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)