Reformer Sri Mulyani set to lead graft-tainted central bank

Vincent Lingga , The Jakarta Post , Jakarta Tue, 06/30/2009 10:54 AM Headlines 

With two of its former governors and four of its deputy governors now in jail for corruption, a good reputation, more than anything else, is what Bank Indonesia, the main plank for our monetary management, badly needs.

That need can surely be met by Sri Mulyani Indrawati, currently finance minister and acting coordinating minister for the economy. Hence, her nomination to be the new chief of the central bank by President Susilo Bambang Yudhoyono should be greatly welcomed.

Sri Mulyani, more than anyone else, is the best candidate for the post after Boediono, who took over the central bank's leadership in April last year, resigned recently due to his being selected as Yudhoyono's running mate for the July 8 presidential election.

Her knowledge and track record of experience - formerly as minister of national development planning and in her current key economic and financial role - is very appropriate, especially now that fiscal and monetary authorities have to strengthen their cooperation and coordination to cope with the fall out from the global financial crisis.

Her more fundamental asset is that she commands great authority due to her impeccable integrity and competence and is highly respected both in international - she was formerly an executive director of the International Monetary Fund - and domestic circles.

All this will significantly strengthen the integrity and credibility of the central bank which had been beset and beleaguered by several corruption cases.

Yet most importantly, she has built a robust reputation as a reformer, winning high praise for her courage and concerted campaigning to weed out ingrained corruption at the finance ministry, especially in the directorates general for tax and customs.

Her steadfastness in standing up against political pressures and interventions from vested-interests - she is known to have engaged in a number of bruising political battles to push reforms through - represents another pre-requisite asset for a Bank of Indonesia which should increasingly be projecting its political independence.

But, however welcome Sri Mulyani would be at Bank Indonesia, her nomination to the central bank would leave a big gap at the finance ministry which has yet to complete its sweeping reforms.

President Yudhoyono will face a tough job in selecting an equally capable person to lead the finance ministry.

The House of Representatives has yet to confirm Sri Mulyani's nomination, and in view of the July 8 presidential election and given the probability of a run off to select a new president, we don't think the other two presidential hopefuls would allow the incumbent president Yudhoyono to select the new central bank chief before the whole presidential election process is completed.

The central bank governor plays a very important role in macroeconomic management and a president always wants to have that position filled by someone he or she can count on to implement his or her economic framework as promoted during the election campaign.

Presidential aspirants Jusuf Kalla and Megawati Soekarnoputri, who command major factions at the House, would most likely block Yudhoyono's move to change the top management of the central bank at least until the whole process of the presidential election is completed and the new head of government is appointed.

Given the political uncertainty about the selection process, there is actually not any urgency at all to nominate a successor to Boediono at Bank Indonesia now.

After all, Darmin Nasution, another tough reformer and trusted aide of Sri Mulyani, who pulled off remarkable achievements in reforming the highly corrupt directorate general of taxation, will enter the central bank later next month as the new senior deputy governor to replace Miranda Goeltom.

Nasution, currently director general of taxation, and formerly chief of the stock market watchdog, will serve as acting governor of the central bank until the appointment of the new governor.

Darmin is expected to jumpstart preparations for the establishment of the Financial Service Authority which will take over the bank supervisory function from the central bank in early 2011, as mandated by the central bank law.

Given the acute shortage of tough reformers with impeccable reputation within the government bureaucracy, having both Nasution and Sri Mulyani simultaneously in the same institution would rather be a case of squandering severely limited high-caliber resources.

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Commentary: The poor, the unemployed and the inflated promises

Vincent Lingga , THE JAKARTA POST , JAKARTA Fri, 06/26/2009 1:05 PM Headlines

The second round of presidential debates Thursday evening presented a slightly livelier exchange of views, especially between Jusuf Kalla and incumbent president Susilo Bambang Yudhoyono, concerning what they would do to alleviate poverty and unemployment.

While Megawati Soekarnoputri continued to spout ideological rhetoric but didn't say anything substantial about job creation and poverty reduction, both Kalla and Yudhoyono demonstrated their mastery of the problems, succinctly articulating the connection between investment, economic growth, employment, purchasing power.

Like in the first round of debates, Megawati in her opening statement of vision and mission, haphazardly rambled from one subject to another, citing the importance of the traditional mutual-assistance spirit (gotong royong), then jumping to the problem of water, food imports, food sovereignty and the need for farmers to keep informed about weather forecasts.

Though her campaign slogans centered on what she called people-based economy, she didn't present any concrete policy measures on how she would cope with the problems of poverty and unemployment, failing miserably to show the vital role of economic expansion to create jobs and generate purchasing power.

Megawati failed to answer directly the moderator's questions about income, inflation, fuel subsidies. She repeatedly asserted the vital role of mutual-assistance spirit in attacking poverty and unemployment but failed to explain how. But both Yudhoyono and Kalla candidly enlightened the public on how poverty would never be reduced without fairly high economic growth, emphasizing the crucial importance of stimulating private investment through a better business climate.

As the incumbent president, Yudhoyono enjoyed the advantage of being able to articulate what his government has been doing and his achievements over the last five years.

Encouraging also was that both Yudhoyono and Kalla realized the need for multi-pronged policies in addressing poverty and unemployment, combining pro-growth policies with government intervention through populist programs specifically targeted at the impoverished people.

Economist Aviliani, who moderated the debates, deserved credit for her probing questions to each of the candidates, prodding them to debate each other's views.

According to the school of thoughts of Yudhoyono and Kalla, the fundamental goals of poverty and unemployment reduction strategy are to increase the opportunities available to poor families, reduce their vulnerability to economic shocks and empower them to address their own specific problems.

"We should not only provide them with fish, fishing hook and canoe but we should also produce fishing rods and canoes," Kalla said in emphasizing the importance of national economic resilience and minimizing dependence on imports.

According to Kalla, economic growth should reach at least 8 percent a year to reduce the poverty rate (currently 15.4 percent) by 150 basis points (1.5 percentage points) a year.

The three candidates, however, failed to present a clearly firm stance on whether they would be willing to raise fuel prices according to international price levels.
Nor did they reply explicitly to the moderator's questions about whether they would ask for foreign debt reduction or restructuring.

"I will increase tax receipts, improve austerity and efficiency to plug the budget deficit. But I will not sell or privatize state companies," Yudhoyono said, apparently in teasing Megawati who sold several state firms during her 2001-2004 presidency. The three candidates shared the same view about the need to revise the 2003 labor law to make it more flexible in order to encourage new investment but none of them elaborated how they would achieve the badly-needed amendments.

"We also need to make our fiscal incentives for investment comparable to those offered by other ASEAN countries," Kalla pointed out. So all in all, don't expect any policy breakthroughs, whoever of the three candidates eventually win the July 8 presidential election.The basic policies will remain the mixture of market-based economic management to spur growth and government intervention through well-targeted programs for the impoverished people.

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Special Report: Reforms in place to root out rent seekers

Vincent Lingga , The Jakarta Post , Jakarta Tue, 04/28/2009 12:54 PM Headlines

 

Limited financial resources and inadequate institutional capacity have forced the government to go slow in reforming the civil service.

Since bureaucratic reform is also about abolishing or reducing rent, it faces strong opposition from those whose rents are at risk.

