RI may join world's 20 largest economies

RI may join world's 20 largest economies

JAKARTA (JP): Sustained annual economic growth of 7.5 percent
would place Indonesia among the 20 largest economies with per
capita income of US$2,300 in 2005, the World Bank says in its
1997 report on the country.

The World Bank warned that deterioration in Indonesia's
economic policies growth could cause a slump in growth to 5
percent annually, leading to per capita income of only $1,850 in
2005.

The report, Indonesia sustains high growth with equity,
prescribes a set of policies needed to generate sustainably high
growth, including macro-economic stability and high investment
and saving rates.

The following is a summation of the World Bank's main
recommendations for sustaining growth and what the results would
be by 2005.

Annual economic growth of 7.5 percent will more than double
Indonesia's per capita income (at current rates) to $2,300 in
2005.

Indonesia would become one of the world's 20 largest
economies.

Exports will rise to 28 percent of GDP

Population will reach nearly 220 million, with half living
population in urban areas.

Greater Jakarta population would reach 25-30 million.

Following are more excerpts taken from the World Bank report
on how Indonesia could maintain high growth with equity into the
21st century.

Some of the gains from past deregulation packages, especially
those related to deregulation of foreign investment, will
continue to maintain high growth. However, the gains in output
from resource reallocation, are gradually being exhausted.
Further deregulation would give another upward push to growth and
increase labor demand and real wages.

In the final analysis, Indonesia is most likely to keep up
with the competition by relying on those instruments that have
already served it well " (i) macroeconomic stability, (ii) a
deregulated economy with equal incentives/ low protection and no
discrimination against foreign investment, and (iii) rapid
physical and human capital growth.

Infrastructure

Infrastructure limitations could hinder growth and reduce
Indonesia's attractiveness to investors. The potential problem
may be greatest in urban areas. Lack of water, sewerage
treatment, electricity and inter- and intra- urban transport will
raise costs o pollution, health care, congestion, distribution
and power inputs. In Jabotabek, these problems threaten the
source of nearly quarter of recent non-agricultural growth.
Surabaya and other large metropolitan areas suffer from similar
problems.

Better public sector management and institution will be a
critical, fifth factor in sustaining high growth with equity and
meeting new challenges in the 21st century. Specific areas in
which improvements could be made include :

- laws and the judicial system;
- greater reliance on clear transparent rules;
- greater reliance no the private sector, through the set up and
institutional implementation of clear, competitive frameworks
that would encourage private participation and privatization
while ensuring that the public receives maximum benefits from
private participation;
- integration of private and public investment more effectively,
through public planning (for example, the intra-urban transport
network, water basin management and power generation,
transmission and distribution); and,

Greater reliance on the private sector could improve
Indonesia's growth prospects and delivery of service to
consumers. Although progress has been great in some areas,
improvements in the framework and its institutional
implementation could reap large benefits.

Despite some improvement, state firms' performance, in term of
rates of return, remain poorer than the private sector firms, on
average. Many public firms show losses or require conversion of
Government loans to equity. Service provision often is poor,
particularly in infrastructure areas such as water supply.

Private sector interest in developing country infrastructure
has grown substantially in recent years.

The greatest advances have occurred in telecoms (full
privatization, partial privatization and privately managed joint
ventures in various parts of the industry) and power generation
(private production for sale to a public distributor), as is the
case worldwide. But private participation has also grown in toll
roads, water, and ports, although construction has been slow
getting underway.

Greater reliance on the private sector, both privatized
services and private provision of services would provide three
major benefits:
- increased revenues (for the government and/or the enterprise)
from sales, which can be used for investment or public debt
prepayment;
- private sector investments reduce the need for public
investments, freeing development resources for social uses; and,
- increased efficiency, that is, better service at lower cost.

Remaining Issues

Despite the substantial progress to date, some issues remain.
For example, perceptions of non-transparency, lack of
competition, unfair dealing and favoritism will need to be
addressed as the privatization program is implemented. In
addition, with regard to institutional mechanisms for pricing
outputs and inputs some "framework" issues also remain, such as
subsidies in industry, mining, fertilizer and steel production.
In the power sector, concerns remain about harmonizing the
interaction between public and private sector in order to avoid
and/or to cope with excess power generation capacity.

Increase in these benefits would come from Government
realignment toward increased management and regulation and more
focussed direct provision of services. This realignment would
involve:
(a) Provision of a transparent, competitive framework for sale of
concessions and assets;
(b) Maintaining sectoral frameworks that are competitive,
including clear, sustainable pricing policies; and
(c) Focussing the remaining public provision of goods and
services in sectors/areas where private interest is limited (such
as urban infrastructure, basic education, and some infrastructure
in the Eastern Islands).

Competitive

A clear, competitive framework for privatization and for
granting concessions would encourage additional investment and
greater benefits from increased private participation. Such a
framework would ensure that the nation maximizes the receipts
from sales of it assets and that user needs are met at the least
cost.

An alternative approach is competitive sale of ownership or
concessions or management rights. This is likely to yield smaller
up-front cash returns and may increase economic concentration.
But it also may improve management more than partial
privatization through financial markets. However, a major issue
is ensuring a reasonably competitive sale -failure to do so would
leave the Government open to charges of favoritism.

Sectoral frameworks that are transparent and competitive will
also increase the benefits to the country from privatization.
Transparent sectoral frameworks, in particular the pricing
arrangements, increase private sector interest. The ease of
setting-up a transparent framework for power generation, through
take-or-pay contracts, explains the large interest in that
sector. (13/vin)