RI to enjoy fruit of investment

By Suhadi Mangkusuwondo

JAKARTA (JP): The growth of Indonesia's Gross Domestic Product is greatly influenced by two factors: climatic conditions and government policies.

Increased rainfall due to climatic change is a major influence, as the agricultural sector's contribution still makes up a considerable part in development of domestic product.

This is clearly shown in 1995 growth, which rose above expectations to 8.1 percent. Non-oil production even rose to 9 percent, on par with the high growth rate of neighboring countries like Thailand. This was due to the marked increase in agricultural production, especially food, due to good weather.

In 1994 the growth of food production went below the minimum, with minus 2.1 percent because of an unfavorable climate; this figure jumped to a positive 4.5 percent in 1995.

Unforeseen climate changes surprised many economic observers, many of whom initially found information released by the Central Bureau of Statistics for 1995 hard to believe.

Aside from climatic influences, economic growth is mainly influenced by government policy. Government policies in 1996 were mainly drawn with a concern to slow the economy, which appeared to be overheating because of rapid growth in 1995. A sharp rise in consumerism, in both investment and consumer sectors, resulted in an inflated balance of payment deficit. Financial policies, monetary and fiscally, were therefore geared to keep the deficit within sustainable limits. This, in turn, dictated a tight financial policy which stemmed consumer buying power, thereby slowing down economic growth in 1996.

Analysts predict GDP growth in 1996 of between 7.5 to 7.7 percent and a drop in the inflation rate from around 8 percent in 1995 to 7 percent in 1996. This indicates the government's cooling efforts on the economy have succeeded without harming growth rates excessively.

The sharp increase of the current account deficit, from US$2.96 billion in 1994 to $7.22 billion in 1995 and nearing $9 billion in 1996, is understandably seen as a warning light. However, putting the blame for the deficit on large-scale importing and a weakening in export performance ignores an economic fundamental: when incoming capital is on the increase, imports and services naturally rise, unless this capital is put as foreign exchange reserve.

It follows that in discussing the current account deficit we should also touch on the subject of capital surplus in the balance of payments. This surplus has jumped from $4 billion in 1994 to $10.6 billion in 1995 and declined slightly in 1996. The bigger part of incoming capital this year is those of private funds, in the form of direct investments and portfolio investment.

In other words, the increased deficit account at present reflects a jump in the surplus of the capital account. Thus, the main issue of the deficit account is not quantity but the quality. Which means whether or not we are importing goods and services we really need, and how much of the incoming capital is of a short and speculative nature.

In this connection we have to note that the government has prepaid its foreign debt with high interest rates in 1995 and 1996. Part of the payments were funded by sales of state company shares like PT Timah, PT Telkom and PT Indosat on the stock exchange. This action should be praised, as it lowered the psychological burden from "debt overhang", which was hitherto an element of risk which also influenced the credit level, and the reason why interest rates remained at an all-time high.

The policy also helped stabilize a shaky economy caused by a rush of foreign capital, which the money supply reduction policy applied in the previous two years failed to do.

Last year was also a busy year in international politics for Indonesia. The Asia-Europe Summit was held in Bangkok in March, the APEC summit in the Philippines in November and the Ministerial Conference of World Trade Organization in Singapore in December. All meetings stressed a growing consensus that future development will focus on a more integrated global economy with widening investment opportunities and free trade.

In line with this development the government took a bold step when it announced a staged tariff reduction plan, effective in May 1995 and June 1996, to bring present import tariff rates down to between 0 percent and 5 percent by 2003. Similar commitment was made in the framework of ASEAN Free Trade Area as part of the Individual Action Plan at the APEC forum. In line with its commitment at the Uruguay Conference, the government also has indicated it would eradicate all nontariff barriers by 2004.

Another interesting issue of 1996 was the national car case, regarded by certain foreign critics as a setback in the Indonesian APEC trade liberation commitment.

Also of interest this year were allegations leveled at Indonesia by other countries of frequent export dumping strategies. Part of these charges were obviously a new form of protectionism by advanced industrial countries. However, on the other hand, it signals that greater attention should be given to GATT-WTO's rules of the game.

The first thing that sprang to mind in looking at economic prospects for 1997 was May's general election. Most companies will defer important decisions until election results are made public.

New investment and business expansion will lessen in the first part of the year. In the second half, when the political scenario is clearer, economic activity should rise again.

While the political temperature is rising the issue of equity will come under the spotlight. The government must come up with more policies to close the widening social gap.

The impact of the significant investment waves of 1994 to 1996 will also be felt in coming years. This is the second wave of major investment after 1988 to 1990, which resulted in significant increases in textile exports in 1990 to 1993.

The 1994 to 1996 investment wave was dominated by investments in the chemical industry and included petrochemicals, pulp and paper. We will shortly be observing a steep rise in the production of chemical industries, one part replacing imports and another will be taken up by export commodities.

Recent projections by the International Monetary Fund show world economics should boom in 1997, including those of advanced industrial countries, though more so in the former socialist countries of East Europe, which have gone through a difficult transition period towards market economies.

These bright global economic prospects are certain to have a positive effect on the Indonesian economy.

A poll of ideas from business executives taken in early 1995, by a company in cooperation with Gallup International, showed they were optimistic about general business prospects in 1996 including exports. The Indonesian stock exchange was largely bullish throughout the year.

It appears business executives are more optimistic than economists, who are either in doubt or even casting a gloomy picture of Indonesia's economic prospects. If we must choose between the two, we tend to side with the sentiment of business executives who seem confident the Indonesian economy will make promising and brightening steps in the years to come.

Dr. Suhadi Mangkusuwondo is a prominent economist and member of the APEC Eminent Persons Group. This view was first presented to the Indonesia Forum.