Soedradjad bemoans economic inefficiency

JAKARTA (JP): Bank Indonesia (the central bank) Governor Soedradjad Djiwandono said yesterday he was concerned about the domestic economy's inefficiency.

Soedradjad said high incremental capital output ratios (the amount of capital needed to generate one unit of output), high costs and wasteful spending were indicators of economic inefficiency.

"The latest survey by the World Economic Forum ranks Indonesia low in its 1996 competitiveness index," he said in a speech when installing an Association of Indonesian Economists sub-chapter at Bank Indonesia.

The index ranked Indonesia 30th in terms of competitiveness among the 49 developed and developing countries surveyed.

"The survey results are another warning to us to launch more concerted efforts to improve our economic efficiency," he said.

He did not specify suitable incremental capital output ratios, but most private-sector analysts have put them at more than four.

Economic competitiveness had become more important than ever because of globalization, he said.

"Higher efficiency is more crucial, especially in Indonesia where the investment-savings gap is still very wide," he said.

He said the gap had been covered by foreign capital from loans, foreign direct investment and portfolio investment.

But higher efficiency would let Indonesia reduce its dependence on foreign capital.

"We have planned to reduce our foreign debt from 57 percent of the gross domestic product in 1994 to 46 percent in 1999, and higher efficiency would contribute greatly to debt reduction," Soedradjad said.

On the government's policy to face challenges from globalization, Soedradjad reaffirmed the importance of prudent macroeconomic management.

"Monetary policy is also always designed to maintain macroeconomic stability and sustainable high growth," he said.

Soedradjad said monetary and fiscal policies would always be well coordinated to enhance macroeconomic stability. Good coordination would help control inflation and the current account deficit.

"Our anti-inflation measures should develop a strong perception among the public that expected inflation is about 5 percent and not simply single-digit inflation," he said.

The country has kept annual inflation below 10 percent for the past eight years, even though rates have been high since 1993. The inflation rate was 9.77 percent in 1993, 9.24 percent in 1994 and 8.64 percent in 1995.

The inflation rate is expected to be below 7 percent this year.

He said prudent macroeconomic policies were not enough to promote high growth.

"Prudent macroeconomic policies should be coupled with sound microeconomic policies. Hence market players should also be strong and healthy " he said.

He cited economic policy consistency as a vital component of prudent macroeconomic management.

"Policy consistency is vital because the effectiveness of both macro and microeconomic policies depends on the government's credibility," Soedradjad said.

Soedradjad said monetary policy could be effective in the long run only if it was supported by a sound, strong financial system. (vin)