RI's economic remain inefficient

MANADO, N. Sulawesi (JP): Bank Indonesia's Governor J. Soedradjad Djiwandono reaffirmed yesterday the urgent need for Indonesia to further improve the efficiency of its economy in order to sustain economic growth in the increasingly globalized economy.

"Our high incremental capital output ratio (ICOR) shows that our economy is still inefficient," Soedradjad told the 8th plenary meeting of the Association of Indonesian Economists here.

He did not specify the rate of ICOR or the amount of capital required to generate one unit of output but it was estimated by many economists at four, the highest in the ASEAN region.

The issue of efficiency should not be seen as a simple problem, he said, contending that efficiency is in fact one of the key factors that will enable the country to sustain development amid the increasingly competitive global market.

"High ICOR requires us to invest a larger amount of capital to bolster economic growth and that condition is not favorable especially in our country where the investment-savings gap is still very wide," Soedradjad pointed out.

He said the investment-savings gap has so far been covered by foreign borrowings and foreign direct investment and portfolio investment.

"The consequence, though, is that our foreign debts have steadily increased," he told approximately 200 economists from various provinces.

He noted that Indonesia has been under closer scrutiny by foreign creditors due to its high indebtedness and the increasing portion of commercial, short-term loans in the debt stocks.

"Hence, by increasing our efficiency we will be able to strengthen our economic competitiveness but at the same reduce our dependence on foreign borrowings," he added.

Latest estimates put Indonesia's foreign debts at the equivalent of about US$100 billion, $60 billion of which were government debts and the remainder owed by the private sector and state-owned companies.

The plenary meeting of the economists' association which began at the Manado Beach Hotel yesterday is held under the theme of increasing competitiveness and efficiency.

The conference is featuring nine sessions reviewing macro- economic developments and discussing, from theoretical approaches, the issue of efficiency in various fields such as financial and monetary, taxation, manufacturing, accounting and manpower sectors and competition policy.

Not promising

Anwar Nasution, professor of economics at the University of Indonesia in Depok near Jakarta, who discussed macro-economic developments, expressed pessimism about the medium-term prospects of the country's economy.

"Indonesia's short-term prospects look good. Nevertheless, for reasons mostly of Indonesia's own making, the medium-term economic prospects do not seem as promising," Anwar observed.

At the macro level, he added, there is a tendency for internal and external imbalances to increase due to the erosion of financial discipline and a rise in debt repayments and servicing.

At present, though, the imbalances are masked by capital inflows, he said.

He recalled that until 1994, the group of conservative economists in the government were able to maintain high fiscal discipline and to resist imprudent demand for expensive projects.

"But the technocrats have been sidelined from the center stage of policy making and their influence weakened by the recent transfer of some of their power to non-economists who now dominate the policy-making bodies," Anwar pointed out.

He strengthened his observations by quoting a recent newspaper interview with Subroto, one of the country's economic architects in the 1970s and early 1980s.

Subroto, former secretary general of OPEC, expressed his concerns about the erosion of financial discipline, the inertia of government bureaucracy, monopoly, business conglomeration at the expense of income distribution and fair market competition.

Anwar pointed to stronger pressures on the budget as well as on state banks and other financial institutions to finance new sub-optimal projects and to rescue ailing companies from bankruptcy.

He cited the steep increase in off-budget transactions which blur the distinction between public finance and monetary and credit policies and between public finance and the financial transactions of politically well-connected companies.

"State companies are still treated as arm's length extensions of the public administration and ministries," added Anwar, who will soon take up the post of Sasakawa Distinguished Professor for the Chair in Development Policy at the United Nations University in Helsinki, Finland.

He also pointed out the artificial entry barriers to various industries and numerous distortions that hinder fair market competition.

Unless these weaknesses in economic management are not properly addressed, they could cause serious problems in the medium term, Anwar warned. (vin)