Glowing World Bank report card for Indonesia

‘A model developing economy’ —————————-

LAST month, Indonesia received its much-awaited report card from the World Bank. The bank lauded the country as a “model” developing economy. Indonesia, it said, could become one of the world’s 20 largest economies by 2005 if it continues to sustain high economic growth rates with equity.

Not that it was looking at Indonesia with rose-tinted glasses. There were potential pitfalls. It warned that any adverse change in economic policies could slow annual growth to 5 per cent, down from the predicted 7.5 per cent.

In particular, the bank said that the country needed to restore the deregulation momentum if it wanted to maintain a high growth rate.

Three weeks later, the government released its long-awaited deregulation package, slashing tariffs on 1,600 items, reducing the number of local taxes and fees, abolishing contentious non-tariff barriers on sugar imports and seeking to streamline the revenue structure of provinces.

It also does away with differential treatment for local and foreign investors over the import of capital goods.

Economists and businessmen said that the measures looked good on paper, but questions remained, particularly in their implementation.

In announcing the deregulation measures, Coordinating Minister for Economy and Finance, Mr Saleh Ariff, said that they were intended to improve “economic efficiency” shore up competitiveness.

Economic observers here believe that in line with this goal, the package was aimed at reducing the cost of doing business in Indonesia and reviving its sluggish exports.

Analyst Kwik Kian Gie believes the measures would encourage foreign investors to compete more. This would benefit the economy and consumers in the long-term. He cited the example of the continued drop in cellular phone prices because of the government’s policy to let the product compete openly in the market.

Other economists believe that the latest package was aimed at boosting Indonesia’s exports. The country’s economic growth over the last three decades has relied heavily on revenues from the export of primary commodities.

Mr Umar Juoro, a senior economist at the Centre for Information and Development studies, said there was now growing concern over the slowing down of Indonesia’s year-on-year export growth. It was 3.1 per cent in April, compared with 18 per cent last year. Non-oil exports fell to 3.1 per cent from 22 per cent.

He said: “By cutting the import tariffs of various goods, the government will promote greater exports.” It will also rectify perceptions of Indonesia being a high-cost economy.

Other observers said the deregulation measures also brought Indonesia closer to tariff reduction schedules set by regional and international trade pacts like the Asean Free Trade Area and the World Trade Organisation.

Noted Professor Mohammed Sadli, a prominent economist and former Indonesian Cabinet minister who held various economic portfolios from 1967 to 1978: “It shows that Indonesia is on track with respect to its various trade commitments and in creating a free market.”

The move made Indonesia one of the most liberal trade regimes in South-east Asia. Indonesia’s import tariffs are now the second lowest in the region after Singapore.

Some observers, however, believe that the deregulation package may not be enough to stimulate exports because structural impediments were behind Indonesia’s recent lethargic export performance.

Economist Rizal Ramli of the independent Econit advisory group said that labour-intensive export products had suffered a slowdown in the past few months. They could not be rectified with deregulatory measures. “What they need is a restructuring of the labour-intensive industry”, he said, citing the textile industry as an example where spinning machines from the 1970s were still in use.

He said small- and medium-sized textile industries, one of the pillars of Indonesian exports, could not be helped with reform packages because of their low productivity. “If you lower import tariffs, you will get more imports from China and Hongkong.”

This sentiment was shared by business tycoon Sofyan Wanandi, who said that more goods could be coming into Indonesia because local products were less competitive as a result of the high costs of doing business in the country.

Said Mr Wanandi, who heads the Gemala Group: “It could be counter-productive. Once we reduce import duties, more goods will come in at the expense of local products.” He, like other businessmen, said that the deregulation measures were unlikely to help reduce business costs.

“The real question now is implementation,” he said. “We would like to see whether the spirit of this deregulation package is followed by local governments and bureaucracies.”

To be sure, the package reduced the number of local taxes and fees. Local taxes were cut from 42 to nine, and local service fees brought down from 192 categories to 30.

The government simultaneously clipped the powers of provincial authorities to impose regional taxes and levies on products. They must get its approval for any new taxes.

Acting on concerns over irregularities committed by regional officials, Jakarta also announced steps to streamline the collection of taxes.

But the local business community feels that these policies are not fool-proof enough to cut back on “invisible costs” which arose because of corruption.

The chairman of the Indonesian Chamber of Commerce, Mr Aburizal Bakrie, warned that local administrations might create new levies to replace the old ones revoked.

Compared with previous deregulation packages, a paradox underpinned this one – it had regulatory measures built into it. To control lending to the property sector, the country’s central bank, Bank of Indonesia, issued a decree banning new loans for land acquisition and development by property companies. The exception is development of cheap housing.

Along with other measures, the stricture aims to cool the overheated property sector and reduce Indonesian banks’ exposure to property, which has grown from 13 per cent four years ago to nearly 20 per cent this year.

The aim was to ensure that rapid property development, on the back of low land prices and an expanding economy, did not get out of hand.

Most economic observers felt this was a shrewd move by the government to prevent a Thai- style crisis from developing.

Noted Mr Umar: “We need deregulation in this country. But we also want greater regulation from a strong institution like the central bank. The main aim is to ensure macro-economic stability and that we do not head in the direction of countries like Thailand.”

But like the other measures, economists question whether this can be implemented, given that many businessmen were lured by the booming property market in the country and would exploit loopholes for this purpose.

Said an analyst, who declined to be named: “It’s questionable whether the central bank can perform its regulatory functions here. Big businesses can secure loans from banks using different channels of influence.”

The government also took steps to promote the interests of small and medium-sized enterprises. Export procedures for small firms have been streamlined, and such companies can now raise the value of their exports, without a licence fee, from Rp 100 million (S$60,000) to Rp 300 million.

Said Mr Umar: “The buzzword is equality and the government is doing its best to further the interests of smaller businesses.” He added, however, that despite such measures, small firms were still likely to face problems given that the market structure was still biased towards big businesses.

Others observers said that the move also dashed against the rocks of political expediency. While the government supported deregulation, it was at the same time backing the monopolistic schemes of the country’s major conglomerates.

In this recent exercise, for example, some analysts have questioned the exclusion of automobile and petrochemical sectors – controlled largely by influential business tycoons – from the deregulation package.

Despite such doubts, observers said that the government was on course towards economic reform. The momentum generated by such reform would guarantee there was no turning back on the road towards laissez-faire.

Said Prof Sadli: “We must be realistic and remember that this is a step-by-step process. The economic ministers have done the best they can, given the inherent limitations of the current environment.

“In due time, even the ‘sacred cows’ will be touched.”

PITFALLS

* Any adverse change in economic policies could slow annual growth to 5 per cent, down from the predicted 7.5 per cent.

* Indonesia needs to restore the deregulation momentum if it wants to maintain a high growth rate. Analysts fear that the deregulation package announced recently may be difficult to implement.

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