Kahlil Rowter, Jakarta
Almost a decade since the crisis that hit Indonesia in mid-1997, unlike Korea and Thailand, we have yet to witness previous economic growth levels.
It is true that, unlike those two countries, Indonesia also underwent profound political changes. But, since 2002, the political situation has stabilized. The fundamental question now is, is Indonesia, under the current politico-economic framework, doomed to a low economic growth path?
What has changed dramatically in the economic structure? Since 1993, we have seen a dramatic increase in exports and imports. Looking at sector by sector, the structure has not changed a lot over the last 15 years. However, in the last five years, the main engine of growth has been the services-related sectors, including trade, hospitality, transportation and communications and financial services.
These sectors have low employment elasticity, which means recent growth has created fewer jobs than before the crisis. It is also less equitable as ownership and employment in these sectors are concentrated in large cities, particularly Greater Jakarta.
Policy-making institutions have also undergone significant changes with an independent central bank and only a small part of public expenditure under direct central government control, along with divestiture of public spending to regional governments. An independent central bank and a floating exchange rate should provide a better banking sector governance and better inflationary management. But both also have associated costs.
Improving banking sector governance entails a transition period when structures are put in place and human capital accumulates. Floating the exchange rate to allow better inflation management also entails a transition period until economic agents become familiar with and able to handle volatility.
For an open economy like Indonesia's exchange rate pass-through is substantial, hence a volatile exchange rate creates additional uncertainty through other variables. The absence of a deep hedging market further exacerbates this situation.
The small development budget controlled by the central government created its own problem. In place of a centralized development effort we would have expected a well coordinated plan executed by the center alongside regional governments. But this has not materialized and it appears regional governments have different goals that do not necessarily add up to a well-thought out whole.
As I have argued before (The Jakarta Post Aug. 19, 2005), as most local governments are controlled by national parties it should be possible to make them toe the national line.
Having oversight of the state budget is one thing, but having the legislature micro-manage decision-making is quite another. Furthermore, recruiting Cabinet members from important parties does not always mean the President can have his way. It may even entail a cost in terms of cohesion, particularly when facing tough cross-cutting issues. These party-spawned Cabinet members are first and foremost politicians seeking political capital and are not necessarily able or willing to carry out politically costly policies. Hence the most important and usually controversial decisions are handed back up to the President.
An analogous case to regional development expenditure not adding up to the whole development effort can also be argued to exist in other regional level policies that affect economic activities.
Examples abound on regional regulations that run counter to national level policy direction. It is gratifying to learn that there is a concerted effort to overcome this. But this effort could easily run aground once faced with sweetheart deals or other high profile regional projects.
It is easy to equate these two, but they are certainly distinct. Governance has been defined as how authority is gathered and exercised for public goals.
Indonesia has made great strides in bringing to justice those who blatantly break the law. Yet, there remains a host of other corrupt -- but not illegal -- practices that are much more subtle and difficult to prosecute but just as, or even more, harmful. But even when anticorruption procedures have been put in place and watchdogs are unleashed, there remains the much broader challenge of governance.
Indonesia has made great strides in the selection, monitoring and replacement of political leadership, which forms the first dimension of governance. Next we must strive for the second governance dimension: An effective government. This is our greatest challenge now. Examples abound on this very weakness. The result is that Indonesia faces a crisis in the third dimension of governance: Respect of citizens and the government for the country's institutions. Respect starts with trust, and we are not even here yet.
Respect for institutions promotes efficiency. This is because policy can achieve its goals simply by being announced. This is the credibility angle. Furthermore, respect also lowers transaction costs -- mainly the costs of monitoring -- and reduces uncertainty. Ultimately, in the case of corruption, respect promotes deterrence, which naturally lower the incidence of corruption and its attendant costs.
Recent inflows into the financial market strengthened the rupiah and increased foreign exchange reserves. One explanation is the high interest differentials and at the same time the expected downward path in interest rates (on the back of declining inflation) promises a potential upside for bond investors.
This removed awkward questions on state budget sustainability and the inefficient use of resources. Even prior to this move investments in financial institutions took place, as a vote of confidence on reforms in this sector. Another boost to confidence was the settlement of the Cepu oil block.
Now is the time to stop focusing only on fighting corruption and enlarge the focus to governance. Besides stifling creativity and even normal processes by instilling fear in the people carrying out just about any procedure, focusing only on anticorruption could hamper the anticorruption drive itself. For one thing it diverts attention away from addressing the underlying causes of corruption, and additionally it can even create opportunities for other forms of corruption in the future. An anticorruption drive should not be used only to show that something is being done.
For proper governance to start, the key is to increase government policy effectiveness and next to aim at trust and respect for institutions and processes. Coherence in policy-making, with simple and easy to understand but concrete steps will be needed. In order to increase credibility, one key component is transparency.
In this regard, the public disclosure of the incomes and assets of public officials is needed along with credible and more frequent audits. It is probably a good idea to create a national salary standard for public officials. Lastly, regular governance, anticorruption and public expenditure surveys will improve trust and credibility. The old adage ""trust but verify"" may provide guidance.
If these reforms are conducted the current favorable financial conditions will continue and spill over to the real sector creating a more equitable growth. Otherwise, Indonesia should expect a prolonged slow growth.
The writer is a lecturer at the University of Indonesia's School of Economics. The views expressed are his own.