Given its complexity, civil service reform therefore requires a long, tedious and modest implementation in several small steps, in which the correct sequencing of reform is crucial.

No wonder, then, that the structure, work attitude and values of most civil servants seem to have remained largely unchanged despite the introduction of the new civil service law 10 years ago and the decentralization of more than two-thirds of civil servants from the central government to regional administrations under the 2001 local autonomy law.

World Bank reports and studies by various other international agencies have cited unpredictable and low-quality services from civil servants and arduous licensing processes as some of the main barriers to doing business in the country.

However, the situation is not so hopeless. The big bang reform, launched in 2007 by building "islands of integrity and competence" at three institutions - the Finance Ministry, the Supreme Court and the Supreme Audit Agency (BPK) - has produced fairly impressive results.

These institutions were selected for their strategic roles in law enforcement and in safeguarding state revenue, minimizing state losses. Most of these strategic functions happen to fall with the Finance Ministry, such as tax, customs and excise duty collection, budget allocations, treasury management and the oversight of the capital market and non-bank financial service industry.

But why does the civil service reform cost so much?

Most studies have concluded one of the main causes of the bureaucratic problems and inertia is gross underpayment. Civil servants always point out their rock-bottom salaries as an excuse for their poor performance, corrupt practices or absenteeism.

Therefore the redesigning of the civil service system with modern personnel management requires exponential increases in their pay, often by as much as five times, to make their living conditions comfortable enough to resist the temptation of corruption.

The reform at the three institutions alone, for instance, cost about US$5 billion.
But the state budget cannot at once afford massive, across-the-board large pay increases for all civil servants. Hence the incremental approach for the bureaucratic reform.

The generous pay introduced under the reform is nevertheless worthwhile, as it are based on a comprehensive personnel management system with clear-cut job classification, job descriptions for key positions and guidelines for recruitment, firing and promotion based on clear-cut performance criteria.

The recruitment system in most other institutions now is largely flawed and corrupt, requiring bribes to enter the civil service or get promoted. The pay system is devoid of any built-in performance criteria.

Riding confidently on the success of the three pilot projects, the administrative reform ministry is now extending the islands of integrity and competence to the President's Office, the National Police, the Indonesian Military and the Attorney General's Office.

Bureaucratic reform, however, has been taking place not only in the central government.
The 2001 regional autonomy law, which requires the direct election of governors, regents and mayors, has forced an increasing number of regional administrations to implement wholesale reform of their civil service and set up one-stop licensing centers for businesses to woo investors.

Reform-minded regional administrations realize businesses create jobs, which in turn provide wages, which in turn generate purchasing power to fuel local economies.
Regional chiefs have increasingly realized that natural-resource endowments, though important, are not the only key assets to attract investors.

A conducive investment climate, including the ease of doing business, is no less important for wooing businesses. And a good portion of a good business atmosphere is related to the public administration service.

As regional competition for investment has now become much more fierce, more regional administrations have issued pro-business policies.

At present, more than 50 district and municipal administrations, or 10 percent of the total, have set up one-stop service centers for business licensing as the competition for new investment grows keener.

The main question, though, in view of the false starts of similar reforms in the 1970s, is how to make the civil service reform sustainable - how to extend the islands of integrity and competence into an archipelago of best governance practices amid the succession of government every five years.

Previous attempts to reform the civil service failed because the initiative and drive depended mainly on the heads of the institutions concerned. And when the reform-minded heads were replaced, it was again back to business as usual.

Here lies the importance of establishing a politically independent National Civil Service Commission, as called for by the 1999 Civil Service Law. The National Civil Service Agency, in charge of managing government personnel, also needs further empowering.

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SG’s misguided investment

Vincent Lingga , JAKARTA Tue, 03/24/2009 10:00 AM Opinion

The failure of state-owned PT Semen Gresik (SG), the country’s largest cement maker, to control its “renegade” PT Semen Padang subsidiary should be blamed partly for the flight of almost US$340 million capital when Mexico’s Cemex cement group quit Indonesia in 2006.

Cemex, the world’s third largest cement group, was so fed up with years of political, legal and business harassment by Semen Padang that it finally decided in late 2006 to sell its 25 percent holding in SG for around $340 million to the Rajawali Group, a domestic conglomerate.

The publicly-listed SG, riding high on the back of a 42 percent increase in net profits and a cash balance of around $250 million last year, is again moving to take hundreds of millions dollars of much-needed capital out of the country.

SG Vice President Heru Adiningrat said last Tuesday that the company had hired Credit Suisse Group as an adviser for its plan to acquire a 40 percent stake in a cement company that operates in Malaysia, Vietnam or the Philippines in a bid to maintain its revenue growth amid the expected slump in cement demand due to the global economic crisis. 

But given the global credit crunch, the thin margin generated by cement exports and Indonesia’s hunger for new foreign direct investment, this corporate move is misguided. Why a state company is initiating a move that will result in such a large amount of capital flight at a time when new foreign direct investment in Indonesia is getting harder to come by is mind-boggling.

It is hard to comprehend how by holding a 40 percent stake in a cement company that operates in one of the three target countries SG would be more profitable than if it invested in resource-based ventures in Indonesia, especially because the investment will partly be funded by costly borrowing from the capital market (bonds) or banks.

Yet what is even more questionable is how such an investment could contribute to SG’s synergy. After all, its brand-name is relatively unknown internationally, while the giant world-class cement groups have long operated in the three target countries.

Another big question is how SG’s 40 percent holding in a cement company would contribute to strengthening its competitiveness against its two strongest competitors in the domestic market: Heidelberger-controlled PT Indocement and Holcim-controlled PT Semen Cibinong.

The blunt fact is that although it already utilizes 98 percent of its designed production capacity of 18.5 million tons and controls 44 percent of the domestic market, SG is not the most efficient cement producer in the country.

Why doesn’t SG simply focus its resources on implementing its long-delayed $785 million plan to build two new cement plants with a combined capacity of 2.5 million tons in C. Java and S. Sulawesi?

These investment projects would be timely and quite promising because by the time the domestic economy returns to its usual robustness, expected in 2011, SG’s new units would be on stream to meet the increased demand for building materials. 

SG’s plan to invest hundreds of millions of dollars in a cement company in another ASEAN country looks strange, because Indonesia, as Southeast Asia’s largest economy, will remain the region’s largest market for cement and its derivative products.

By initiating an investment overseas, a domestic company could create the impression that Indonesia, endowed with such a rich variety of natural resources and potential market of over 235 million people, no longer offers viable business opportunities.

This is irrespective of how cheap the prices of cement companies in Southeast Asia might be, as SG CEO Dwi Soetjipto touted last week.

Minister for State Companies Sofyan Djalil, who, with a 51 percent holding, is the government nominee shareholder at SG, as well as the investing public, which has a 25 percent stake, should oppose the overseas investment plan which the SG management will propose at a shareholders meeting scheduled this May.

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Karen should be as brave and no-nonsense a leader as Sri Mulyani

Wednesday, February 11, 2009 Vincent Lingga, The Jakarta Post, Jakarta

Only time will tell whether the government is really serious about reforming Pertamina by giving its new CEO Karen Agustiawan full mandate to run the country's largest state company.
But it is good to know that Karen herself has pledged from the outset of her tenure she will reject, at any cost, any undue political intervention that could harm the US$28 billion oil firm.

