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Pessimistic prediction questioned

Prof Mubyarto from the state-run Gajahmada University doubted the prediction of many observers that sound pessimistic about the country's economy. Mubyarto said many Indonesian economists failed to see the empirical fact that the real progress has been in the making in the country's

economic development.

Mubyarto, who is known as a conceptor of "Pancasila and people's economy", said the economic growth, driven by consumption factor, is real, not false as described by many. The consumption factor has became the engine of growth driving the sagging economy before the much expected foreign investment comes ashore to the country. He said foreign investment is not the only savior of the country's economy.

Even the economists acknowledged that amid the flagging conglomerates in urban areas, small and medium scale enterprises which are based mainly in rural areas managed to resist the crisis and continue to pick up. When urban people are struggling for survival, farmers and craftments in rural areas enjoyed a windfall as their products suddenly became valuable export commodities. Farm produces like vegetables and fruits surged in price in term of rupiah to follow the soaring value of the U.S. dollar against local currency.

The income of the rural people increased contributing to rise in sales of consumer goods in rural areas such as clothes, electronic goods and motor vehicles. Increase in the rural people's income was recorded not only in the outer regions but also in Java among the flower, vegetables and fruit growers and craftment.

The rural growth is shown by the brisk development of new houses amid slump that hits real estate business in urban areas. The brisk construction activities in rural area is marked by rising demand for cement, sand, rock and other building materials in village areas. In addition, the motor vehicle to population ratio in rural areas has increased sharply especially in the case of motorcycles. Unfortunately, road infrastructure is getting worse battered by long use without maintenance as the government has no fund for it. Sales of motorcycles in 2000 surged 78% over 1999.

Certainly not all rural areas have gained from the rupiah fall, and it is just as certain that not all Indonesian people are suffering as a result of the crisis as the mass media have tended to dramatize. As already said that farmers, fishermen and craftment producing export commodities have enjoyed a windfall.

The positive side of the tumultous period, however, is lost amid the sharp criticism by overzelous oppositionists that would not pass a day without calling for the resignation of President Abdurrachman Wahid. A group of students even threatened to forcibly unseat the president as they did to former President B.J. Habibie. Political elite like House Speaker Akbar Tanjung and Congress Speaker Amien Rais seemed to have come to a conclusion that Wahid's inclination to creating controversies is unremediable and he should step down. In their eyes the government had done nothing good for the country. Some legislators are eager to find fault in what Wahid had done and capitalize on it. Observers also are no less cruel in their criticisms against the performance of the government especially the president. The voices of those supporting the government found no place in the mass media as they would not attract readers. Good news are bad news.

It has to be acknowledged, however, that the president contributed to the chaotic condition with his controversial statements. His statements are often unpopular making himself a good target for criticism. Both Wahid, Akbar Tanjung and Amien Rais are similarly unwise and arrogan.

The battle against corruption, collusion and nepotism have been blunted. Instead of being reduced, cases of corruption, and nepotism are getting rampant and out of control. Everybody seems to take advantage of loose control to enrich himself. There is no change toward improvement. If there is it is only in the number of regulations but not in the implementation. The people including the leaders have lost idealism. What they care is how to amass wealth preparing to shield themselves and their family against the worst to hit the reeling nation.

However, under such condition, the country's economy managed to pick up. Certainly the growth would have been faster if the condition is more conducive and political elite restrained from adding fuel to the fire of conflicts.

Unexpected growth recorded in 2000

According to the government, as said by President Abdurrachman Wahid, the country's economy expanded 4%-5% in 2000, exceeding a previous estimate of 3%-4% and 1999's growth of 0.3%.

The economic improvement in 2000 was marked by development in the real sector. Consumption of electricity was estimated to rise 11% in 2000 and the retail sector grew by 11% compared with in 1999. The buying power of middle to lower class people increased as indicated by the surge in the sales of motorcycles, electronic goods and electric appliances. The construction sector has also begun to revive as indicated by a 21% rise in the sales of cement.

Construction of houses in rural areas was unaffected by the crisis. On the contrary, house construction was brisker. The capacity utilization of the industries in the third quarter rose to 70%-75% from 60% in the second quarter of last year.

The financial sector, which was the hardest hit by the crisis has taken turn for the better. Bank capital totaled Rp 32 trillion by August in 2000 as against minus Rp 41 trillion a year before. In the same period the ratio of non performing credits was lower at 27.9% from 32.8%.

The government's estimate of the country's economic growth was not different much from those of observers and international institutions such as the World Bank and IMF. Critics said consumption driven growth is false. Mubyarto, however, said consumption driven growth is real as the increase in consumption has helped prop up the sagging economy.

Foreign investment, which has been described as the main engine of growth is not yet forthcoming. Political uncertainty and security problem have scared foreign investors away from the country. Intensive campaigns including frequent foreign visits by the president did not help convince investors. Aware that it was futile to attract foreign investment with the political and security condition, the government is seeking to concentrate more on boosting exports.

Exports contributed considerably to economic growth in 2000, though consumption still gave a far greater contribution. In the 1980's, exports played a major role in economic growth. In 2000, exports were estimated to grow to US$ 61 billion from US$ 48 billion in 1999. The government, which is determined to boost exports, is expected to remove obstructive the red tape and regulations to facilitate exports.

The country's balance of payments was also estimated to improve in 2000. The country was estimated to have a current account surplus of US$ 7.7 billion, up from US$ 5.8 billion in 1999. By the end of December, 2000, the country's foreign exchange reserve was recorded at US$ 29.3 billion, up from US$ 27 billion a year before.

