RI needs to turn its economy inward

RI needs to turn its economy inward

The Indonesian economy continues to deteriorate as the rupiah
further weakens against the U.S. dollar. Economist Kwik Kian Gie
proposes a new strategy in the development of the country's
industry.

JAKARTA (JP): The International Monetary Fund (IMF), which has
been losing its momentum to help revive the Indonesian economy,
is now apparently trying to revise the government's budget plan
before deciding on the disbursement of the next tranche of its
aid.

The revision is to help the IMF understand how much of a
budget deficit it will have to cover, so that the government will
not print new money, which would in turn cause hyperinflation.

The problem is, the IMF's US$43 billion in aid will be
disbursed in small increments in line with the implementation of
the country's economic reform programs.

Several domestic and international analysts believe that
Indonesia will only be able to overcome its social and economic
problems if it receives massive aid, much like the assistance
given to Europe after World War II under the United States'
Marshall Plan. Such assistance must come under favorable terms or
it would become a time bomb ready to explode at the date of its
maturity.

The country's worsening economic situation, mainly from the
rupiah's sharp depreciation against the U.S. dollar and
skyrocketing interest rates, has created social turbulence and
political instability. The nation is even facing the danger of
disintegration since some provinces, from which natural resources
are used to finance the central government, want to become
independent.

Dipression

Without such massive aid, Indonesia's economy is likely to
fall into a very serious depression marked by stagnation and high
inflation.

While waiting for the disbursement of IMF aid, Indonesia
should undertake several measures to revive and improve the
economy. The country will first need to have a credible national
leader who can maintain social and political stability even as
the population suffers from increasing hunger and poverty. Such a
leader must have a past free from corruption, collusion and
nepotism.

With political stability, foreign investors would likely
invest and take over some Indonesian factories, which are now
facing financial difficulties due to huge overseas debts and a
dependence on importing raw and auxiliary materials. Backed by
foreign money and benefiting from Indonesia's low labor costs,
these factories would be able to focus their operations on
exports.

Innovative

Meanwhile, Indonesian entrepreneurs must become more
innovative by establishing new factories that can rely totally on
domestic resources and be free from imports. Technology needs to
be developed within the country for agriculture, plantations,
animal husbandry and fisheries.

Such new factories could temporarily ignore the international
market because it would be difficult for them to export their
products for a period of time. They could rely totally on the
domestic market, which is very huge. This inward-looking strategy
should not necessarily make Indonesians feel inferior because
there is nothing wrong with it.

Such a strategy could help Indonesia restart industrialization
programs with support from domestic human, financial and natural
resources, with the domestic market its main target for the time
being.

Up to now, Indonesia has made the mistake of adopting a broad-
spectrum system in developing its export-oriented manufacturing
industry, while ignoring the quality of individual factories and
their owners. The factories have been too dependent on imports
and their owners much too attracted to foreign capital.

The government has also made the mistake in relying too much
on foreign capital in its monetary policy while ignoring domestic
savings. This policy caused the economy to grow rapidly as the
inflow of foreign capital increased. But business activities
subsequently stopped when foreign investments dried up.

So, now let Indonesia's debtors settle their own problems with
their foreign creditors. They can reschedule the debts or turn
the debts to equities for the creditors.