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)