RI's economic remain inefficient

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)