can be done to help developing countries, especially the poorest and those most burdened by debt.

This would allow them to make the most of the opportunities offered by the world economic system, which has been simply unjust and unfair to the poor over past few years. The question now is whether we can do it, with an understanding of the grave consequences if we do not.

The writer is also a lecturer of the Sahid University in Surakarta and a researcher at Uni Sosial Demokrat, Jakarta.