Vague economic vision causes business disarray

Weakness in national leadership has had a more negative impact than positive impact, according to some economists. The Jakarta Post's contributor Rikza Abdullah talked to Djisman S. Simandjuntak, executive director of Prasetya Mulya business school, who shared his thoughts on the economic vision of President Megawati Soekarnoputri's administration.

Question: Would you say the government lacks commitment to policy reform?

Answer: The government apparently has no intention to make policy reform and has no clear direction in its economic policies. The business community, therefore, cannot move forward and make accurate business plans.

Radical policy reform and the redesigning of the basic architecture of economic policies are very important for the country to respond to radical changes in the world economy.

Globalization has made it possible for investors to move their funds -- in the form of either portfolio or direct investments -- from one country to another, drastically altering business competition. Former closed-market countries like China and those in Eastern Europe have now opened their markets.

So, we need open, market-driven economic policies supported by the business community.

Q: Does this mean that Megawati's government has no clear vision in its economic policies?

A: Look what's happening in the privatization of state firms. Part of the privatization process has been hampered by protests by local authorities seeking democratization in the economy. If the government had a clear vision, it would have been able to find a legitimate form of privatization in line with economic democratization.

Q: What has caused this lack of vision? Is it because of Megawati's choice of economic advisers?

A: Her aides actually include senior consultants Ali Wardhana and Widjojo Nitisastro. They became great (several years ago) because they then worked under the strong leadership of former president Soeharto. If they now perform poorly, it is probably because they are working under the weak leadership of Megawati.

Her lack of leadership can be seen from the recent conflict among her ministers on Indonesia's cooperation with the International Monetary Fund. Another indication of her weak leadership is the prolonged legal uncertainty caused by very poor law enforcement.

Q: What are the good points of her leadership?

A: She has acted positively in the development of monetary affairs, banking and the state budget. She's been able to stabilize the rupiah's exchange rate. This is related to improvements in the balance of payments due to the return of capital to Indonesia, which flew out of the country during the crisis.

The rupiah's stability has helped curb inflation, even though the year-on-year inflation rate is still in double digits.

A positive development in banking has been the improvement in the health of banks' operations after the sale of part of their assets by the Indonesian Banking Restructuring Agency (IBRA).

As for the state budget, Megawati's administration has been able to reduce its budget deficit by reducing subsidies.

Q: And the shortcomings?

A: The long list includes slow economic growth, high unemployment, the decline in exports and imports, weak investment promotion, the slow disposal of assets by the IBRA, slow privatization, the absence of progress in dealing with bad debtors and the eradication of corruption, poor law enforcement, the poor management of security and the lack of commitment to reforming policies.

Q: Could you elaborate?

A: Our economy grew by 2.5 percent during the first half of this year, far lower than the annual 4 percent growth in 2000. The decline of exports and investment indicates that economic growth is supported by domestic consumption. We cannot continually rely on this because so far we do not know where consumers get their money from. Most probably, the money is from the liquidation of their assets.

We need export-led economic growth because we are in dire need of foreign exchange earnings to service external debts and to pay obligations related to foreign investments. True, the decline of exports was partly caused by the slowdown of the world economy, but we would have been able to boost our exports if we had directed past investments to export-oriented industries, instead of projects destined for the local market.

The decline of imports (by 25.8 percent in the first quarter of this year and by about 5 percent in the second quarter, according to the latest quarterly report of Bank Indonesia) also indicates the slowdown of investment activities, which traditionally rely mostly on imports of machinery and intermediate products.

The combination of the decline in investment and exports has affected economic growth and worsened unemployment.

Moreover, the absence of progress in the dealing of bad debtors and the eradication of corruption, poor law enforcement and management of security have created a bad perception of Indonesia's business and investment environment, particularly for foreign investors.

Q: What would improve the economy?

A: Because the economy is very much affected by debt services, the government should reduce debts by repaying its debt principles. There are three options to obtain funds for their repayment. First, it could accelerate the privatization of state companies and the sales of assets currently held by IBRA.

Second, it could activate the secondary bond market, so the bonds for the restructuring of banks could be refinanced with the capital to be generated from the sales of new bonds at the time of their maturity. Third, the government should take bold measures to accelerate economic growth, so that the government can increase revenue from taxation.