This means the 50-year-old oil mining technology expert could choose to resign from her post rather than succumb to meddling from vested interest groups and rent seekers within the government and political parties.

But that is much easier said than done.

Karen must be as brave and no-nonsense a leader as Finance Minister Sri Mulyani Indrawati, "the Iron Lady" who has launched a big-bang reform to remove leeches from the customs and taxation offices, long perceived to be one of the most corrupt public institutions in Indonesia.

Political intervention and corruption and collusive practices by rent-seekers who want to make Pertamina their cash cow have always been among the oil company's biggest enemies, even after the fall of Soeharto's authoritarian government in May 1998.

In fact, Karen's appointment last Thursday to abruptly replace Ari Soemarno, who had only been at Pertamina's helm for less than three years, was not free from political meddling, as Sofyan Djalil, the minister of state enterprises, himself admitted that Soemarno's firing had nothing to do with his performance.

Soemarno, the fifth CEO at Pertamina in the past 10 years, had brought about significant improvement in the corruption-riddled domestic and foreign logistics departments of the company's upstream and downstream oil operations.

But he ran into bad luck.

He incited President Susilo Bambang Yudhoyono's ire, after temporary shortages, though not pervasive, of liquefied petroleum gas (LPG) and gasoline in several areas over the past few months occurred at a time when long lines of people at gasoline stations were scenes mostly despised by a president facing an election.

Judging from her decades of experiences working at Mobil Oil (now ExxonMobil) and the Halliburton oil service company, Karen seems to possess the basic character of a person able to stand up against undue intervention, even at the cost of her highly rewarding, yet "hot" corporate position.

Her high technical competence and integrity gives her the advantage of being able to forfeit her corporate position, instead of compromising on good corporate governance principles.
Karen rightly listed securing smooth distribution of fuel and LPG and further development of upstream operations as her top priority programs.

Downstream operations, notably domestic fuel marketing, are a piece of cake. Despite the liberalization of the oil industry and market, Pertamina still virtually holds a monopoly over the downstream operations, due to the advantages of the nationwide network of storage, haulage and refining facilities it has developed over the past five decades.

However, as Soemarno's bitter experiences have shown, fuel distribution is so socially and politically sensitive that it can make or break the career of the Pertamina chief.

The government seemed to pin high hopes on Karen to bolster Pertamina's upstream operations as the state company remains a small player with a daily output of 150,000 barrels, or just around 15 percent of the national production.

The rationale is that Pertamina's survival as a commercially viable company depends largely on its upstream operations, because oil refining and distribution generate only very thin profit margins.

However, increasing oil production is not only a highly risky business that needs a lot of investment and high technology, but also has a long payback period because the time lag between exploration and production, if any commercially feasible volume of oil reserves can be discovered, often takes more than five years.

Hence, as higher oil output was set as one of the key parameters to assess Karen's performance, she and her board of directors should be given a secured term of office at least of five years.

But a secured term of office will not mean much if the cash-strapped government continues squeezing Pertamina by demanding an annual dividend payout of more than 50 percent, as it did over the past few years.

Dividend payouts of more than 30 percent will adversely affect Pertamina's capacity to finance upstream operations.

Unless there is real commitment by the government to give a full mandate to Karen, then all the talk of transforming Pertamina into an internationally competitive oil company like Malaysia's state-owned Petronas is only hot air and Karen's tenure will simply depend on the outcome of the upcoming presidential election.

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Tax cuts the most sensible component of the stimulus package

Monday, February 02, 2009 Vincent Lingga, The Jakarta Post, Jakarta

Of all components of the Rp 71.3 trillion (US$6.5 billion) fiscal stimulus package Finance Minister Sri Mulyani Indrawati reported to the parliament last week, tax cuts and waiving of payroll taxes make the most sense as long as they are designed for those who will most likely spend, rather than, save.

Different from the other component of the stimulus-the Rp 10.2 trillion in additional infrastructure spending, which will take far longer to implement as the tendering process alone sometimes takes as long as one or two months - tax cuts can be put to work within weeks.
Their effects also can percolate into the economy much quicker.

Many businesses may not realize it and those that are aware of it may be reluctant about acknowledging that they are actually enjoying the fiscal stimulus in the form of tax cuts resulting from the enforcement of the 2008 Income Tax Law starting last month.

In fact, I assume the Rp 43 trillion (US$3.6 billion) in tax savings, or 60 percent of the Rp 71.3 trillion pump priming package, will be derived from tax cuts brought about by the new income tax law throughout this year.

The new income tax law reduces tax rates for individuals from five to four layers, with the highest level down from 35 percent to 30 percent, and sets a flat rate of 28 percent for businesses for 2009 and 25 percent in subsequent years, down from the highest rate of 30 percent under the old law.

The new law also increases tax allowances for low-income earners by more than 15 percent by raising the maximum income exempted from tax from Rp 13.2 million to Rp 15.8 million a year for a single taxpayer and from Rp 18 million to Rp 21.04 million a year for a married taxpayer.


The tax cuts resulting from the new income tax law take effect immediately and permanently because they apply to each additional rupiah of income that an individual or company earns.

Likewise, the Rp 6.5 trillion in waived payroll taxes to be provided also as part of the Rp 71.3 trillion stimulus will help bolster businesses as they will inject more income into the corporate system by reducing the employer contribution to employees' income taxes.


These payroll tax cuts and the other Rp 6 trillion-worth of waived value-added taxes and import duties to be granted to selected businesses will immediately cut the operating or production costs of enterprises and increase their income.

Further down the road, the cost of labor will decline, thereby encouraging hiring, and profits will encourage businesses to expand.

Unfortunately, as Sri Mulyani said last Wednesday, her ministry was still working on the technical details over which companies in which sectors will be eligible for the Rp 6.5 trillion cuts in payroll taxes and the Rp 6 trillion in waived value-added taxes and import duties on basic materials and capital goods.

It is regrettable, though, as to why the distribution mechanism for the payroll tax cuts and import duty relief has not yet been set up, whereas the government has been talking about the stimulus package since last October.


The finance minister demonstrated the government's full understanding of the uphill challenges the economy is facing when she said after the House's approval of the 2009 state budget last October that the stimulus would be extended in the form of tax cuts and import duty relief and much bigger spending on basic infrastructure and poverty alleviation programs.

Put briefly, the stimulus is rightly designed to increase people's purchasing power and the competitiveness of businesses facing the economic downturn.


All this is needed because the global downturn is adversely affecting Indonesia's economy on all fronts, from slumping demand for exports and slowing down flows of investment, to weakening consumer purchasing power.


The government pump priming, therefore, would take up the slack, otherwise private investment and the economy as a whole will plunge even more.

But almost four months later, the operational mechanism of the stimulus package remains on the drawing board. What a sense of urgency to cope with the sharp global downturn that is already hitting hard on our economy!

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Fiscal stimulus key for economy

Monday, December 22, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Government and private sector analysts have a consensus prognosis: Indonesia's economic growth will markedly slow down next year because of the international credit crunch and the deep recession in the United States, Europe and Japan.

