The myths and realities of the Indonesian economy

Sjahrir, Jakarta

After the Dec. 26 earthquake and tsunami hit northern Sumatra, Indonesia was back in the international news. Governments, multilateral agencies, non-government organizations and celebrities have all poured their good will, and money, into Indonesia, especially into Aceh.

The World Bank has revised downward by 0.4 percentage points its projection of Indonesian economic growth for 2005, as other economists estimate about US$8 billion will enter the nation's economy -- and this amount may increase even further. Not all of this is tsunami aid money: The Consultative Group on Indonesia (CGI) conference increased its lending and aid commitments to Indonesia to $5.1 billion.

But before looking at the Indonesian economy, it is quite important to expose some of the myths about Indonesian economic indicators, so that we can see the real situation more clearly.

This article will look at five myths in the economy and explain why these ideas are unfounded.

The first myth is that the economy has to be separated between the real sectors, and "the non-real" or "monetary sector". People should try to understand the basic economics and not get trapped in terms most-often used by prominent businessmen, especially by Vice President Jusuf Kalla and Coordinating Minister for the Economy Aburizal Bakrie.

When one talks about the non-real sector as the monetary sector they miss the fact that there is nothing more real than money. Because if a country's currency has an exchange rate of Rp 15.000 to US$1, that is bad for the economy and it will affect the real sector.

If an inflation rate, meanwhile, hits 200 percent, then there is no such thing as production in the economy. This article postulates that the distinction between the "real" and monetary sectors is itself "unreal" and irrelevant.

The second myth is that there is some kind of separation between macro and microeconomics. Seeing the economy bifocally in separate micro and macro segments is inviting trouble; not only for one's understanding of so-called economic theory but also of one's understanding of economics in progress -- in this nation as well as in the world. You cannot, for instance, say that we have problems with the share price of the Gudang Garam cigarette maker, but that these "problems are only micro". These are not necessarily micro problems because any major decline will definitely have a wider "macro" impact if it is sharp enough.

This writer has often heard half-baked statements like: "Well, of course it is true that inflation is now below 10 percent and it is true that we have some degree of price stability, but actually the microeconomy is not working." What a misguided statement. Because if this part of the economy is not working, then how does one explain the 4.7 percent economic growth rate?

The third myth is about what we consider balance of payments stability -- ideas that in Indonesia, are often based on totally false premises.

Oddly enough, the nation has posted a current account surplus throughout the continuing economic crisis. A current account balance measures all the foreign transactions associated with the current economy in Indonesia involving Indonesian rupiah and is part of our general balance of payments indicator.

Most people will still remember that during the Soeharto era how worried economists were about Indonesia's mounting current account deficit.

Does this mean, now, with a current account surplus, that we have more balance of payments stability? In a word, no.

Unfortunately, in this country our current account surplus has nothing to do with the strength of our balance of payments -- it simply illustrates that we have not paid the interest rates on our debts that are due.

That, obviously, puts the service account in a much better situation, because companies are not servicing the debts they should. Therefore, the balance of payments becomes "healthy".

In reality, although we have a positive current account, it does not represent a "healthy" external balance.

The fourth myth is about the abundance of credit availability in the banking sector. People are asking themselves why the loan to deposit ratio of many banks is now only 40 percent. General economic theory would predict an increase in lending since surplus money is available in the banks. This myth arises from the assumption that the banks in Indonesia are normal and in line with the conventional standards used in the banking industry. We do not, however, have normal banking institutions.

Until now, quite a portion of the revenue flowing into all major banks is derived from the interest paid by the government for its high-yielding bonds, which are put on the banks' balance sheets as capital.

Hence, the slow pace of new lending has nothing to do with any intermediary activities in the banking sector. And as such, it is a myth to talk about improving bank lending by increasing the loan to deposit ratio. The simple but bitter reality is that most major banks in Indonesia are not working as normal banks do in other countries. Unless we address the issue of government bonds in recapitalized banks once and for all, we are likely to make more serious mistakes by interpreting banks' loan to deposit ratios as normal banking indicators.

The fifth myth is the growth potential and positive aspects for Indonesia's economy stemming from greater globalization. The positives will only be positive if Indonesia is a competitive economy. We are far from that. As this writer understands, the level of Indonesian economic competitiveness is the lowest in ASEAN and as such, we should not jump to the conclusion that globalization is automatically positive for Indonesia.

If we bring up these five myths and talk about them in international conferences such as APEC meetings, we have to be careful. We have to understand that many civil society organizations in Indonesia are highly critical of globalization and that they are not automatically wrong. Nor will they be easily converted into globalization supporters simply by preaching that globalization is good for the economy.

Policy makers and economists in the post-tsunami era must calculate carefully each of the steps they take. We do not have all the answers, even though many economists like to think this when they look at themselves in the mirror.

Destroying the myths will allow us to see the Indonesian economy as it really is and help us better understand how it will work this year.

It is not impossible that the rate of growth could even be higher than the World Bank has estimated, simply because an Indonesia with the eyes of the world on it may be less willing to act as corruptly.

The writer is an economist and chairman of the New Indonesia Alliance Party (PIB).