Transformation of economic system needs a boost

JAKARTA (JP): The transformation of Indonesia's economic structure, which has generated a 6.9 percent average growth rate over the past three decades, has not been followed by a sound transformation of its economic system, an economist says.

Sjahrir, a lecturer at University of Indonesia's School of Economics, told a one-day seminar yesterday that the country's rapid economic growth has so far been unable to guarantee a high level of efficiency, at either the micro or the macro economic level.

"The impressive growth of Asia's economy, including Indonesia, which is sometimes dubbed 'miraculous', has mostly been the result of enormous investments in capital, human resources and economic assets," he said, quoting the observation of leading economist Paul Krugman.

"But it has not been the result of improved efficiency. The biggest question we are facing now is whether we can continue to transform the country's economic structure and, concurrently, boost the efficiency of the economic system," Sjahrir said.

The seminar, which discussed finance and banking in Indonesia, was opened by Bank Indonesia Governor Soedradjad Djiwandono. It also featured economists Dorodjatun Kuntjoro-Jakti, Marzuki Usman and Rijanto Sastroatmodjo as panelists.

Sjahrir said that Indonesia exercise caution in relation to the process of globalization, which implies not only the free flow of goods and services but also the free flow of capital.

"It is very important for Indonesia, which has a free foreign exchange regime, to closely watch the shifts in the world's capital flows," he said.

Speaking of the international currency market, which currently has a daily turnover of up to US$1.3 trillion, Sjahrir said the rupiah should not be over-valued if the government cannot control inflation.

"Can we, amid the world's rapid changes, reduce the discrepancy between our inflation rate and the depreciation rate of the rupiah against the American dollar?" he asked.

If Indonesia is unable to narrow this gap, he said, it will become harder in the future to keep the rupiah at a stable level.

To keep the rupiah stable, he said, "domestic interest rates have to be kept at high levels. That means that capital inflows will mostly consist, not of productive investments, but of speculative funds which are short term."

Sjahrir said that Indonesia's increasingly open economy should be matched by an opening up of the society in general, such as by allowing more democracy and freedom.

Government policies should consist, not only of those in favor of a more liberal economy, but also those which encourage economic justice and narrow the economic gap in society, he said.

Sjahrir criticized some of the government's policies as being 'anti-market'. Those policies, which the economist said were introduced to benefit particular interests, were distorting the market mechanism, he said.

Meanwhile, Dorodjatun, the dean of the University of Indonesia's School of Economics, said that in the coming years the government should continue to open up the country's economy through further deregulation to attract investment and increase the proportion of foreign ownership in listed companies.

"I think Indonesia should gradually allow for an increase in foreign ownership in listed companies from the present level of 49 percent to 55, 60 and more," he said. (pwn)