However, with the news on the global economy getting worse every week, they differ on the extent of the downturn. The government, the central bank, the World Bank, the International Monetary Fund and the Asian Development Bank still expect the gross domestic product (GDP) to grow by between 4.5 and 5 percent, while private sector analysts forecast an expansion ranging from 2.5 to 4.5 percent.

Depressed demand in the world's economic powerhouses has begun to hit Indonesian exports, pushing down commodity prices and forcing manufacturing companies to reduce employment. In the third quarter the economy grew 6.1 percent -- the slowest in the past six quarters -- as declining prices for palm oil, rubber and coal slashed the value of exports.

Growth in the last quarter could be less than 6 percent with the second round impact of the global economic downturn hitting all sectors of the economy harder.

Although overall growth for the whole year could still hover at 6 percent thanks to robust expansion in the first half, the economic landscape next year will be bumpy and jagged.

Private consumption, which accounts for 65 percent of growth, will slacken because of steep falls in commodity prices and the erosion of consumer purchasing power by the estimated 11.30 percent inflation this year and the 20 percent depreciation of the rupiah over the past two months alone.

Exports, already hurt by depressed demand in the developed world, will further be hindered by the tighter credit markets, making it more difficult for companies to secure working capital and payments for international shipments.

This is different from the 1997-1998 economic crisis when export-oriented businesses continued to do very well. Companies depending largely on export markets will suffer because of the recession in the developed economies.

In fact, manufacturers have begun feeling the pinch, as evidenced by the wave of employee layoffs that started last month and which, it is feared, will escalate next year as the full impact of the global crisis makes itself felt.

Political spending during the parliamentary elections in April and the following presidential election will be an additional boost to private consumption but surely not as strong as in the 2004 elections because of the negative impact of massive wealth destruction on the Jakarta stock market in October.

According to the Central Statistics Agency, between July and September, the contribution of foreign trade (exports and imports) to economic growth was virtually negligible.

Even though the country is not largely dependent on foreign trade (which contributes only about 20 percent of GDP), given the size of the economy ($400 billion), it will still feel the brunt of the global downturn via the financial channels -- both from higher risk aversion on the part of investors as well as extremely tight liquidity conditions (due to the credit crunch).

The crash of the Jakarta stock market in October, which shaved off almost 60 percent of market capitalization as the composite index collapsed from 2,800 early this year to as low as 1,100, reflected the withdrawal of foreign portfolio capital and at the same time spelled the end of the investment boom.

This also means that the nearly 400 listed companies can no longer rely on the stock market for long-term funds. Consequently, they will slash capital expenditure, thereby reducing the possibilities for investment and job creation.

The only good news is moderate inflation, probably controlled at 6 percent for the whole of next year.

But even though inflationary pressures have eased because of the falling prices of food and fuel, there is not much leeway for Bank Indonesia (BI) to ease its monetary policy substantially.

So don't expect a significant lowering of the BI rate from its current level of 9.25 percent because of the international financial volatility and the vulnerability of the rupiah to speculative attacks.

The high interest rates will further hit consumer spending and new investment.
Weaker domestic demand and an expected slowdown in manufacturing exports will reduce imports, but the risk of imported inflation will remain high if the rupiah remains highly vulnerable to speculative attacks.

The biggest challenge for both the government and the central bank, therefore, is maintaining public confidence in the rupiah. With an 8.25 percentage-point differential with the U.S. funds rate, rupiah financial assets are still attractive for depositors and investors.

But given all the volatility and the uncertainty in the international financial market and the risk of the crisis taking a sudden turn for the worse, the rupiah could be severely hit as people may lose confidence in it.

In such circumstances, the interest rate differential would become less meaningful as depositors and investors may simply move their money to safer places (flight to safety).
Here lies the issue of the government guarantee for bank deposits, which is still limited to Rp 2 billion ($165,000) per account compared with the blanket 100 percent guarantee available in Hong Kong, Singapore and Malaysia.

But this issue is also directly related to the condition of the banking industry.
The Finance Ministry, which oversees the Deposit Insurance Corporation, seems not fully comfortable yet with the quality of the central bank's supervision of the 125 city-based banks and hundreds of secondary (rural) banks.

Introducing a blanket guarantee without strong supervision of the banking industry could put taxpayers at risk of having to pay out for another huge bailout as they did after the 1997-1998 banking crisis.

Banks will also have to brace for a new wave of nonperforming loans (NPLs), especially in areas such as plantations and mining, due to the steep fall in commodity prices between August and October.

This risk could slow down the pace of new bank lending, but not to the point of a severe credit crunch.

Given the grim prospects for private consumption and investment, government spending should take up the role of the locomotive of growth. An aggressive fiscal stimulus package must take up the slack, or the economy will plunge into the worst-case scenario of growth below 4 percent.

Fortunately, the government has fully understood the urgent need for pump priming to offset the anticipated sharp decrease in the growth of private consumption and investment.

The Finance Ministry has been accelerating the implementation of its investment program in labor-intensive projects such as infrastructure (for example, highways and rural infrastructure), with total spending expected to reach Rp 200 trillion within the next two months alone.

Most analysts agree that with a government debt-to-GDP ratio of less than 30 percent -- compared with more than 100 percent at the height of the crisis in 1998 -- and with a fiscal deficit of just around 1 percent of GDP, the government has a lot of leeway to increase its deficit spending next year.


Larger budget spending is needed not only for the construction of infrastructure but also for expanding the social safety net into public-employment works and providing assistance to financially distressed businesses in anticipation of a sharp economic downturn.

The problem is that almost half of the country's population of 227 million still lives on less than US$2 per day (the international poverty line). They live on the edge of the absolute poverty line, so that even a slight downturn in the economy could plunge a hundred million poor into abject poverty.


Given the tight international and domestic liquidity conditions, which make borrowing costs punitively high, the government made the right move in approaching the World Bank, Asian

Development Bank and bilateral sovereign creditors such as Japan and Australia for larger standby loans.


All in all, the economy will muddle through at a much slower pace next year. Growth could still hover at more than 4 percent if the government succeeds in implementing its pump priming measures and takes forceful and credible steps to maintain stability in the banking industry and the rupiah exchange rate.

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Commentary: Distrust among banks the cause of liquidity problem

Vincent Lingga , The Jakarta Post , Jakarta Tue, 11/25/2008 7:14 AM Headlines

Almost one week after Sinar Mas Multi Artha, the financial unit of the powerful Sinar Mas business group, signed a preliminary agreement to acquire 70 percent of Bank Century, this small bank remained in a liquidity crisis, forcing the central bank to put it under the control of the state-owned Deposit Insurance Corporation last Friday.

Sinar Mas’ commitment to take control of Bank Century should have reignited market confidence in this small bank and enable it to get access to interbank loans. But it didn’t.

The big question is then: Is liquidity in the banking industry so tight that this publicly listed bank was unable to secure interbank loans to resolve its illiquidity even with the strong support of the Sinar Mas Group?

The answer is a resounding “No”.

Analysts and bankers estimate that Bank Indonesia’s lowering of the minimum reserve requirement at banks last month from 9.5 percent to 7.5 percent unleashed between Rp 50 trillion (US$4.5 billion) and Rp 70 trillion in new lending resources. Moreover, the pace of bank lending has slowed down from its annualized rate of 35 percent in the first three quarters.

