Total reform of the economy not practical: Expert

JAKARTA (JP): The view that Indonesia needs a complete structural economic reform to lift its economy out of its worst ever economic crisis might not be practical, a foreign expert said here yesterday.

"This is a very radical view. It suggests that you need to have a clean sweep of everything," said the deputy director general of the Australian Agency for International Development (AUSAID), Peter McCawley, yesterday at a seminar organized by the Indonesian Institute of Sciences (LIPI).

He explained that this view was based on the perception that Indonesia's current economic crisis was the result of imperfect market conditions caused by over 20 years of corruption, collusion and nepotism in the economy.

Indonesia will, therefore, need complete reform to eliminate the structural problems across the economy, he said.

"This interpretation is a very pessimistic view. You need 20 to 40 years to tackle the entirety of this problem. The agenda is too large," he said.

The International Monetary Fund has been considered the strongest supporter for complete market reform to help the country recover from the economic crisis. The Fund is organizing a multibillion dollar bailout to finance the country's economic reform programs.

McCawley, however, warned that proponents for complete reform should consider the possibility of unexpected consequences.

"When you introduce reform, you are often faced with unexpected results," he said.

He pointed to the country's 1988 banking reform which liberalized the financial sector, but then became one of the major causes for the current crisis.

"To let market forces work, you need a strong regulatory environment," he said.

He added that the weak legal system had also dislodged the World Bank-sponsored liberalization policy in the real sector, which only created a transfer of state assets to a small group of conglomerates.

"The World Bank was very naive. They thought there was free competition," he said.

He stressed that to move toward pro-market reform, there must be a proper balance between the market and the regulatory side.

He, however, added that overhauling the country's legal system was quite expensive, as was the case in Australia.

"Can you afford an expensive rule of law while many are living in poor conditions?" McCawley asked, adding that this was a dilemma for developing nations.

The government, supported by the IMF, is currently preparing various new laws including the anti-monopoly law, bankruptcy code, and the new central bank law.

He also said that Indonesia must manage its international support well because the country would need foreign aid, particularly to cover the large fiscal gap resulting from the government's huge subsidy commitments at times when domestic revenue is declining.

"I can assure you that Australia will provide positive support for Indonesia," he said.

He, however, added that the European view on the country was still cautious.

"Its rather difficult for investors and donor institutions to make predictions amid the political instability," he said.

He also said that the government should not control price increases too tightly, especially those which were being subsidized, including electricity. (rei)