RI macroeconomic coordination 'need improvement'

RI macroeconomic coordination 'need improvement'

The Supreme Advisory Council has recently provided a document
explaining the government's economic strategy to a group of 15
economists who criticized the administration for having a
populist policy last week. The group's spokeswoman, Sri Mulyani
Indrawati, discusses loopholes in the government's concept.

Question: What do you think about the government's economic
concept?

Mulyani: The concept is actually a result of a repackaging of
the government's economic programs under its letter of intent
signed recently with the International Monetary Fund (IMF).

It sounds good because it aims at restoring confidence and
starts with the description of macroeconomic measures for the
establishment of economic stability.

However, it does not have a focus and does not show any
priority in the programs needed in the coming two to three
months.

Furthermore, it also shows an inconsistency in its
macroeconomic measures, giving the impression that it is merely a
compilation of separate, individual policies in various sectors
without any systematic coordination. The whole concept indicates
that it has been prepared mainly for political and populist
purposes.

At the level of its implementation, Cabinet members seem to be
competing against each other, indicating that the economic team's
leadership is poor.

Q: How could such a lack of team leadership occur?

M: I am sure that it has been caused by poor leadership from both
the President and the economic coordinating minister. There seems
to be a lack of basic trust among Cabinet members, exhibited by
poor communication among themselves.

Such a problem is structural and it can become more serious if
political pressure mounts and the economic situation
deteriorates.

Political pressure may increase as next year's general
election approaches and the economy could deteriorate if the
disbursement of aid from the Consultative Group on Indonesia
(CGI) is interrupted (by the government's failure to repay some
of its old debt) or if China devalues the yuan.

Q: Does the concept have a high dose of economic policy based on
people's economic needs?

M: No. President B.J. Habibie's statement that the economic
policies were based on developing the economy according to
people's needs was confusing because such development takes up
only a small portion of the concept. Only one point of the fiscal
policy mentions measures that aim at reinvigorating people's
economic activities, particularly small businesses and farming
programs.

So saying that the concept is based on such economic
development is merely based on political and populist purposes.

Q: You said the concept did not show consistency among its
macroeconomic measures?

M: The concept, for example, says that the government, on the one
hand, will avoid hyperinflation by tightening the country's
aggregate monetary demand and limiting the growth of net domestic
assets at zero percent this fiscal year. But, on the other hand,
the fiscal policy allows the government to suffer a budget
deficit worth 8.5 percent of the country's gross domestic product
(GDP). Such a big deficit, even though it will be financed with
foreign aid, may cause hyperinflation.

Furthermore, such a tight money policy will not be effective
as long as Bank Indonesia, the central bank, provides a great
deal of liquidity support (currently totaling Rp 140 trillion, or
US$10.7 billion) to ailing commercial banks and subsidized loans
for the State Logistics Agency (Bulog) and small businesses.

Q: How should the country's economic policies be formulated?

M: The policies should be formulated with the highest priority on
the establishment of economic stability, marked by low inflation
and a stable, low exchange rate of the rupiah against the U.S.
dollar.

At the macroeconomic level, monetary and fiscal policies must
be consistent with each other, so that none of them will
neutralize the effectiveness of the other. Monetary supply must
be tightened -- this may result in high interest rates -- while
the government budget should be set to produce a surplus.

However, because the social situation is not conducive for the
production of a budget surplus, the government's budget could be
set with a maximum deficit worth 3 percent of GDP.

At the microeconomic level, all programs must be consistent
with macroeconomic policies, so that their implementation will
not boost inflation rates and will not worsen the country's
balance of payments.

On employment measures, for example, social safety net
programs must be targeted at the creation of labor-intensive jobs
and subsidies must be limited to projects that can really create
employment and encourage the production of goods totally or
mostly based on local resources.

Economic policies directly aimed at helping certain small
businesses and farmers could be introduced after six to 12 months
or after the establishment of macroeconomic stability.

Besides such policies, the government must also improve its
sense of crisis, its leadership and coordination among Cabinet
members.

Officials in charge of macroeconomic policies, the minister of
finance, the state minister of development planning and the
governor of Bank Indonesia, for example, must improve the
synchronization of their policies and transmit them well to
ministers in charge of microeconomic policies.

The latter ministers will then have to keep their policies
consistent with macroeconomic policies. (riz)