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.