Should Indonesia rely on the U.S. dollar?

Imam Nur Azis and Jason Meade, Center for Indonesian Reform, Jakarta

The U.S. dollar should remain weak over the next decade at least, for a number of reasons. Firstly, the U.S. is currently incurring enormous budget deficits which are being financed by taking on new debt. However, the borrowing the U.S. government is committing to is not intended to finance anything productive or positively beneficial to the United States.

The bulk of the money being borrowed is being spent on increased defense and "homeland security" related initiatives. Unfortunately, these initiatives are only intended to prevent a catastrophic attack on the U.S.

Even if every one of these initiatives is completely successful, they will contribute little or nothing to the advancement of the U.S. economy. They will only prevent its retardation by antagonistic powers. The decay of America's physical and human infrastructure will continue unabated under the current government initiatives, and will even be exacerbated by the future need to repay the debts currently being taken on.

Over the next decade, the debts being incurred today will have to be repaid by the Americans. However, since the Bush administration is simultaneously pushing for large and permanent tax reductions for the richest segments of American society, the burden of repaying today's debts will almost certainly fall to the individual American taxpayers of the middle and lower classes.

This repayment will come either in the form of further government cutbacks, or increased taxes, or both. Whatever the final formula, the outcome will be the same -- a severe reduction in the economic health of the average American consumer and of the national economy generally.

As an example of the long-term effects of the current budget problems, consider the case of publicly funded university education in the United States. A large number of the American states have been forced to raise the attendance fees at publicly funded universities substantially over the past two years, and further large increases are contemplated for at least the next year or two.

As a result, the number of people enrolling in university has declined noticeably each year, which may eventually affect the workforce.

The effect will be long-term and may be irreversible. At the same time, fewer foreign students are being allowed into American universities as a result of "homeland security" concerns, and those who are admitted face even larger bills than the American students do.

The current U.S. economic situation demonstrates that the consumer spending levels are probably already unsustainable, and that anything from a gentle decline to a crash in those levels should be considered as a serious possibility over the next five years to 10 years. Of course, this would have extremely serious consequences for the U.S. economy and its international position generally.

The business community in the U.S. faces an array of new, and possibly permanent, burdens on the conduct of its affairs. The broadest burden is the loss of confidence on the part of both domestic and foreign business and investment directors in the quality of the U.S. economy.

The titanic corporate scandals that have hit the American economy over the past few years cast a long shadow over investor confidence, and the lackluster government response to the crisis has failed to dispel that shadow.

Also, the constant government warnings of impending terrorist attacks against U.S. targets have also served to dampen the spirits of both consumers and business people. The airline industry has been particularly hard hit by this phenomenon. Furthermore, the deterioration of the national infrastructure also contributes to the gloomy outlook for American business.

At the same time, U.S. businesses face many real and unexpected burdens stemming from the "war on terrorism". There are many new rules and regulations associated with preventing terrorism. These rules and regulations frequently require businesses to change their operating procedures, retrain some employees, and file more paperwork.

Businesses also face new fines for not complying with the new regulations. None of this extra work contributes to the profitability of the companies. As in the case of increased government spending, the increased business spending is only intended to prevent a retardation of business. Post Sept. 11 2001, U.S. businesses has faced much more work and the need to spend more money to achieve the same outcome as they would have had before the terrorist attacks.

These increased operating costs are most likely permanent. At the very least they will persist through the rest of the decade. Therefore, U.S. business will either have to raise prices to cover the new costs of doing business (which will further hit the American consumer), or else keep prices the same and accept a lower level of profitability. Either scenario works out to yet another hit against the U.S. economy.

All these trends indicate a further weakening of the American economy over the next decade. The above areas of concern are by no means comprehensive of the problems facing the U.S. economy. Specific issues relating to the projected series of foreign military actions have not even been considered here, for example. The intent is only to show the breadth of the problem.

The U.S. economy is the pillar on which the strength of the dollar rests. Without the economy, the dollar will be of little value. Therefore, it is quite prudent for the Indonesian government to reexamine the wisdom of its reliance on the dollar. As Vice President Hamzah Haz has noted, the switch from the U.S. dollar to the Euro ought not to be carried out for political reasons, but there are definitely sound economic reasons to question the future strength of the dollar.

The writers are alumni of the Leeds University in the United Kingdom.