RI needs more than luck

David Sumual, Analyst, Danareksa Research Institute, Jakarta

The Indonesian economy has seemingly taken advantage of a number of positive global crosscurrents recently. The impact of SARS nationally is minimal so far. Given Indonesia's close proximity to Singapore, the Philippines and Malaysia (that have been hit hard by the disease), a measure of luck is the only thing to credit for the country's incredibly low incidence of SARS.

One more thing, the SARS phenomenon gives a valuable learning outcome for global investors that benefit Indonesia. SARS may cause investors to vigilantly rethink their investment strategies. Business executives realized that concentrations of investment in any one country, such as in China, is always risky.

This imminent new investment strategy has been accentuated by the statement of the Japan External Trade Organization (Jetro) that plans for a high-profile Japanese business mission to identify investment opportunities in ASEAN, including Indonesia.

Meanwhile, it appears that the escalating conflict in Aceh would only have a minor impact on the economy as the Indonesian economy is historically immune to tensions in this restive province. Aceh's economic contribution to Indonesia's gross domestic product was only 2.44 percent in 2001.

Aceh was the fourth largest producer of oil and gas as only 10.4 percent of the country's 2001 oil and gas output was obtained from Aceh. Instead, with the additional Rp 1.23 trillion recently-approved boost in military spending (the funds will be taken from the 2003 state budget reserve), the massive operations in Aceh may further stimulate the economy.

Another blessing in disguise for Indonesia is the reality that the weakening US dollar has put the country's inflation under control. Following a statement by the U.S. Treasury Secretary John Snow that Washington would tolerate a weakening of the dollar, the rupiah as well as most Asian currencies strengthened. As such, we can expect a new round of deflationary pressures that give leeway to the central bank to cut Bank Indonesia Certificate rates to below 9 percent by the end of 2003.

These current developments may have some policy implications for Indonesia. Actually, a weaker dollar should reshape Indonesia's trading strategy. With currently about 18 percent of Indonesian exports going to the U.S., Indonesia counts on only U.S. economic development -- what a risky strategy.

In order to hedge risks, Indonesia should look at other markets like those in Europe and Japan that now have more buying power or markets in Latin America, the Middle East and Eastern Europe that have not been fully explored. Of course, it does not mean that Indonesia must pull the rug out completely from the U.S. market.

Indeed, in the near term John Snow's policy to fight the trade deficit would face the innermost challenge from the China low- cost powerhouse (in the first three months of this year, the U.S. still ran a $24.67b trade deficit against China). Moreover, China has fortified its economic barricade by its yuan's peg policy. In the longer term, John Snow's policy may, however, help stimulate U.S. growth and Indonesia should thus prepare for reinvigorated demand from the U.S.

Nevertheless, Indonesia cannot continuously depend on the accidentally positive global crosscurrents or luck. The people in charge should have a fresh idea to cope with the currently rising unemployment. Most people do not care whether GDP growth is 2 percent or 5 percent; what matters to them is whether they can find jobs and keep spending.

Unfortunately the job situation is increasingly dismal. The unemployment rate has reached 9.1 percent in 2002, signifying that Indonesia is currently experiencing a jobless recovery, in which GDP is growing but employment isn't.

To improve the standard of living, the economy needs higher productivity, not only in order to be more competitive in the global economy but more importantly to produce more. The government should also take the opportunity of currently encouraging developments to expedite the resolution of persistent problems facing investors.

Meanwhile, Bank Indonesia must also continue to introduce easy money bias policies to push money out into the real sector. Both the government and BI should act fast to tackle the currently weakening purchasing power that is likely to hurt the current spending spree.

Meanwhile, Indonesia's citizenry has been sick and tired of complaining about corruption and poor law enforcement. People saw an unfair policy when conglomerates got off the hook and the public had to bail out all of them without any guarantees that those who stole state money would never do it again.

However, the establishment of the long-awaited special court to hear corruption cases shows at least a first step of political will that the government is serious about combating corruption.

Given the nascent freedom of the press, the current ruling parties (the Indonesian Democratic Party of Struggle and the United Development Party) must be really careful since any unresponsive measures by the government would have real consequences for them in the upcoming elections.

Money politics will not work effectively in the upcoming elections. Trillions of rupiah would not be enough to bribe nearly 100 million voters. The current government's accountability instead will be fairly judged by its performance to open new job opportunities and not only by its promises.