But why are many banks still complaining about tight liquidity and businesses groaning over what they claim to be a tightening of credit?

“The problem is not liquidity because industry-wide the level of liquidity is adequate. But banks awash with liquidity are reluctant to lend to others out of fear their money will not be repaid,” Bank Indonesia’s research and regulatory director Halim Alamsyah said.

He revealed there had been suspicions among money market players, notably between small banks, as one bank did not trust the soundness of another bank, hindering interbank lending.“That is why we (Bank Indonesia) have recommended that the government introduce a blanket guarantee on all liabilities of banks, including interbank loans and letters of credit,” Bank

Indonesia Deputy Governor Hartadi Sarwono said.

There seems to be information asymmetry within the banking industry.

Theoretically, banks that are not under the special surveillance of Bank Indonesia (the central bank) are assumed to be sound.

But the suspicions between banks have spread widely. This condition is, to a limited extent, similar to the environment in the financial market in the United States since September, when the financial crisis turned into a total crash following the bankruptcy of the Lehman Brothers investment bank.

Such mutual distrust should not have hit banks in Indonesia because they do not own, or have not bought, the toxic assets (subprime mortgages and derivatives) that fueled the U.S. financial crisis.

Several bankers said the segmentation within the banking industry has widened to the point where big banks are increasingly uncertain about the quality of small banks’ assets.

Faced with huge difficulties of their own, banks have tightened their purse strings, lending less and driving up the cost of credit to consumers and corporations — thus compounding the already grim outlook for the world economy.

Uncertainty about the depth and length of the global slowdown is making things much murkier. But the combination of a battered banking system and shell-shocked consumers suggests things could get particularly tough for many businesses. So banks prefer to secure as much cash as they can now to make sure they can see their operations through the downturn.

Many bankers also are nervous that borrowers who look solid today may turn out not to be so solid within the next few weeks or months. In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending them short-term credit.

Doesn’t this mean a distrust in the quality of banks under the supervision of the central bank?Certainly a blanket guarantee, as recommended by the central bank and most businesspeople, will with one stroke remove the clog within inter-bank lending.

But this may simply encourage reckless lending practices and bad bank governance practices, further exposing taxpayers to the risk of having to pay for another big bailout.

However, if banks fully trust the integrity and reliability of Bank Indonesia’s bank oversight, it should be possible and easier for them to better identify which banks are reliable.

In normal times, banks have several mechanisms for providing the necessary information, such as accounting disclosures, quarterly balance sheets and credit rating agencies. But the financial situation now is irrational and volatile.

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Special Report: Commodities boom ends as speculative bubbles evaporate

Vincent Lingga , The Jakarta Post , Jakarta Fri, 11/14/2008 11:02 AM Business

Indonesia benefited greatly from the boom in the prices of primary commodities since the middle of last year as palm oil, rubber, coffee and cocoa as well as coal, pushed up the Jakarta stock market index to its peak of over 2,800 in April, 2008, bolstering exports and generating greater purchasing power for millions of smallholders in Sumatra, Kalimantan and Sulawesi.

However, the boom cycle abruptly ended last August after the United States financial crisis turned into a crash, setting off a global credit crunch and driving the global economy into a recession-led economic downturn, bringing down the Indonesian (IDX) stock index at one point to below 1,100.

The prices of most commodities collapsed to as low as one third of their market quotations only three months before. Crude palm oil tumbled down from its peak of US$1,300/ton to below $400 last month, rubber from $0.33/kilogram to $0.15, coffee from $2.54/kg to $1.5 and cocoa from almost $3/kg to $1.8.


This development validated analysts' views that what had so far been dubbed as speculative bubbles did play a big part in the earlier sky-high prices of commodities.

Growing global demand probably was the reason for the gradual rise in palm oil prices from an average $470/ton in 2006 to $780 in 2007, but speculative bubbles fueled the rise up to the range of $1,000-1,300 between January and July this year.


The fundamentals of the supply and demand equation were also responsible for the gradual rise in crude oil prices from $20 a barrel to US$40 earlier in the 1990s, and even up to US$60 by mid-2005, but speculative sentiments helped fuel the steep increase to as high as $147/barrel last July before falling steeply to below $60 now.


Even such high-growth emerging economies as India and China with a combined population of more than 2.3 billion people could not have all of a sudden gobbled up enough palm oil, rubber, coal and other commodities to generate such steep price rises in the first half of this year.

The problem is that the price elasticity of both demand and supply is low for commodities like palm oil, cocoa, coffee and rubber. Put another way, neither the underlying supply nor the demand for such commodities could have changed so quickly. Consumers will still drink one or two cups of coffee even if its price rises sharply, but will not suddenly take ten cups when its price falls. Likewise, people do not abruptly stop frying food even if the price of palm oil skyrockets.


As debt instruments suddenly became illiquid and risky, investors sought safety in commodities. That surge of cash created a new bubble which has recently burst.

Investors such as hedge funds and even such solid institutions as pension funds made speculative purchases as they diversified into alternative investments away from the uncertainties in the financial market.


The sub-prime mortgage crisis started raising its ugly head in the United States in early 2007.
Analysts observed the flood of money from investors into the commodity futures markets, thereby distorting spot markets for physical commodities.


However, speculation by investors to avoid the uncertainty within the financial market was not the only factor behind the one year boom-cycle.The fundamentals of the supply-demand equation also played a part as the global economy enjoyed one of its high growth periods.


According to the International Monetary Fund, the world economy grew faster, expanding by an average 4.5 percent, 50 basis points higher than most analysts had forecast earlier.

As most analysts have often noted, global economic expansion had been driven mainly by major emerging economies, notably China and India, which grew at an annual average rate of nearly 10
percent for several consecutive years. Given their large populations, this development generated a dramatic rise in demand, particularly for natural commodities.





Government-induced distortions have also blunted price signals. In many emerging economies, including Indonesia, governments control the prices of important fuels such as gasoline and food staples.



Even though several countries have removed such price distortions, many others, notably major producers, kept prices fixed, thereby blocking the transmission of market reactions from higher prices to weaker demand.To reduce carbon emissions, the U.S. government encouraged biofuel production by subsidizing these fuels. Consequently, the demand for biofuel feedstocks such as maize and vegetable oils exploded.


The World Bank estimated biofuel demand was the biggest single reason why food prices soared in the past two years.

Hence, all in all, demand shocks caused by speculative bubbles, higher-than-estimated economic growth and misguided government policies combined together to fuel the commodities boom in the first half of this year.

But now, the world economy is suddenly accelerating into a recession-led downturn and the financial market has crashed, leaving behind a liquidity crunch which has consequently removed the demand shocks caused by previous robust economic growth and speculative bubbles.

The strongest message of this roller-coaster market development is that only the fundamentals of supply and demand are able to generate sustainable price trends in primary commodities.

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Commentary: Sri Mulyani, the bedrock of SBY’s economic management

Vincent Lingga , The Jakarta Post , Jakarta Tue, 11/11/2008 7:13 AM Headlines

President Susilo Bambang Yudhoyono’s political debts from his 2004 presidential election campaign seem to be haunting him still, even to the point of occasionally impairing his economic judgment. Yudhoyono was warned of the big risk of conflicts of interest within his Cabinet when he appointed Aburizal Bakrie, then chairman of the Bakrie conglomerate, as the chief economic minister at the outset of his administration in October 2004.


