Sound macro-economic policy vital for economic stability

JAKARTA (JP): Former economics minister Ali Wardhana said yesterday that sound macro-economic management, including monetary and fiscal policies, will remain an effective tool for managing the domestic economy amid the rapid movement of global capital.

Speaking at a seminar on "Indonesia and the World at the Beginning of the 21st century", Ali noted that the size of global capital movements are around 70 times greater than the value of world trade in goods.

"Although we now have opportunities to finance growth that hardly existed a few years ago, some of this capital is extremely fickle. It can flow out as easily as it flows in," Ali told around 500 businessmen, officials and diplomats at the seminar.

The seminar was organized jointly by The Jakarta Post and the Centre for Strategic and International Studies in connection with the 50th anniversary of Indonesia's independence.

He said large capital inflows can mask imbalances caused by poor macroeconomic management, and capital, including domestic capital, can fly out in a hurry when the imbalances become unsustainable. The Mexican crisis of less than a year ago serves as a good example.

Ali praised the effectiveness of Bank Indonesia (the central bank) in managing the inflow of foreign capital, especially when it is accompanied by higher domestic interest rates, through the selling of central bank certificates (SBI) and issuance of fewer short-term securities (SBPU).

However, Ali suggested that there are more options than simply driving up interest rates through the sale of SBIs or the manipulation of SBPUs.

"We have, for example, not varied the reserve requirements of our banks, as other countries do," Ali said, adding that the changes should be small ones that won't threaten the solvency of some banks.

Ali noted that in addition to monetary policy, fiscal policy remains an effective tool for managing the domestic economy. Slowdowns in government spending, for instance, or acceleration of tax collection serve to slow the economy.

"Some neighboring countries, including Thailand and Malaysia, have relied quite heavily on a variant of fiscal policy to manage their domestic economy," he said.

To help minimize the destabilizing aspects of capital mobility to the domestic economy, Ali suggested that Indonesia support the efforts of international agencies such as the World Bank and the International Monetary Fund to seek new institutional means to respond to crises that disrupt financial markets.

Ali is currently an economic adviser to President Soeharto. He was finance minister from 1968 to 1983 and coordinating minister for economic, finance, industry and development supervision from 1983 to 1988.

However, Ali is entirely against the idea of imposing foreign exchange controls as a means of managing exchange rate stability and the rapid cross-border flow of capital.

"Indonesia has followed an open capital account for some 25 years and this policy has served us well and will continue to do so," he said.

Advantage

With regard to developing industry competitiveness, Ali supported noted economist Sumitro Djojohadikusumo's recent suggestion that Indonesia not abandon industries which rely on the country's comparative advantages.

"We cannot prematurely reject natural resource-intensive and labor-intensive industries as we lay the groundwork for the skill and capital-intensive industries of the future," Ali said.

Indonesia must continue to support comparative advantage-based industries. They have been, he said, a vital source of foreign exchange for nearly two-thirds of export growth during the last five year development plan, which ended last March.

High-tech industries, on the other hand, contribute very little to Indonesia's net foreign exchange earnings and are unlikely to do so for some time to come, Ali said.

"In light of the recent increase in our current account deficit, it would be unwise to abandon the industries that have become a mainstay of our economy over the past decade," Ali said.

Besides, Ali argued, high-tech industries employ primarily skilled workers, such as technicians, engineers, and scientists. Meanwhile, two-thirds of Indonesia's labor force has no more than a primary school education.

"If we push aside labor-intensive industries to devote resources to high-tech industries, where will these 60 million- odd workers find jobs?" Ali asked.

"Let us continue to support industries in which we are currently competitive, while investing in human resource development that holds the promise for Indonesia's future," he continued.

Globalization

Ali noted that in the era of globalization, one key to success for Indonesia's development will be cooperation with other nations in the Association of Southeast Asian Nations (ASEAN), its partners in the Asia Pacific Economic Cooperation (APEC) forum and nations throughout the world.

Speaking on APEC, Ali stressed that Indonesia should remain committed to the fundamental APEC principle of open regionalism to discourage others from building exclusionary trade blocs.

He said Indonesia's commitment to an open world trading system can be seen in the most-favored nation principle or in the non- discriminatory way that Indonesia lowers its own tariffs.

The last deregulation package, announced last May 23, made a substantial "down payment" on Indonesia's commitments to the ASEAN Free Trade Area (AFTA), the Uruguay Round, the World Trade Organization and to APEC's Bogor Declaration.

"This unilateral tariff reduction applied equally to all our trading partners... We hope to set an example for other economies," Ali said.

He noted that Indonesia's commitment to fair world trade means that it cannot resort to the easy, and costly, policies of erecting barriers to imports or subsidizing its exports.

"We believe that domestic suppliers will increase their efficiency and their quality as protection disappears," Ali said. "But again, the government must also stop burdening these suppliers with extra costs in the form of unnecessary regulations and in the form of delays and costs in obtaining tax and tariff rebates, for example." (rid)

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