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Amid slowdown, lessons from Soeharto

Economic plans: President Joko “Jokowi” Widodo (center) announces a major economic deregulation policy with his ministers and staff backing him up at the State Palace on Wednesday (Sept

Anton Hermansyah & Arif Gunawan S. (The Jakarta Post)
Jakarta
Tue, December 15, 2015

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Amid slowdown, lessons from Soeharto Economic plans: President Joko “Jokowi” Widodo (center) announces a major economic deregulation policy with his ministers and staff backing him up at the State Palace on Wednesday. (kompas.com) (center) announces a major economic deregulation policy with his ministers and staff backing him up at the State Palace on Wednesday. (kompas.com)

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span class="inline inline-center">Economic plans: President Joko '€œJokowi'€ Widodo (center) announces a major economic deregulation policy with his ministers and staff backing him up at the State Palace on Wednesday (Sept. 6). (kompas.com)

The formula to cure the current economic slowdown may be found in the Soeharto era, looking back to 1983 when the country confronted a similar situation to today.

Principally, Indonesia'€™s economic problems this year have marked a similar pattern to what happened in the country during the slowdown of the 1980s, said an economist at the Institute for Development of Economics and Finance (INDEF), Didik J. Rachbini.

In 1983, when 80 percent of Indonesia'€™s revenue was contributed by oil exports, commodities price slumped and the US dollar fluctuated heavily. Today, Indonesia depends on coal and palm oil exports, and faces sluggish commodities prices and a volatile greenback.

It is interesting to know what president Soeharto did back then, according to Didik.

Soeharto, known as '€œthe smiling general'€™ despite the many human rights violations he allegedly committed during his reign, gathered his economic experts to find a solution. After long hours of discussion, what they recommended was simple: speed things up through deregulation.

In 1983, the government finally allowed state-owned banks to decide the interest rate for their own deposits and loans, the first deregulation launched by the country since independence in 1945.

"Then there came the privatizations. Half of the functions in the Finance Ministry were handed over to private entities," said Didik in a discussion entitled Economic Governance Reform and Leadership Challenges on Monday.

To reform the corrupted Customs Office and smoothen exports, Soeharto in 1985 took swift action by suspending the Customs Office'€™s authority to check export goods, temporarily handing it to a team of Geneva-based consultants, the Societe Generale de Surveillance (SGS).

A year later the general'€”who was bearing the status of defendant at his last breath in the wake of fraud allegations at his Supersemar Foundation, helped exporters by abolishing export certificates (SE), which previously required the obtaining of export tax allowances as well as subsidies.

To boost the manufacturing industry, Soeharto in 1987 abolished import tax for six pivotal sectors: automotive, machinery, electricity, textiles, cotton and steel.

In the same year, he went further by simplifying investment licenses in the mining, agriculture, pharmacy and manufacturing sectors. He also helped businesspeople to enter the international market by abolishing export permits.

Lastly, on Oct. 27, 1988, he issued the '€œ88 October Pact'€ allowing a businessman to create, own and run a bank with only Rp10 billion, equal to Rp70 billion (US$ 5 million) today. This measure has been heavily criticized as it led to bubble in the economy, which then exploded during 1997 crisis.

In total, Soeharto launched eight deregulation packages in six years (1983-1988) to tame the effect of the 1980s global slowdown. And the results, in general, were quite successful. Soeharto managed to grow the manufacturing industry by 7 percent in 1990, a record that still stands.

 

Debottlenecking

In a bid to deal with the current slowing economy, Didik underlined the importance of exports and investment. Unfortunately, bureaucratization and complicated regulations in Indonesia troubled the two crucial economic activities plague these two economic pillars.

President Joko '€˜Jokowi'€™ Widodo has in fact taken similar measures to Soeharto, abolishing unnecessary regulations through deregulation packages in the last four months.

Of a total of 165 deregulation policies, 135 have been issued and/or are being processed at the State Secretariat. The remaining 30 deregulation bills were by processed at the ministerial level, said Presidential Chief of Staff Teten Masduki.

Around 60 percent of the deregulation policies were related to five economic-related ministries: the Trade Ministry (32 regulations), Cooperatives and Small and Medium Enterprises Ministry (29), Industry Ministry (15), Finance Ministry (12) and Energy and Mineral Resources Ministry (11).

However, the current problem in Indonesia government is not with regulation per se. There is an issue that was not found in Soeharto'€™s day, namely a lack of harmony among different government entities.

Today, as Didik said, the government is too confident about its tax income target amid low interest rates. After setting a tax income target of Rp 1.49 quadrillion, the tax office admitted failure, predicting a 2015 shortfall of around Rp 438 trillion.

"In that situation, the new issuance of government bonds will be unavoidable in order to meet the needs of state revenue. But without high interest rates, investors will be reluctant to buy them, and the government will then blame Bank Indonesia for it," he said.

Meanwhile, Faisal Basri, an economist from the University of Indonesia, said that the heavy bureaucracy had led to a high-cost economy and slashed profit margins in the business realm. This explained, he said, why Indonesia heavily depended on commodities, rather than its manufacturing sector.

"Developed countries are exporting manufactured products because of the high profit margin. In Indonesia, the margin in the manufacturing industry, such as garments, is just 12 percent. Meanwhile, [the margin] in the extractive industries such as palm oil and cement is more than 40 percent," he said on Monday.

The government, he went on, was not yet able to stimulate manufacturers to develop their industry. Which leaves us to wonder how the current democratic government can beat the authoritarian Soeharto regime in deregulating business.

Jokowi has, it is true, issued more deregulation packages than were released in the Soeharto era during slowdown in 1980s. And he is, according to Teten, tightly monitoring the implementation of the packages, as well as their effect on the economy.

As we already know, the devil usually hides in the implementation. And, we should note that the iron fist is usually more effective than the open hand in implementing policies. All remains to be seen. (ags)

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