The economy: Between muddling through and a strong recovery
The economy: Between muddling through and a strong recovery
By Vincent Lingga,
Senior Editor
Optimists are looking forward to a more democratic
Indonesia built on a stronger, better local autonomy five years
down the road. In their hopeful vision, provinces will compete
with each other to woo investment, with new businesses creating
jobs which will pay wages to generate consumer demand and propel
the production machineries of goods and services.
This process will develop new major economic centers in the outer
islands, notably Sumatra, Kalimantan, Sulawesi, Riau archipelago
and Papua, and provide local administrations with broader and
bigger sources of tax revenues to enable them to expand and
improve public services and public welfare as well.
Are these optimists simply dreaming?
The pessimists think so: Their various versions of doomsday
scenarios for the years ahead have been shaped by the daily
turmoil of events during the learning process of democracy and
local autonomy.
They are nervous about the first experiment with the direct
election of the president and vice president next year, seemingly
hopeless about any significant improvement in the quality of
governance and national leadership with the new crop of political
leaders emerging from the 2004 elections likely to be as bad as
their predecessors.
An air of pessimism seems unavoidable in view of the steady
increase in unemployment and under-employment that is now
estimated at more than 40 million. Even though the incidence of
absolute poverty has declined to about 15 percent from as high as
27 percent in 2002, the almost 50 percent of the population
hovering on the verge of poverty are still highly vulnerable to
the slightest decline in the economy.
Worse still, the political transition and turmoil have left many
feeling uncertain about the future direction of the nation,
especially as law enforcement against corruption is perceived to
be extremely lacking.
But, given the problems inherited from the previous regime and
the achievements made over the past years, the best course for
assessing the economic outlook within three to five years is
neither inordinate pessimism nor blind optimism, but cautious
confidence.
It may be cold comfort for the pessimists to be reminded of how
the nation has often flirted with disasters over the past five
turbulent years, only for common sense to prevail.
Macroeconomic stability has been strengthening with a stabilizing
rupiah exchange rate (although still losing more than 60 percent
of its 1997 value), inflation under control, interest rates
falling steadily and the government's debt ratio to gross
domestic product down from more than 100 percent to 70 percent at
present.
These gains are no reason for undue complacence as the overall
condition is still fragile because many structural reforms --
vital to fuel sustainable, strong growth -- have yet to be
implemented.
There are several major factors that will determine whether the
economy will continue to muddle through at annual growth of 3-4
percent or will be able to expand at the pre-1997 crisis level of
6-7 percent.
The first risk is related to the government's ability to keep up
the pace of its reform programs this year and to resist political
pressures for populist, yet misguided, policies in the run up to
the 2004 election.
Failure in this area would erode the little confidence the
international market still has in the economy and undermine the
foundations of a sustainable recovery.
Bleaker still would be the prospects if opponents of the
International Monetary Fund-supervised reform program win their
campaign against any extension of the IMF facility after its
expiration later this year, while the government possesses no
credibility nor discipline to push through structural reforms.
Even now under the tight supervision of the IMF and the World
Bank, in their capacity as the opinion leaders among Indonesia's
international creditors, the reform drive has often floundered
under resistance from entrenched vested interests.
Macroeconomic stability, though very important, is not by itself
sufficient to fuel robust recovery. A long agenda of structural
reforms has yet to be implemented to make the economy more
efficient and competitive.
The formidable challenge is that state institutions have yet to
build up adequate competence and credibility to facilitate a
self-sustaining reform drive, while institution-capacity building
is a long-time process as improvement is incremental at best.
Then there is the sovereign risk related to the government's
capability in reducing the service burdens of its almost Rp 650
trillion (US$72 billion) in domestic debts through refinancing
with the placement of treasury bonds, debt buy-back or bond
reprofiling.
All these debt-reduction measures will depend on the strength of
the macroeconomic condition, which in turn is highly influenced
by the pace of structural reforms and fiscal consolidation.
The government will risk derailing its fiscal consolidation if
its reform-agreement with the IMF is not extended after this year
because the rescheduling of foreign debts to sovereign creditors
will have to be negotiated on a bilateral basis outside the
auspices of the Paris Club.
The quality of the 2004 elections of the president and vice
president and members of the House and regional assemblies will
also make or break market confidence in the economy.
If the polls are seen as fair and credible the democratic
exercise will reinvigorate investor confidence. But the economy
will continue to plod along if the quality of the national
leadership in the government and legislative branch remains as
mediocre as it is now.
Obviously, the country cannot afford to continue the low growth
(below 4 percent) course as it did in 2001 and 2002 without
risking huge unemployment exploding into massive social unrest
and the incidence of poverty rising at the expense of political
stability.
And muddling through will remain the economy's course if growth
continues to depend mainly on domestic consumer demand, now
increasingly losing steam.
Investment has to be reinvigorated to generate higher growth.
Analysts estimate investment should increase from around 18
percent of GDP now to at least 30 percent to generate 6 percent
growth.
Investment, especially foreign, is unlikely to materialize unless
political stability strengthens and legal and regulatory
certainty improves.
Investors fully realize that many of the structural reforms,
especially those in the judicial sector and civil service (good
governance), will take a long time. They simply want to see a
firm commitment to reform, supported by concrete and consistent
measures to allow for a reasonable calculation of business risks.
The government is actually aware of the importance of restoring
investor confidence, as can be noted from the high priority that
has been given to areas of greatest concern to businesses:
improving tax and customs service, creating more conducive labor-
market policies, minimizing the excesses of decentralization,
speeding up asset disposal and divestment of nationalized banks.
Achievements in these areas have not only been very slow but also
have often been reversed by policy inconsistencies caused in part
by adversarial relations between the government and the House of
Representatives.
Progress in these reforms could be quicker and more consistent to
accelerate the process of regaining investor confidence, provided
the government demonstrates a stronger and more effective
leadership, and the government and the legislative branch are
united in a stronger determination to push ahead with the reform
agenda.
But it is almost impossible to create these preconditions in the
run up to the 2004 election. President Megawati Soekarnoputri
seems to be preoccupied with her political ambition to win the
2004 presidential election and the House seems too divided by
factional interests.
Nevertheless, politicians would be well advised to realize that
they share common interests in restoring strong growth. Whoever
takes over the government must be aware that their days in power
will be numbered if adverse economic conditions persist.
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