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.