Aburizal remains in the Cabinet, although now with largely diluted power as the coordinating minister for the public welfare. However, his presence in the executive power center continues to cast a shadow over the credibility of the government’s policymaking.

The government’s flip-flop handling of the trading suspension on the Bakrie Group’s Bumi Resources coal mining company since early last month is only the latest example of how the integrity of the government’s economic management has sometimes been compromised to protect the Bakrie interests.


Given the legislative and presidential elections next year, there are now increasing concerns not only about who is really managing the economy with Yudhoyono and Vice President Jusuf Kalla both gearing up for their campaigning. There are also major concerns over the integrity of the economic management itself.

Fortunately, as with the situation in the 2004 election year, when we had Boediono as the finance minister and the vanguard of economic management under then president Megawati Soekarnoputri’s administration, now we have the “iron lady” Sri Mulyani Indrawati as both the finance minister since late 2005 and the acting chief economic minister since June.

Boediono, who is highly respected in both international and domestic circles, was then more than any other person responsible for restoring and maintaining our macroeconomic stability between 2001 and 2004.


Likewise, Mulyani’s integrity, competence and courage to stand up to pressure from vested interests, even from such a politically well-connected conglomerate as the Bakrie Group, serve as the bedrock of the credibility of the government’s economic management.

At a time when Yudhoyono, Kalla and several other Cabinet members from various political parties are busy with their political posturing for next year’s elections, Mulyani and Boediono, currently the governor of Bank Indonesia, make up the automatic pilot of the country’s economic management. 


The rumors last week that Mulyani and her core team at the Finance Ministry threatened to resign over the powerful political pressure on her to compromise economic policies simply revealed her true character, her courage to stand up even against her boss when it came to the principle of sound economic management.

Earlier rumors of a strong conspiracy and various forms of subterfuge to oust her from the Cabinet further reflected the determination of the award-winning finance minister in fighting corruption.

Soon after her appointment to the Finance Ministry, the former executive director of the International Monetary Fund acted immediately, against strong opposition from vested interest groups, to clean up Jakarta’s main tax and customs offices from corrupt officials.

Mulyani also dealt firmly with the largest coal and palm oil producers over underpaid royalties and taxes and imposed travel bans on businesspeople who owed the government overdue taxes.

No wonder, then, that for two years in a row she has been named Finance Minister of the Year by specialist magazines Euromoney (2006) and The Banker (2007). Forbes magazine last August honored Mulyani as the 23rd Most Influential Woman in the World, a position that also put her at number three on the list of Asia’s most powerful woman.

At a time when we are highly vulnerable to the fallout from the global financial crisis and economic recession and when market confidence, rather economic fundamentals, is the main issue, Mulyani’s competence and courage, consistency and impeccable integrity in treading the messy politics of policymaking are both the anchor and the lightning rod of the government’s economic management.


Yudhoyono’s alleged tussle with Mulyani over the covert attempt to bail out the Bakrie business group should be the last spat over policymaking — otherwise he may lose her altogether at the risk of devastating damage to his government’s credibility. The President should see to it that Mulyani, as the acting chief economic minister and finance minister, is really and fully in charge of making and directing economic policies based on the strategy set by the government and the parliament.


Having said all that we don’t mean to say that Mulyani can perform miracles. She can’t, given the uphill challenges ahead with the global financial crisis and economic recession.

But her impeccable integrity, credibility and competence will help strengthen the credibility and consistency of the government’s economic policymaking, especially in view of the legislative and presidential elections next year.

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Special Report: Lessons from Citibank Indonesia: Customers get burned

Vincent Lingga , The Jakarta Post Wed, 10/15/2008 10:27 AM Headlines

Citbank Indonesia customers that lost a lot -- in my case, most of my savings -- after the collapse of American investment bank Lehman Brothers last month need not be ashamed of admitting how low and utterly poor their financial literacy turned out to be.

Many investors in Hong Kong vowed last week to fight for a full refund of their Lehman products, alleging that the banks who sold them the investment instruments had not fully explained the risks associated with the financial derivatives.

In the current era of globalized financial markets, it is almost impossible for us, including me, an economics reporter for the last three decades, to have the financial literacy necessary to understand complex investment securities like the Lehman's market-linked notes peddled by Citibank Indonesia.

Robert Reich, a former U.S. secretary of labor and now an economic advisor to presidential candidate Senator Barack Obama, recently wrote in the International Herald Tribune about the U.S. financial crisis "I once asked a hedge fund manager to describe the assets in his fund. He laughed and said he had no idea."

Financial markets trade in promises that assets have a certain value. With so many derivatives in world financial markets, there is virtually no limit to what can be promised.

I, along with other Citigold customers I talked to, painfully realized only recently we had no idea what we bought in mid-2007 through our Citigold executives.

In another shocking information sheet sent one week after Lehman went bankrupt, Citibank revealed that the holders of Lehman notes in Indonesia were unsecured creditors.

For many banks, private banking or wealth-management services have become a significant source of fee-based incomes. But as it now turns out, such services have become wealth-destruction centers for a number of Citigold clients due to the unprecedented pace in which the U.S. financial crisis turned into a crash.

Hence, the first lesson from the debacle of the Citigold customers is don't ever touch offshore, sophisticated investment securities. There are now so many derivatives, hedge funds, structured vehicles and swaps offered on the international market.

We are glad to know, though, that after several days of denial, both Bank Indonesia and the capital market watchdog (Bapepam) late last month said they were preparing regulations on the trading of offshore investment securities to protect consumers.

"We should have set up an oversight mechanism years ago," Bank Indonesia's Deputy Governor Muliaman Hadad said Sept. 26, as quoted by newspapers.

Singapore is doing the same.

According to the Straits Times on Oct 3., the Monetary Authority of Singapore will soon review the way structured investment products are marketed to retail investors as thousands of investors in Lehman Brothers products stand to lose most of their money.

Lacking adequate oversight of offshore investment securities sales in Indonesia puts many consumers, notably big depositors, at a high risk of big losses.

The second lesson is don't ever rely your investment decisions on the offers, recommendations or information given even by such highly reputed financial institutions as Citibank Indonesia and its Citigold wealth-management centers.

In so far as the risks of your investment are concerned Citigold executives mean nothing for you. They work primarily to massage the ego of big depositors to keep their accounts at the bank.

Relationship managers at Citigold could simply overlook their clients' risk profile, caring more about their annual sales bonuses.

The third lesson is read carefully each word of any investment contract documents given by Citigold staff with the assistance of a respected lawyer before you sign them.

It was stupid and careless of me (and many other victims) to only skim my investment subscription form, signing the 11-page document in good faith, trusting Citibank's competence and reputation.

Most of the clauses in my contract turned out to have been designed to protect Citibank as the seller and its employees, and for them to avoid any fiduciary responsibility for the investment products they peddled.

I, quite painfully, only discovered three weeks ago that one of the clauses states, "I/We (investors) did not obtain any legal, tax or accounting advice or advice in relation to the suitability or profitability of any Notes from Citibank N.A or Citigroup or any of their employees. I/We made My/Our own judgment and decision regarding the transaction independently."

