RI's economy needs massive reforms: economists

RI's economy needs massive reforms: economists

JAKARTA (JP): Total reformation requires changes from both the
government and the business sector to prevent another economic
crisis in the future, economists from the University of Indonesia
said here Thursday.

Sri Adiningsih said business players and bureaucrats had to
change their attitudes to ensure they would create a healthy
business environment.

"The government and the business sector seem to resist rapid
economic changes, but they have to adapt to these changes,"
Adiningsih told a seminar on Indonesia's future economy, hosted
by the Indonesian Economists' Association.

"Businessmen, for example, still demand that the business
environment be like it was before the crisis," she said.

She said this kind of attitude was not acceptable anymore,
because the economy would never return to the way it was before
the currency crisis, when local businesses were "like living in
an incubator".

Rapid changes are part of the dynamics of an economy, she
added.

She said changing the bureaucracy's attitude might take time,
but in the long run it would only improve the economy.

Sri Mulyani Indrawati, deputy chairperson of the Center for
Economic and Social Studies at the university, said without
significant changes in the economic, governmental and political
system, there would be no guarantee that the financial crisis end
anytime soon.

Mulyani said political aspects had hampered the government
from making clear and firm decisions.

She said the government was still weak in making its policies
applicable and in foreseeing their possible outcome.

In coping with the currency crisis, which reduced the rupiah's
value against the US dollar by around 35 percent since July, the
government had not clearly indicated its first priority.

The August decision to free-float the rupiah in the market
when the market was not ready caused the currency to further
depreciate, she said.

The government even made a blunder by over-tightening
liquidity and increasing interest rates by three times to 30
percent for the one-month benchmark Bank Indonesia Certificate
(SBI).

The blunder resulted in corporate bankruptcies and banking
failures.

"It seems the government thinks that they can outsmart the
market, but the market always ends up outsmarting the
government," she said.

"The government should be the first to learn, but it seemed to
always distance itself from the economic laboratory," she added.

She said the government again misjudged the market by pursuing
reforms on the macroeconomic level with the help of the
International Monetary Fund.

But what the country needed was something to boost market
confidence, she said.

"It was a wrong answer to the wrong question," she said.

The misjudgment actually started back in the early 1980s when
the government began liberalizing the finance sector, she said.

"The conventional wisdom -- as in any economic theory -- is
that a country must first liberalize its real sector before the
financial sector, but it was the other way around here," she
said.

As a result, many banks were established, accumulating
capital, but there was nowhere to channel the funds, as the real
sector was yet to be liberalized, she said.

The banks then allocated the funds for nonperforming sectors,
giving short-term loans to projects with long-term investment,
such as properties, she said.

In the same time, the government was heavily developing the
country's physical infrastructure to create many jobs, but it
failed to develop a soft infrastructure such as human resources,
she said.

To get out of the current crisis, the president of the state-
owned Bank Negara Indonesia, Widigdo Sukarman, suggested the
government help tackle private offshore debts.

For instance, the government could help establish a company
which would secure foreign loans held by the private sector.

"We could establish a new company which would buy commercial
papers and other debt instruments unpayable by private
companies," Widigdo said.

The company would then issue other commercial papers and
instruments and offer them to investors with a higher rating, he
said. (das)