Policy stability

Policy stability

The chief economist at the New York-based Salomon Brothers
Inc. securities company, John P. Lipsky, tried last week to
address the jitters, notably among foreign investors, over the
likely impact of next year's election for House of
Representatives and the presidential election in March 1998 on
Indonesia's economic policies. Lipsky, as expected, did not touch
upon the highly delicate and tricky issue of any change in the
national leadership (president).

However, Lipsky's message at a seminar in Jakarta on Friday
does make a lot of sense and is highly logical. He explained why
businessmen should not worry too much about the results of next
year's election. He hinted at the great dangers of a reverse in
the current process of economic and bureaucratic reform, thereby
implicitly warning whoever takes over the government in March,
1998 to maintain the current policy stability.

The massive economic and bureaucratic reform process which was
started in 1985 has steadily increased Indonesia's links with the
global economy, especially as a result of the export-led strategy
pursued to bolster national economic development. The intensive
ties consequently make the economy highly vulnerable to
developments in the international economy.

The vulnerability to external factors makes policy consistency
even more imperative, especially now that Indonesia's external
balance is under strong pressures with the current account of its
balance of payments reaching as high as four percent of the gross
domestic product, much larger than the government's target of 2.5
percent. The large current account deficit can be managed only if
foreign capital continues to flow in either through direct or
portfolio investments.

Further down the line, foreign capital will keep flowing in if
foreign investors believe in the prospects of Indonesia's economy
and such confidence can be gained only if the government is
consistent in its policies-- particularly of deregulation and
bureaucratic reform.

Therefore, whoever takes over the government after the 1997
general election will have no other choice but continuing and
deepening the process of economic and bureaucratic reform. If the
next administration reverses the present policy direction, not
only foreign but also domestic investors would relocate their
capital elsewhere. Such capital flight would adversely affect the
economy and would consequently leave the administration in
serious trouble.

There is, however, one fundamental prerequisite in order to
maintain the political viability of the reform process -- public
support. People will continue to support economic and
bureaucratic reform only if its excesses can be minimized. These
excesses, if allowed to worsen, will sooner or later destroy the
very foundations -- social, economic and political stability -- of
the development process itself.

Among the most conspicuous excesses are the widening gap
between the rich and the poor due to the maldistribution of
incomes and the lack of public participation in the growth
process. The government is addressing one aspect of the problem-
incidence of poverty- by pursuing concerted, better-targeted
programs to alleviate poverty. However, more concrete, consistent
measures are required to ensure a broad-based pattern of growth,
and consequently generate sustained increases in the real incomes
of the majority of the population.