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.