Sound macro-economic policy vital for economic stability

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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