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.