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Jakarta Post

Seven pathways to building growth (Part 2 of 2 )

  • Rachmat Gobel

    The Jakarta Post

Jakarta   /   Thu, July 24, 2014   /  09:01 am

Financial markets will be watching the new administration'€™s early decision on the matter of energy subsidies '€” failure to tackle the issue forthrightly will result in a loss of confidence. It is therefore heartening to see both presidential candidates are willing to take strong action in this area.

A more rational allocation of scarce fiscal resources is necessary '€” a shift is needed away from wasteful and untargeted subsidies toward more spending on health care and education that focuses directly on the poor and needy. Resources have to be released to be spent on the infrastructure improvements that alone can ensure the growth of well-paying jobs in manufacturing and services.

The new president should exert leadership by building a new consensus on the best balance of policy between (a) spending government money on immediate support for the poor through subsidies and other social spending and (b) longer term spending on constructing infrastructure and building human capital through spending on vocational institutes and universities.

Fourth, Indonesian business would like to see monetary and financial stability so that we are not thrown off track every few years by stresses related to high inflation or excessive external deficits.

Too often, a surge in Indonesia'€™s growth has been brought to a halt by a spike in inflation or by swelling external deficits that cause the rupiah to tumble. Indonesia must break this cycle and it can do so by giving Bank Indonesia greater independence to set monetary policies that bring inflation down and restrain the excess demand that destabilises the external accounts.

At the heart of recent challenges to the business sector, such as the sharp weakening of the rupiah in 2013 and rising costs of production, is monetary policy. Bank Indonesia should be given a target of bringing inflation down from the current 5 percent or higher to closer to 2 or 3 percent over a period of time. If this succeeds, interest rates will fall and bring the very high cost of capital for businesses down.

Such stability can only be ensured through a robust system of supervision and regulation of the banks and other financial institutions. Indonesia has made much progress since our own terrible crisis in 1997 but more needs to be done to improve financial regulation.

Fifth, we need policies to substantially boost the manufacturing sector.

We need to understand why, despite the very good headline growth of recent years, employment in the formal sector has been lackluster. One basic reason is that the manufacturing sector has been more capital intensive than labor intensive. Apart from the poor infrastructure referred to above, manufacturing has been held back by a weak business climate that scares away foreign as well as domestic investors.

One key element in the business environment is labor regulations. Well-intentioned policies to protect labor may well have hurt workers in the end - by raising the costs and risks of employment, businesses have been deterred from raising employment as much as they could have.

It takes political courage and skill to effect a transformation of labour policies and regulations - but we cannot keep deferring this decision.

Sixth, the new president should build a new consensus around a practical and hard-headed version of nationalism.

All countries pursue their own national interests and no serious leader of Indonesia is going to be anything but a nationalist. But nationalism has to be pursued in a practical manner. Recent policies in the mineral sector to accelerate the move up the value chain are to be applauded. These policies are good for Indonesia'€™s future and should be broadly supported. However, their implementation can be fine-tuned so that the disruptive effect on tax revenues and export volumes can be mitigated.

Seventh, Indonesia needs to engage with the rest of the world but to do so in a way that does not cause damage to local workers or businesses.

It is in the larger interest of Indonesia that it be part of the ASEAN Economic Community (AEC). The AEC is slated to take full form by the end of 2015, allowing much freer flow of goods, services, capital and people around the ASEAN region.

Only by creating such a large and more integrated market can ASEAN countries, including Indonesia, collectively and individually be able to compete against the likes of China and India, whose massive market size even a large ASEAN country like Indonesia cannot match. From a geopolitical perspective, Indonesia needs a cohesive ASEAN region as its bulwark against the world market.

However, the AEC will bring greater competition for local businesses. To facilitate a proper transition to a full-fledged AEC, the new administration should consider establishing funds to support efforts by businesses to raise their productivity and branding power.

Beyond facilitating Indonesia'€™s integration with the regional and global economies through such initiatives as the AEC or the Regional Comprehensive Economic Partnership (RCEP), Indonesia should also look to strengthen ties with strategic partners such as Japan. Under Prime Minister Shinzo Abe, a revitalized Japan is looking to work more closely with its Asian neighbors. Indonesia has had a long and highly productive relationship with Japan and the new president should work to secure more Japanese investment in the country as well as assistance in areas such as education and research and development.

Indonesia'€™s business sector is preparing to move up to the next level. It is not looking for government handouts or molly-coddling. What it needs from the next president are things it cannot do for itself, things which only a government can do. So, whether it is tackling the high inflation that drives cost pressures, or the currency and inflation shocks that come out of the blue every few years or the woeful state of infrastructure, Indonesian business looks forward to the next president building on the successes of incumbent President Susilo Bambang Yudhoyono and taking Indonesia into the next lap.

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The writer is deputy chairman of the Indonesian Chamber of Commerce and Industry (Kadin) and president director of PT Gobel International. The views expressed are his own.

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