Tuesday, October 17, 2006 Vincent Lingga, The Jakarta Post, Jakarta
This is the second in a series of articles The Jakarta Post will publish to mark President Susilo Bambang Yudhoyono's second anniversary in office on Oct. 20. The first article appeared Monday.
Almost two years into his five-year term and President Susilo Bambang Yudhoyono has yet to fully utilize his strong political mandate to transform the country's macroeconomic stability into improved living standards.
Macroeconomic downside risks have been reduced, fiscal management improved with a sustainable deficit and the government debt-to-GDP ratio halved to below 50 percent.
Macroeconomic stability has strengthened but the economy remains vulnerable to shifts in investor sentiment and occasional asset market volatility, because the bulk of foreign capital inflows consist of short-term, portfolio capital, which can fly out at the slightest sign of policy inconsistency.
The financial sector's performance has improved, though the largest two state-owned banks, Bank Mandiri and Bank BNI, remain fragile due to mountains of bad loans. Gross international reserves have increased markedly to enable the government to amortize all its debts to the International Monetary Fund four years ahead of maturity.
Exports have reached all-time records, expanding by over 17 percent in the first eight months of this year. However, most of this gain should be attributed to luck, as the increase was generated mainly by steep price rises in primary commodities such as palm oil, rubber, coal and oil, not by any improved economic competitiveness on the part of Indonesia.
Different from previous presidents, who were often associated with the abuse of power and rampant corruption, Yudhoyono still presents himself as an honest, hard working person with a great deal of integrity.
But his legitimacy and impeccable integrity will not mean much as people lose patience with his indecisiveness on badly needed reforms to reinvigorate the economy and create jobs.
The President failed to take advantage of his strong mandate and push through significant reforms at the start of his term. And he has failed miserably in the sector most meaningful to the majority of the people -- job creation. Unemployment has instead risen.
Poverty increased by 11.25 percent, or 3.95 million people, to almost 40 million people or 17.75 percent of the total population between February 2005 and March 2006, due to the devastating impact of the doubling of fuel prices in October 2005. This poverty incidence, though lower than that between 1998 and 2002, was the highest since 2003.
We don't mean to say the fuel policy was wrong. It should instead be praised as the boldest measure yet taken by the Yudhoyono government to strengthen the foundations of the economy. Its negative impact should be blamed on a poorly designed social safety net and anti-inflation measures.
Open unemployment and underemployment have reached as high as 40 percent of the 105 million total workforce because of persistently moderate economic growth (below 6 percent) amid an acute lack of new investment. Indonesia has failed to rejoin Asia's club of high-growth countries.
While the pace of economic reform announcements has been much slower than expected, the implementation of policy reforms is even more disappointing. The cascading impact of these problems is a disappointingly slow recovery of public and private investments.
Yet more worrisome is the trend whereby each percentage point of growth now generates fewer jobs in the formal sector than it did before the 1997 economic crisis, because of what most analysts see as the impact of too rigid labor regulations.
Things will not likely improve much in this labor market because the government has succumbed to demands of trade unions who oppose the amendments to the 2003 Labor Law, even though they represent no more than 5 percent of the total workforce.
The government apparently does not realize that in the long term, companies, workers and society as a whole will benefit from a more flexible labor market where workers have an incentive to invest in their own social capital and lifelong learning in the competition for better jobs.
Worse still, another set of important economic laws regarding taxation and investment, already several years behind schedule, will most likely suffer another delay. The only small consolation is the new customs law, which is scheduled to be approved by the House of Representatives tomorrow (Oct. 18).
The Infrastructure Summit held last November to woo new investment fell flat due to uncertainty about legal frameworks and lack of clear-cut provisions on government-private sector partnership and risk management. The second Infrastructure Summit, scheduled for next month, does not seem very promising either because of the delay in the formulation of a more conducive regulatory environment.
Promises and symbolic moves, though needed, are not enough to maintain the momentum of market confidence. The market requires concrete measures because only consistent and effective implementation will give credibility to government policies.
As long as the President remains hesitant to assert stronger political leadership to push through key reform measures and vital infrastructure projects, the pace of new investment will remain slow and the economy will continue to muddle through, unable to generate enough jobs for the unemployed and new entrants to the labor market, and lift the 40 million up from poverty.