Although I knew about Lehman market-linked notes only from the sales offer and the scant information provided to me by my Citigold relationship manager, I signed in the subscription document of never having obtained advice or information from Citibank or its employees regarding the notes.

Was this the way of selling financial products in good faith?

On Sept. 26, or around 15 months after I signed my investment order and ten days after Lehman went bankrupt, Citibank sent me the final terms on the Lehman notes dated July 4, 2007, contained in a 22-page English document.

The first page of this document, among others, states, "These notes are only suitable for highly sophisticated investors who are able to determine themselves the risk of an investment linked to an index."

I wondered why I was never given this document before.

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Herd mentality, short-term vision grip our stock market

Vincent Lingga, The Jakarta Post, Jakarta Thurs, 10/9/2008

The capital market management and regulator made the right decision Wednesday to halt share trading here after the benchmark index plunged by another 10 percent to close at 1,451 points, because that development was indeed rooted in an irrational market mechanism.

Letting the stock market (IDX) continue operating in such a chaotic situation would be like allowing a few rice sellers to freely set the price of the staple amid a massive, nationwide famine.

Stocks in such blue-chip companies as telecommunications firm Indosat, coal producer Adaro and automobile and plantations group Astra International should not have plunged between 19 and 23 percent Wednesday, had it not been for a herd mentality on the part of domestic retail and institutional investors.

The long-term outlook for telecommunications and our natural-resource-based companies remains bright and promising. Even though the prices of most primary commodities such as coal, palm oil and rubber have of late fallen steeply, they remain way above their 2006 levels.
The recent downward trend was even good for long-term stability, because the skyrocketing prices during the first semester were partly fueled by speculative sentiment. These prices are now seeking a new equilibrium.

Our domestic investor base should have been broad and diverse enough to shield the IDX from the abrupt changes in international investor sentiment.

The growing role of domestic institutional investors such as pensions funds, mutual funds and insurance companies should have contributed to broadening and diversifying the pool of investment in equities.

The long-term horizon of these institutional investors should have played a stabilizing role in our stock market. Basically, a diverse investor base, in relation to investment horizons and risk appetite, can contribute to financial stability by spreading risks more widely.

But as Wednesday's irrational market development showed, most domestic investor behavior was still controlled by a herd mentality, toeing the move of foreign portfolio investors.
What are the main determinants of share prices?

One of them is global factors, such as international liquidity and credit and market risk premiums. True, these factors are now all negative, as the impact of the financial crisis and panic in the United States and Europe sets in.

However, the strongest determinants of our equity prices -- the domestic or fundamental factors such as economic growth, the differential between domestic and global interest rates, the expected forward exchange rate, the inflation differentials -- remain fairly positive.

In fact, after Bank Indonesia's move on Tuesday to raise its benchmark interest rate by another 25 basis points to 9.50 percent, our interest rate differential with the U.S. Fed funds became 8 percentage points.

I don't think the amount of foreign portfolio money still playing in our stock market remained at such a level because it was still able to heavily influence the market trend.

Most of this hot money had flown out a few weeks ago as these skittish investors became highly risk-averse and tended to generalize things.

The steep fall in our stock market Wednesday was therefore exacerbated by the herd mentality and short-term-oriented stance not only of our individual (retail) but also institutional investors.

Hence, as BI Governor Boediono and chief economics minister Sri Mulyani Indrawati said Sunday, if we really care about protecting our own house from the fallout of the international financial crisis, then we all, in our respective roles, should help contribute to maintain calm.

This calls for domestic retail and institutional investors to get rid of their herd mentality and adopt a more long-term view in order to contribute to building up a financially stable base for our equity market.

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Audits could curb illegal logging

Vincent Lingga , Jakarta Tue, 10/07/2008 9:58 AM Opinion

The Indonesian Forestry Ministry's bold move to require forestry companies to have their wood stocks audited throughout the supply chain to ensure the wood is derived from sustainably managed forests could go a long way in reducing illegal logging in the country.

Hadi Pasaribu, the Forestry Ministry's director general for the management of forestry production, who revealed the new policy recently, did not elaborate as to when the audit -- internationally known as forest certification scheme -- would be mandatory for wood-based companies.

But surely the new measure needs thorough preparation because the audit or certification process requires independent certifiers who must be accredited according to the international standards as those applied by the Bonn-based Forest Stewardship Council.

It is international market forces (consumers and traders) united into a global green consumer campaign that have forced wood-based companies to have their wood certified as green by independent certifying companies.

Hence, whatever the system used by the Forestry Ministry for the wood audit, an inspection or certification scheme, it must be based on international standards to gain international recognition.

Wood audit for forest certification aims at verifying that a particular wood is derived from sustainably managed forests. This process requires companies in the whole wood supply chain to hold chain-of-custody certificates so that the label or bar-code can follow the word from the forests to the finished product.

The chain of custody itself is the process of wood harvesting, primary and secondary processing, manufacturing, distribution and sales. The wood audit, as referred to by Pasaribu, inspects each of these processing steps to ensure that the timber or wood originated from forests which are being managed in accordance with social, environmental and economic aspects of sustainable forest management.

Hence, for example, a buyer of a wood cupboard from a furniture store in Denmark which sells certified green products is able to ascertain that the product he or she is purchasing was made from timber derived from sustainably managed forests in a particular area in a specified country.

The current wood or timber inspection carried out by the Forestry Industry Revitalization Agency, besides being ineffective and vulnerable to corruption and abuse, inspects only legal documents from forestry offices which can easily be forged or falsified.

No wonder Indonesia is on the losing side in a battle against illegal logging, despite an intense crackdown by authorities.

The government has enacted laws on environmental protection and has issued myriads of regulations and rulings to protect forests and erected non-tariff barriers to prevent the trading of illegally-cut wood.

However, illegal logging continues on a massive scale.
But the new wood audit scheme, called Wood Legality Verification System, will involve independent certifiers such as environmental NGOs which have been accredited to conduct such certification, according to Pasaribu.

Since forest certification involves the employment of multidisciplinary teams consisting of various specialists such as forest engineers, ecologists and sociologists to evaluate the various aspects of forest management, the audit or certification process could be quite costly.

Therefore market incentives are necessary to make wood audit or forest certification attractive to wood-based companies. Certainly, the best incentives are premium prices paid to wood products derived from certified forests.

Even though premium prices gained by certified wood today do not seem to be high enough to spark a rush by wood companies to certify, neither the government nor companies can wait much longer.

Market forces have become much stronger now and can force companies to certify the origin of the wood they use. Five European Union governments, including Britain's, have adopted procurement policies that would oblige state-funded construction projects to use certified wood.

Certainly, countries cannot demand that all wood entering their territories be certified, since that would break the rules of the World Trade Organization. But more consumer organizations, especially in major developed countries, have pressured suppliers of wooden products to certify, otherwise they will face massive boycotts.

The concept of forest certification thus uses market forces to curb illegal logging through demand-side and supply-side approaches, mobilizing consumers and traders to shun forest products that are not certified according to internationally recognized standards of sustainable forest management.

Such threats of boycott from powerful consumer organizations and environmental NGOs could force forest-based companies (producers) to have their operations and products certified by accredited, independent forest certifying bodies.

