The only choice left: Go with the right policy

Riyadi Suparno, Jakarta

The much-criticized new economic team has an uphill battle to prove to the skeptics and the lackluster market that they can deliver results, especially over the next 100 days.

The new team, and even President Susilo Bambang Yudhoyono, all recognize the challenges ahead: high unemployment, widespread poverty and slow economic growth.

In addition, they have set the appropriate priorities to address these problems: stimulate the economy to achieve high growth, enhance productivity and competitiveness and lure investment.

These priorities are, however, surely easier said than done. To achieve them, the government must have the required tools of money and the right policy.

In terms of money, this administration has less than the previous administrations did.

The government cannot write checks at a whim anymore and rack up an overdraft in the budget without worrying about penalties from the market, as it does not have a large windfall profit from surging oil prices like Soeharto enjoyed during his early days in office in the 1970s.

Although oil prices have soared to US$55 a barrel -- a level unimaginable even during the 1970s -- Indonesia's oil output is much lower now than before.

Indonesia's crude oil output has decreased to about 950,000 barrels a day from 1.3 million barrels a few years ago. Much of its oil-based income is used to import crude for domestic refineries, as well as to cover fuel subsidies that have risen along with oil prices.

Unlike the administrations of B.J. Habibie, Abdurrahman Wahid and Megawati Soekarnoputri, the Susilo administration is not privy to foreign aid in the form of stand-by loans from the International Monetary Fund.

Furthermore, the new government has inherited huge debts: US$68.6 billion in foreign debt as of January and the much greater domestic debt of Rp 622.7 trillion ($72.4 billion) as of July.

The Susilo administration has practically nothing it can sell to pay off these mounting debts, as most assets appropriated by the government during the late-1990s crisis have already been sold by previous administrations.

Worse still, it must confront all the negative images Indonesia has accumulated thus far, from its shame as one of the most corrupt countries in the world as ranked by Transparency International, to its disgrace as one of the most difficult places in the world to do business, according to the World Bank's Doing Business in 2005: Removing Obstacles to Growth.

So what's left for the newly installed government?

What the Susilo administration has that previous ones did not is the popular support enjoyed by the President, who was directly elected by the people -- a first for the country.

Thus, the much-criticized economic team could stand behind the President and drive the country out of the dragging crisis with credible, market-friendly policies -- as opposed to nationalistic, protectionist policies.

In order to do so, the team could learn from the research and studies presented by this year's Nobel prize winners for Economics, Finn Kydland of Norway and Edward Prescott of the United States.

Two practical propositions that can be taken from their work are the establishment of an independent central bank and the adoption of a bottom-up, microeconomic approach in public policy to turn the economy around.

We will not discuss the first proposition here because it is not applicable to the current economics team, following the legalization of the independence of Bank Indonesia. Instead, we will focus on the second proposition.

A microeconomic policy is best understood by contrasting it with a macroeconomic policy, which has dominated economic policies across the globe since World War II.

A macroeconomic policy seeks to change demand, such as in investment and consumption, to stimulate growth. Such a policy is based on theories developed by English economist John Maynard Keynes, who advocated an expansionist fiscal policy during an economic downturn to drive up demand.

A rise in demand would in turn stimulate producers to increase output by optimizing their spare capacity or investing in new capacity. In the end, it would create growth, although often at the expense of inflation.

This theory does not always work, especially in developing countries like Indonesia, where spare capacity is almost non- existent -- or only exists in uncompetitive industries. Therefore, driving up demand often results in rising import, thus creating unsustainable growth.

This is exactly what occurs in Indonesia, where economic growth in the past few years has been driven by domestic consumption. Therefore, increasing demand by fiscal expansion would not help much.

Adopting a microeconomic approach as advocated by the Economics Nobelists could provide a different insight into Indonesia's economic crisis, i.e., an insight from the supply side.

Unlike Keynesian, who explained economic recession in terms of demand, Kydland and Prescott views the crisis from the supply side, such as advancements in technology, fluctuating oil prices and other "supply shocks". Most economists now recognize the importance of these supply shocks in explaining the business cycle.

Unlike the Keynesian macroeconomic policy, which takes a top- down view, microeconomic policy takes a bottom-up view, starting with the millions of consumers and producers who are often aggregated as "the market".

However, reading the market is as hard as knowing the interests of millions of economic players. Nevertheless, there are tools to understand them, such as surveys conducted by non- partisan institutions. The National Economic Council that Susilo plans to set up, drawing upon an American model, is another.

This council could be helpful in encouraging the rational application of economic principles to policy, which should give economists some clout among politicians.

The author is a staff writer for The Jakarta Post.