Quality growth

Quality growth

The Jakarta Stock Exchange Composite Index closed at a new record
high of 1,004.43 on Wednesday, while the death toll from Sunday's
earthquake and tidal waves jumped to over 32,000. How is that for
a contrast?

Apparently, the destruction in northern Sumatra has not had a
direct effect on individual and portfolio investors, so the stock
market has continued to rise -- which is good. But the tragedy
surely will bring more poverty and unemployment to the affected
areas, especially the troubled Aceh province.

All of this shows that the stock index, an important economic
indicator, cannot be used to judge the welfare of the people --
many of whom do not even know what shares are. Levels of poverty
and unemployment are much better indicators of how the people are
doing.

So, let's look at the poverty and unemployment data: 35
million people, or 16 percent of the population, are now
categorized as living in poverty, as defined by the government.
If we went by the World Bank's definition of poverty -- i.e.
people living on two dollars or less a day -- that number would
jump to almost half the population.

The unemployment numbers are equally disheartening. Twenty-two
million people, or 22 percent of the total workforce, are
unemployed. These figures are worse than the pre-economic crisis
unemployment numbers, when 15.5 million people, or 17.4 percent
of the total workforce, were looking for jobs.

Looking at these figures, it is fair to wonder just how good
our economy really has been doing over the past four years,
despite annual growth of between 4 percent and 5 percent.
According to the government, gross domestic product is above pre-
crisis levels, meaning that we are wealthier than we were in
1997.

The problem is that this wealth has not been shared equally
among Indonesians. The rich have been getting richer, thanks in
part to soaring interest rates in the early days of the crisis,
while the poor have been slow to rise out of poverty.

Economic growth after the crisis has basically been driven by
rising domestic consumption, not external demand, thanks to real
wage increases, direct subsidies from the government for the poor
and the easy availability of consumption credits.

This type of growth does not bring with it increased economic
capacity and productivity. Because of a lack of investment,
Indonesia since the crisis has seen no growth in its installed
productive capacity. In fact, installed capacity has been on the
decline because of overuse.

As a result, economic growth after the crisis has created far
fewer new jobs. According to the official data, an increase of 1
percent of gross domestic product after the crisis has led to the
creation of only 250,000 jobs, compared to 400,000 jobs before
the crisis. If the economy grows by the targeted 5.5 percent next
year, only 1.37 million new jobs will be created -- not nearly
enough for the two million new workers who enter the job market
annually.

To create the necessary jobs, and lift people out of poverty,
we need not only higher economic growth, but also quality
economic growth. This can be achieved only with more investment
to increase installed productive capacity and, eventually,
economic capacity.

Unfortunately, for a variety of factors, the current climate
is not one that encourages investment. One factor is a lack of
credits, which, if available, are expensive. Banking credits cost
13.64 percent per annum for working capital and 14.25 percent for
investment, as of October, compared to a mere 6.65 percent for a
three-month time deposit.

Also, the perception among businesses is that there has been a
political shift from pro-business (before the crisis) to pro-
labor. As evidence, businesses point to the fact that regional
wages have increased in real terms by 46 percent between 1997 and
2002. And this increase has not been followed by a commensurate
rise in productivity, resulting in rising costs and less
competitive Indonesian products.

In addition, petty corruption -- not to mention corruption of
the larger kind -- is getting out of control. All of these
factors have impeded investment and the business climate in
general. It is the duty of all Indonesians, especially the
government, to eliminate all of these impediments to investment
and quality economic growth.

Achieving quality economic growth to fight unemployment and
end poverty should lie at the heart of this government for the
next year. At the end of the day, the success of this
administration will be judged by its success in improving the
welfare of all Indonesians, especially the poor.