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OECD growth ideas and our national remedies

Thursday, July 31, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Some analysts and many politicians in Parliament may reject the Organisation for Economic Cooperation and Development (OECD) economic policy recommendations for the Indonesian government last week as another one-size-fits-all formula, simply a copy of the "infamous" list of dos and don'ts within the Washington consensus on the virtues of liberalization, deregulation, privatization and free markets.

Even without the upcoming parliamentary and presidential elections next year, the OECD reform recommendations -- which include a further easing of restrictions on foreign investment, further market liberalization, more flexible labor regulations to make it easier for companies to lay off workers, and privatization of state companies -- have always been difficult.

The tone and central theme of the first Economic Assessment of Indonesia by the Paris-based OECD feel very much like the annual report on the Indonesian economy the World Bank used to prepare for the now defunct Consultative Group on Indonesia creditor consortium.

The OECD study seems still too focused on the common formulae and strategy across widely differing developing country conditions, acutely short of country and context-specific solutions.
Having said all that, this doesn't mean the OECD policy options, including those on the need for bigger investment in infrastructure, health and education, are irrelevant to our economy.
On the contrary, evidence has shown that successful economies -- those which are able to post high growth for a long period -- have pursued almost all the policies recommended by the OECD.
They have by and large been implemented by such successful emerging economies as South Korea, China, Thailand, Singapore, Malaysia, Vietnam, India and, to a certain extent, even Indonesia.

These successful economies have many things in common: macroeconomic stability, fiscal discipline, fairly effective government, market-based incentives, adequate investment in infrastructure, health and education and engagement with the global economy.

The main issue for our government is how to sequence and set priorities of the needed reforms so as to make them economically feasible and socially and politically acceptable.
The biggest challenge for the government is to focus on narrowly targeted reforms, proceeding step by step, to discover local solutions.

Several economists cited the gradual reform approach launched by China's Deng Xiaoping in 1978 -- crossing the river by feeling for the stones -- which created the most spectacular period of steady, high economic growth and poverty reduction.

It is the job of both the government and Parliament to devise the right recipe, the right growth concept and strategy most suitable to our economic condition and political complications, using the policy recommendations of the OECD only as the ingredients.

Take for example the recommendation for the easing of labor regulations, one of the reform measures all foreign investors have asked for since 2003 because the labor code has been seen as too rigid, hindering new investment and consequently job creation.

In the absence of an adequate social safety net and unemployment insurance system, however, the government should tread carefully in easing the labor regulations, otherwise the pace of job destruction will exceed job creation.

The gradual reform of the labor code should be designed, however, to protect people, not jobs. This requires measures to make it easier for workers to acquire new skills and enter new trades.
Put another way, labor reform should include programs designed to increase labor mobility across the various sectors of the economy. Most important is that the necessary rules and institutions are well placed to safeguard the basic rights of labor and defend workers against exploitation, abuse, underage employment and unsafe working conditions.

Likewise, the OECD view on the importance of foreign direct investment (FDI) is quite legitimate. An adequate inflow of FDI is vital not only because of the financial capital it brings but, sometimes more important, the concurrent transfer of skills, innovation and ideas to the national economy. FDI brings in knowledge about foreign production techniques, foreign markets and international supply chains.

Just look how our banking industry as a whole has benefited from local bankers who once worked for foreign banks such as Citibank, Standard Chartered, ABN Amro, HSBC, etc.

Then again, the main challenge here is how to strike the right balance between national interests and the need for foreign capital and expertise and for the exposure of national businesses to international competition. The government needs to put the demand it puts on foreign investors in balance with the alternatives provided by other countries competing for foreign capital and expertise.

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Tourism industry mired in poor regulation, infrastructure

Tuesday, August 12, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Although tourist arrivals in Indonesia increased by a respectable rate of almost 12 percent in the first half of the year to 2.9 million, that record is still far from the target of 7 million visitors set for the Visit Indonesia 2008 campaign.

The performance is even poorer compared with our neighbors: Singapore last year welcomed 10.3 million tourists, Thailand 14.5 million and Malaysia nearly 21 million.

Even Vietnam, a relatively new player in the international travel and tourism industry, has already received more than 4 million arrivals, compared with Indonesia's 5.5 million last year.
Our record is even more miserable if it is set against the fact that our country, the world's largest archipelago, is richer in terms of culture, natural attractions and historical heritage than most other ASEAN countries.

Richly endowed with a vast variety of natural resources, several World Heritage listed natural sites and varied fauna, and supplemented with strong price competitiveness, Indonesia should be a major destination for tourists from around the world, offering a lot of incentives for repeat visits.

Travelers can visit Indonesia every year without having to return to the same destination because there are dozens of accessible tourist attractions in Java, Sumatra, Kalimantan, Sulawesi, the Maluku Islands and Papua, in addition to the world-famous Bali.
But these strengths, although considered the main pillars of the travel and tourism industry, are not enough to woo tourists.

In fact, as our tourist arrival records have testified, those advantages have been held back by major weaknesses in other pillars -- regulatory and basic infrastructure, including air and ground transport.

Our regulatory infrastructure worsened after the government, displaying tragic ignorance of the vital role the tourism industry has for our economy, sharply cut the number of countries entitled to visa-free entry for the sake of national interest and national pride.
But it is hard to understand how our national pride is served by restricting foreign tourists from spending their money in our country. This measure has instead hindered inbound visitors.
What a loss to our economic development.

As a nature and culture-based industry, tourism is one of the most suitable businesses for Indonesia to develop because of the multiplier effect and labor-intensive nature of its operations. Travel-related businesses such as hotels, restaurants, transportation, and handicraft and cultural shows are all labor-intensive, exactly the kind of businesses needed to absorb the huge pool of job seekers.

And as for the risk of the visa-free privilege being abused for -- drug trafficking and illegal employment here-- are not so big yet that it hardly warranted that drastic, sweeping measure to abolish the privilege for citizens of so many countries.

We should magnanimously acknowledge that our immigration officials, like most other civil servants in the country, are not known for providing swift services such as the processing of visa-on-arrival.

We also perform poorly with regard to the other pillar of the tourism industry -- basic infrastructure. Our airplanes are still banned from European skies and our road safety standards are infamously low.

Even though our security has significantly improved, the other components of our infrastructure -- health and hygiene -- are in a poorer condition than in neighboring countries because of the inadequate supply of hospital beds and physicians in most cities and poor access to good sanitation and drinking water.

The Culture and Tourism Ministry said it had allocated US$108 million for tourism promotion during the Visit Indonesia 2008 program. That is good. Promotion is one of the most effective tools to market our tourist attractions.

However, as the experiences of most popular tourist destinations have shown, tourism promotion should be supported by a conducive business and regulatory framework as well as international-standard transport infrastructure and bureaucratic services related to foreign visitors.

Just a simple example. Smooth, expedient visa processing and customs inspection services at the airport are more effective in wooing tourists than the distribution of tourist booklets. But these services are not under the jurisdiction of the tourism ministry.

In fact, the Culture and Tourism Ministry handles only one aspect of tourist development and marketing and, unfortunately, not the most important one.

The more important pillars of the travel and tourism industry such as transport infrastructure, health and hygiene, security and regulatory requirements are completely beyond its control as they lie under the jurisdiction of other ministries.

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