Slashing monopolies

Slashing monopolies

The rupiah debacle over the last few weeks, in spite of the
internationally recognized strength of our economy, may have
brought home the message to the government that the current
financial difficulties cannot be tackled by fiscal and monetary
instruments alone. This is the impression we get from the
disclosure made by Coordinating Minister for Economy and Finance
Saleh Afiff after the daily meeting of the Monetary Board on
Wednesday.

Afiff disclosed that the government was considering abolishing
the trading monopolies of the National Logistics Agency (Bulog)
on such basic commodities as wheat, wheat flour, soybean, garlic
and sugar. If the new deregulation measures go ahead as planned,
Bulog's trading monopolies would be reduced to only rice, the
national staple.

Bulog's monopoly of basic food commodities has become the bone
of contention between pro-market ministers, notably those holding
the monetary portfolios, who are supported by private sector
analysts and the World Bank, and other officials who still see
such a regulated trading system as the most effective way of
maintaining food price stability.

Afiff himself admitted on Wednesday that there was still a
tug-of-war within the government itself as to whether the
monopolies (except for rice) should be abolished or not. But the
persistent speculative attacks on the rupiah and the painful
credit crunch being imposed to cope with the currency upheaval,
seem to provide the pro-market technocrats with a more powerful
weapon to advocate their point of view.

It has now become much clearer that the tight monetary policy
is no longer sufficient to direct the rupiah rate toward an
equilibrium level. Market distortions such as monopolistic
practices should be abolished.

In fact, it is these market distortions and other structural
and institutional weaknesses within our economy -- including what
analysts describe as an extreme lack of good governance -- that
have led speculators to doubt that our economic fundamentals have
not been as strong as they seem. The Thai debacle early last
month further vindicated their suspicion, prompting them to move
quickly and make the right bets against the overvalued rupiah.

There are obviously many vested-interest groups who prefer the
retention of the monopolies as these exclusive trading rights,
funded by huge sums of subsidized credits from the central bank,
have so far served as cash cows for rent-seeking businesspeople
and officials. True, the monopolies have so far helped maintain
price stability but at a great cost to the economy which has to
be paid in the future.

It is to be expected that the commodities market will be
jolted and become wildly volatile temporarily after the removal
of the monopolies. But such a development should not deter the
government from taking the much-needed, drastic measure. Thorough
preparations to ensure smooth distribution networks and strong
enforcement of laws against hoarders would help shorten a
turbulent transition period. Firm and consistent measures to
remove institutional impediments and administrative rigidities
would further contribute to smoother flows of goods.

The international competitiveness of our economy, despite its
strong fundamentals and steady high growth over the past three
decades, has gradually been eroded by what analysts have often
called high-cost elements. But the growth seems to have lulled
the government into a comfortable illusion that "everything is
still all right. We are still much better than other countries."

Likewise, we have often cited our impressive track record of
high economic growth to rebut international criticisms of
extensive corruption within the government bureaucracy. We often
deceivingly consoled ourselves by cynically pointing out "how
could our economy be growing so high if corruption was as
widespread as alleged by the critics". We often forget that we
will pay a higher price in the future if we continue to ignore
this illness. In fact, as we are mired in the rupiah crisis, we
are starting to pay for neglecting our economic housekeeping.

The question now is whether the government has the political
will to swallow the bitter pill -- a temporary market jolt after
the removal of monopolies -- in view of the upcoming presidential
election in March. In other democratic countries, such a move may
be taken as a political suicide. But our government is so
powerful and the new vote of confidence it gained in the past
election has been so strong, that it is in a greatly advantageous
position to take the bold measure for the long-term good of our
economy.