RI needs fair trade, investment, not new debts

RI needs fair trade, investment, not new debts

David E. Sumual, Analyst, Danareksa Research Institute, Jakarta

Nothing unusual took place at the annual CGI meeting last
week. As expected, the Consultative Group on Indonesia (CGI)
concluded its annual ritual, pledging US$3.4 billion in loans
(vis-a-vis $3.1 billion last year). The higher amount of loans
required is the consequence of Indonesia's ineligibility for
Paris Club debt rescheduling.

However, it may also be a more worrying signal, that Indonesia
has entered into a debt-trap situation. The large amount of money
needed to service the foreign debts ($10.5 billion or about 5
percent of 2004 GDP) may mean that the country's economic outlook
is threatened.

The huge amount of international debt has turned Indonesia
into a nation of beggars since surely no aid is unconditional.
The countries that have control over the money lent to the nation
may easily dictate the policy of the government, raising people's
suspicion of neo-colonialism.

This means that Indonesia must be ready for not only the
creditors' economic proposals (such as reducing subsidies,
privatization or market or eliminating tariffs) but also
political pressures (such as Aceh, Papua or human rights cases).
This trend would of course restrict Indonesia's sovereignty as
seen recently by the World Bank's intervention regarding
Indonesia's counter purchase scheme, although the matter is
obviously not its area of expertise.

Domestically, instead of helping the poorest people, debt
leads to an incorrect allocation of resources due to
misappropriation and corruption. A significant portion of the
debts even end up in the pockets of consultants from the donor
country -- swallowed up in the government bureaucracy -- or by
cronies of the elite, rather than going toward infrastructure,
health and education.

This is a dangerous trend because only a small percentage of
the population enjoys the benefits of aid or debt. Another
problem is that foreign aid tends to distort markets as the
debtor is usually bound by an agreement to procure goods and
services from the country that provides the funds.

As such, it is important to shift emphasis from the vicious
cycle of dependency on debts to promote fair trade and
investment. Some stylized facts in Japan, Singapore and European
countries, for example, show that aid is only a necessary
condition, while market access plays a prominent role in inducing
economic growth. Therefore, the government must continue to
introduce policies that promote trade as well as urge developed
countries to open their markets.

Through the World Trade Organization (WTO) meeting in Geneva
this week, Indonesia must push the industrialized nations to
provide a level playing field by eliminating various trade
barriers. This is important since many developed countries impose
higher tariffs on products in areas where they do not have the
capacity to export, such as agricultural and processed products.
In other words, the developed countries have stolen back the
money they gave in aid through unfair trade.

In contrast, although there are good reasons for Indonesia to
protect its agricultural markets on food-security grounds, the
donor countries and the World Bank recently pushed Indonesia to
slap import tariffs on staple foods. It appears that the World
Bank has tried to implement free trade without any exceptions,
which is a bad policy formulation.

The World Bank seemingly ignores the appropriate sequence for
developing countries -- like Indonesia -- to take in liberalizing
their markets, disregarding the possible negative impact on the
rural population.

In line with promoting fair trade, the government,
nonetheless, must prepare a policy that can shift Indonesian
development to the next level. Referring to the "flying geese"
model, Indonesia must diversify from its reliance on some
inefficient industries, such as the textiles industry -- which
has come under pressure from more efficient competitors -- to
other promising processed products, such as electronics.

This is imperative given the recent decision of the U.S.,
Canada and Europe to phase out quotas on textiles in 2005, as
part of the deal at the World Trade Organization.

At the same time, Indonesia must continue to improve its
investment climate by solidifying its political will to eradicate
corruption. Corruption, which in the Soeharto era was perceived
as the grease of the economic machinery, is no longer suitable
for the changing global economic and political milieu.

Now, more countries have joined the open world economy,
increasing competition among countries to attract foreign direct
investment. China, Vietnam, Russia, and Eastern Europe -- that
spent nearly 50 years in isolation and provided the window of
opportunity for Indonesia to enjoy 7-9 percent economic growth --
have reawakened.

As such, Indonesia must better prepare a comprehensive
strategy to compete with those countries, especially a strategy
to attract investors in the infrastructure projects to ensure
physical access to the market.

With its mutual risk-sharing characteristics and given
Indonesia's rampant corruption, investment is actually more
attractive than debt -- that requires certain payments either for
profit or loss projects. A $100 investment in a good enterprise
could be like receiving aid of $100 many times over.

Moreover, investment also boosts employment, having a
multiplier effect on the economy through consumption, not
mentioning the intangible opportunity for the people to improve
their skills and access to the advanced technology.

All in all, the government must focus in the short term on
developing a strategic plan to reduce debts, similar to the
Thailand scheme that put the foreign debt as only a supplementary
element of its budget.

Otherwise, a culture of dependency will continue, ensuring the
continuation of Indonesia on the periphery and the dominance of
lender countries at the core, with our grandchildren inheriting
the mountain of debt.