Condition critical: Economic reforms cannot wait

Monday, March 12, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Reform is never easy when it requires changes to an entrenched economic system. That is why broad-based reforms often require a crisis or perception of crisis, or at least a sense of chronic deterioration. It was economic crisis that brought down Soeharto in May 1998 and ushered in the reform era.

And we are once again mired in a critical condition now, despite the macroeconomic stability the government often boasts of.

With unemployment and underemployment estimated at some 40 million and the number people living on less than US$2/day exceeding 100 million, our situation is clearly critical.
But both the government and the House of Representatives have yet to demonstrate a sense of crisis in accelerating the reform measures sorely needed to reinvigorate investment, generate jobs and lift people out of poverty.

We had expected good sense to prevail in the end, but the Susilo Bambang Yudhoyono administration, currently in the middle of its term, has yet to demonstrate a feeling of urgency toward policy reforms in priority areas.

The experiences of other countries that have been successful in pushing through broad reforms shows that the timing of reform depends on political leadership - the leadership to make it clear that there is a crisis.

The government moved decisively in October, 2005 to reform the energy sector by slashing fuel subsidies through a 125 percent increase in fuel prices after the rupiah had come under fierce attacks by speculators.

This move immediately gained rewards from the market in the form of confidence in the rupiah and has substantially increased the government's fiscal capacity.

But it is rather mind-boggling to notice how apparently ignorant the government and politicians at the House have been for not being able to identify the crisis conditions that should have forced them to accelerate reforms.

Look how deliberations of the taxation, labor, investment and mining bills, already several years behind schedule, have been protracted, stuck on issues that are not very important to stimulating economic efficiency. Likewise, reform in public administration, including local governments and state companies , has been quite slow.

The challenges lie on two fronts. While the pace of reform legislation has been much slower than expected, the implementation of reform measures is even more disappointing. The cascading impact of this delay is a disappointingly slow recovery in public and private investments.

The government was commended for the comprehensive reform packages in infrastructure and investment it launched in the first quarter of last year. However, their implementation has dragged.

The crash program to construct 10,000 megawatts in additional power generation capacity seems to have crashed amid bickering about tender procedures and allegations of corruption.

The negative impact of the slow pace of reform is already being felt in the quality of growth as the number of jobs created by one unit of economic growth is now much smaller than before 2000.

The steady rise in unit labor costs in excess of productivity and rigid labor regulations have prompted new investors to economize on labor by avoiding labor-intensive businesses.
Banks, whose function is supposed to center on lending, prefer plowing their funds into debt instruments that have nothing to do with financing real economic activities.

Inefficiency and rampant corruption within the public sector, notably in tax, customs and business licensing, remain the most serious obstacles to new investment and the main source of business risk.

We often fail to realize that besides legal uncertainty, which makes it extremely difficult to do a reasonable risk calculation, corruption is also a source of unpredictability because any deal could be undone by someone bribing someone in the government.

President Yudhoyono received a strong political mandate in 2004 from disillusioned people who want things to change, but he seems unable to show the leadership necessary to translate this broad dissatisfaction into concrete action and move things in the direction the people want.