Watching the U.S. nervously

Watching the U.S. nervously

The rash of corporate and accounting scandals in the United
States will surely have a negative impact on Indonesia, which
sells more than 22 percent of its exports to the world's largest
economy.

The immediate impact is already discernible in the declining
value of the dollar and the almost 5 percent fall in stock prices
on Wall Street over the last few days.

With an estimated half of all households in the U.S. owning
stocks, the wealth effect of falling stock prices is in itself
very important, as it will hurt consumer confidence and
consequently affect market demand.

The core of the problem, as we can see from the financial
market performance over the last three days, is the lack of
confidence in the U.S. economy. This is quite hurtful for the
Americans, who have just come off a decade of overwhelming
consumer confidence, believing that they had the strongest
economy and were the most entrepreneurial nation in the world.

Equally damaging is falling foreign confidence in the United
States financial market. Because its trade deficit with the world
is huge, the U.S must attract at least US$1 trillion in foreign
money every day. A weakening capital inflow could further drive
down the dollar and consequently drive up the prices of imported
goods and depress consumer demand.

Now that the U.S. is no longer seen as the safest and most
profitable place for investment, at least for the time being or
until the market is reassured that there will no longer be a new
major wave of corporate malfeasance, many analysts reckon that
foreign funds will soon search for better places for investment.

The dilemma, though, is that investors do not have many other
places to go. European economic growth is expected to remain
slower than American growth for the foreseeable future, while
Japan remains moribund and emerging markets, such as Indonesia,
are seen as fraught with too many risks.

No wonder most investors are nervously watching the U.S.
economy. But whether the corporate scandals inflict enduring
damage on business investment, a key ingredient to a stable,
long-lasting economic recovery, will depend on the developments
within the next few weeks.

Among the most determinant factors to restore confidence in
the U.S. economy are how strong and deep will the U.S. government
push ahead with corporate and accounting reforms be and how will
investors and the general public react to the forthcoming reports
on second-quarter corporate earnings.

Most analysts are nevertheless optimistic that U.S. economic
resilience is strong enough to survive the "corporate terrorist
attacks" as it did immediately after last September's terrorist
attacks in New York.

How does Indonesia, which is in its fifth year of economic
crisis, stand amid these developments?

Certainly, the external factor is now less favorable for
Indonesia's economy, meaning that exports, currently the largest
generator of growth besides consumer demand, is much more
difficult. Now that the U.S. economic prospect is rather
uncertain, the country should launch a more concerted effort to
promote exports to other markets to offset the expected lower
demand from the American market.

But exporting is only the end of a chain of economic
activities, which consists mainly of the import of industrial
materials, the production process and transportation.

Unfortunately, all these chains are still beset with problems
that directly affect export competitiveness. Imports are still
having to struggle with a corrupt, inefficient customs service
and transportation is suffering from a crumbling infrastructure.

Most damaging is labor unrest, which disturbs production
operations and makes foreign buyers less confident about timely
deliveries from Indonesian exporters.

The government, however, does not seem fully aware of how
crucial exports are for fueling a sustainable economic recovery,
as can be seen in the absence of well-coordinated programs to
bolster exports.

The government should realize that consumer spending, the
largest generator of growth since 2000, will eventually lose
steam without a steady increase in income to build up savings.
Investment, which is supposed to be the other ingredient for
economic expansion, is still hard to come by without significant
improvement in law enforcement, security conditions, a smooth
implementation of regional autonomy and labor relations.

Exporting, therefore, is now the best alternative to generate
a sustainable recovery. But exports will never grow markedly
unless the Cabinet corrects its fatally mistaken perception that
exporting is the sole responsibility of the Ministry of Trade and
Industry.