The myths and realities of the Indonesian economy

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).