Should Indonesia rely on the U.S. dollar?

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.