my blog: conjunction ( kata penghubung )

CONJUNCTION

CHALLEGES FACING THE INDONESIAN ECONOMY

By: Rahmad

Despite the occasional hiccup, Indonesia’s economy has performed well in recent years. Economic growth, at around 5.8 percent in the past 10 years, has made Indonesia one of the world’s fastest growing large economies.

Its macro-economic management has been commendable, with fiscal deficits down to less than 2 percent of gross domestic product (GDP), and external debt has fallen from a worrying 87 percent of GDP in 2000 to just 28 percent. Foreign investment has been rising, reflecting growing confidence in the economy among the world’s biggest corporations. This has helped fund the relatively small current-account deficit while helping Indonesia build manufacturing competence in the longer term.

Nevertheless, Indonesia can do better. The country’s growth rate still under-performs the impressive rates that China has enjoyed and is still well below what the country itself achieved in the late 1980s up to 1997. Indonesia can and should grow by 8 percent a year, a pace of growth that would deliver good jobs and rising incomes to common folk.

The external environment is improving and is offering Indonesia a once in a generation chance to really make it. What are these opportunities and what does Indonesia need to do to achieve its potential.

The global financial crisis is finally over. Economic recovery in the US is gathering momentum after a small deceleration as a result of an unusually harsh winter. The eurozone has also put the worst of its sovereign debt crisis behind it while the Bank of Japan’s unconventional policies seem to be reversing years of deflation.

While China is slowing a tad, it is now so large that the extra demand it generates for commodities and manufactured components is massive.

And as China moves up the value chain, its costs are escalating. This means that labor-intensive activities are relocating out of China and seeking new homes in labor-abundant countries. Indonesia can be a beneficiary if it offers the right incentives.

Moreover, Japanese companies are showing a renewed interest in Asian economies outside China as Sino-Japanese relations deteriorate. Japan and Indonesia have had a mutually beneficial relationship so Japan can become a very important positive driver of our economic development in coming years.

Indonesia’s demographics are also excellent, with a youthful working population unlike China’s increasingly aging one. It is well endowed with energy and natural resources and unlike China, India and many other developing economies, it has fewer challenges with water availability. Indonesia is also fortunate in being part of an ASEAN, which is increasingly integrated and is growing rapidly, potentially providing Indonesia with a bigger market and the scale economies to compete with the likes of China and India.

And yet, Indonesia does not appear to be benefiting from these sizable opportunities. Given the right environment, Indonesia’s businessmen and workers have what it takes to bring Indonesia to a higher level. So, the trick is to provide them with that environment. To do so, we need to go beyond well-known problems such as infrastructure, an uncertain regulatory environment and a lack of skilled labor. We need to get back to basics and ask ourselves why, in the first place, do we have these problems?

Take infrastructure. The reason why there has been so little movement in tackling infrastructure despite the best intentions is that we do not yet have the appropriate bureaucratic and regulatory framework in place. The actual disbursement of public sector spending on infrastructure in areas such as energy, irrigation and transport has fallen well short of the budget for many years.

Multiple layers of red tape and officials’ unfamiliarity with new regulations quite often slow the process. The responsibility for infrastructure tends to be split among too many agencies, with coordinating bodies lacking the power to break deadlocks among these agencies. Finally, price regulation has undermined incentives for private sector companies to participate in infrastructure development.

Thus the first step must be to reform the bureaucracy. We need to improve pay and perquisites for government officials so they are properly incentivized and so government service is able to attract talented and dynamic individuals. There has to be a comprehensive audit of rules and regulations as China has done, to eliminate as many archaic or contradictory or unclear regulations as possible.

Not only will efficiency improve but openings for corruption will also be reduced as a result. A major effort should also be made to improve the way in which legislation is draftedall too often, laws are passed that are not precisely worded, giving scope for confusion and misinterpretation.

Another fundamental issue is how the state intervenes in the economy. Whether it is price regulation of infrastructure projects or our labor laws or the recent controversial ban on exports of unprocessed mineral ore, this nation needs a new, well thought-out consensus on the best way the state intervenes in and plans the economy.

Take the labor laws, which hinder employment by imposing onerous obligations on employers. The result is that much foreign investment that could have created high-quality jobs and built a strong industrial base is bypassing Indonesia and helping to develop the likes of Vietnam and Cambodia instead. Indonesia is missing out on the relocation of manufacturing out of China, an opportunity which will never come again.

Consequently, too few jobs are being created in the formal sector while too many Indonesians languish in informal sector jobs that pay too little, with little protection. Too often, well intentioned policies end up hurting the very people they are meant to help. We need to subject such policies to rigorous examination so that the true intent of these measures is realized.

Step up privatization and unleash the initiative and energies of individuals. There are enough examples in countries as diverse as Korea and Malaysia that private companies make more efficient use of resources and can help accelerate economic growth.

Even in India, not a paragon of privatization, we have examples of private companies being able to build global standard airports when government bodies were not able to.

Whether it is in power generation, airports, ports or toll roads, Indonesia will be well served by allowing more room for its private companies to build infrastructure.

In other areas such as plantations, privatization could well result in higher yields. Such privatization can be structured so as to benefit small holders, giving more individual farmers the opportunity to enrich themselves, as has happened in Thailand and Malaysia.

The global economy is giving Indonesia a huge set of opportunities to accelerate its growth. If it can focus on the basics and improve the business environment by reforming the state role in the economy, Indonesia will deliver transformational improvements in living standards to its people.

Let us not miss this chance