The budget deficit was at 3.2%, smaller than previous estimate of 4.2% of the country's GDP. A setback, however, was recorded in the country's inflation which rose to an estimated 9.35% in 2000 exceeding a previous estimate of 5%-6% or up from 2% in 1999. The inflation was triggered by a hike in the oil fuel prices and the rupiah depreciation and seasonal price hikes toward yearend with the religious and new year festivities.

Another setback was the continued weakening of rupiah. The country's currency weakened to more than 9,000 to the U.S. dollar toward the end of 2000 from only 7,500 in the middle of 2000. The government was wrong in its prediction that the rupiah would strengthen to 8,000 by the end of 2000. The causes of the rupiah fall was non economic factor mainly political squabble that resulted in capital flight and exporters keeping their export earning abroad.

In general the economy grew fairly well in 2000. Though slow there had been signs of recovery. The process of economic recovery would need an annual growth of 7% in three successive years to make up for the 13.4% contraction in 1998.

Expectation in 2001

The government is optimistic that the economy will expand further by 5%-6% in 2001. The estimate was higher than the assumption of 4.5% used in the state budget. A 5%-6% growth rate is to be expected only in 2002 and 2003, according to the assumption used in the state budget.

The optimism expressed by the government was in line with its policy to rely more on exports for growth. The government hopes to boost the industrial and agricultural sectors as the main backbone to increase export earning. It is also expected to rely more on the small and medium scale enterprises as the flagging debt laden corporate sector has not yet been ready to resume its previous role. The banking sector is expected to concentrate more on retail financing with the Islamic banks playing a greater role.

In seeking to expand exports, the country will place itself more in the center of global competition. The World Bank has said that the world's economy in 2001 will not be as good as in 2000. The world's economy will be more sluggish in 2001 as a result of the soaring oil prices and growing financial and economic imbalance between countries as indicated by the lopsided growth of major currencies mainly the U.S. dollar and the euro. Slow expansion of the U.S. and the European economies would also contributed to worsening the world's economy. The World Bank, predicted that the world's economy would grew only 3.9% in 2001 down from 4.2% in 2000.

In 2001, the U.S. economy is forecast to expand 3% slower than 4.4% in 2000. Britain and France are also expected to chalk up a slower growth of 3.1% and 2% respectively in 2001 compared with 3.5% and 3% in 2000. Among the major economies, only Japan is expected to post a higher growth of 1.8% in 2001 from 0.9% in 2000.

The sluggish growth will dampen the world trade. The world's trade is predicted to grow only by 7.2% in 2001 down from 7.9% in 2000. The oil prices will very much determine the economies of advanced nations. The oil prices have been unstable but tending to rise lately. For Indonesia, an increase in the oil price is a boon. But if the economies of industrialized nation are in the doldrums, it would be difficult to expect an increase in exports especially exports of non-oil and non-gas commodities. The country's economic growth is also determined by the policy of the government.

The government has said that it will continue to adopt prudency in its monetary policy in 2001 to create rupiah stability. For that purpose the government has to control the circulation of primary money. The monetary authorities have to keep monitoring developments of factors determining the circulation of primary money such as Net International Reserve and Net Domestic Assets.

The government has said that the monetary program in 2001 will be directed toward creating a conducive condition for investment to speed up economic recovery. In addition, the monetary policy should be directed toward keeping inflation under control. Interest rate and the rupiah value should be maintained within a reasonable level to allow the real sector to grow.

In mid term, the government has to strengthen economic resilience to prevent recurrence of the monetary crisis and facilitate the process of economic recovery. The government has said that its mid term program includes:

1) creating a conducive macro economic condition;

2) facilitating banking and corporate restructuring

3) refurbishing the existing institutions to be more effective and transparent in their function to implement social and economic policies;

4) increasing exploitation of natural resources while preventing damage to the environment in long term and guarantee sustainability of natural resources.

The mid term economic policy is expected to result in stronger economic fundamentals facing possible turbulance in the future. The strategies will be a success if the following targets could be reflected in macro economic indicators namely:

1) economic growth is around 5% annually in mid term;

2) inflation not higher than 5% a year;

3) foreign exchange reserve could be maintained at an adequate level;

4) the ratio of government debt to GDP declines to 65% in 2001;

5) the ratio of state budget deficit to GDP is lowered and in 2004 the budget would be balanced.

In order to achieve the mid term targets, one of the determinants is success in reforming fiscal policy and in the implementation of fiscal decentralization which is to start in 2001.

If the government's program succeeds, the country's economy would expand in 2001 by 5.5%. In 2001, the agricultural sector is predicted to grow 3%. With a 19.5% contribution to GDP, the agricultural sector would account for around 0.6% (3% x 0,195) of the GDP growth. The industrial sector is predicted to grow 8% and with a contribution of 25.8%, the sector would account for 2.1% (8 x 0.258) of the GDP growth. Other sectors are forecast to expand 5.1% and with a contribution of 54.7% they would account for 2.8% of the GDP growth.

The contribution of consumption to GDP is estimated at 2.3% consisting of 1% in public consumption and 1.3% in government consumption. Investment is forecast to contribute 2.8% including 2.3% in public investment and 0.5% in government investment. External sector (net exports) is predicted to contribute 0.4% including 0.8% in exports and minus 0.4% in import. Inflation is expected to be kept within control at 6%-7% and the rupiah value at 8,500 to the U.S. dollar. A surplus of 4% of GDP is expected in current account.
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Publication:Indonesian Commercial Newsletter
Article Type:Brief Article
Geographic Code:9INDO
Date:Jan 16, 2001

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