08 August 2010

The Indonesian Economy -- A Reality Check!

This post is unashamedly cut and pasted from my good mate "treeatwork". I wrote something about the same subject matter, and having read Tree's take on things, I realise that my effort was wholly inadequate.

This piece by Tree will enlighten you for sure.


The bureaucracy is a circle from which no one can escape. Its hierarchy is a hierarchy of knowledge.
~Karl Marx, Critique of Hegel’s Philosophy of Right 

There was a glowing review of Indonesian economy in the New York Times the other day. The economy is growing at 6.2%, the stock market at record high and foreign direct investment up 51%. The President, who was holding a cabinet retreat cited these numbers and applauded his own government for having achieved them. He remains hopeful that the future will be better and so is the rest of us.

Looking ahead however, it pays to be more cautious and I am particularly worried about a few things.

Deindustrialization. I heard Faisal Basri used this expression and it’s probably most accurate. In terms of its industrial output, it does look like Indonesia is on a path towards deindustrialization. For an economy of this size, Indonesia is struggling to meet its own needs and being so close to the global giants – China and India on either side – Indonesia is expecting an import glut.

The Nationalist politicians – and economists – were quick to argue for more protectionism and blame globalization, no less than the Coordinating Minister for the Economi Hatta Radjasa was heard proposing some sort of renegotiation on the AFTA agreements.

For such a proud country, this defeatism mentality is worrying. It almost looks as if Indonesia is totally unprepared to be competitive, despite all of its promises and recent successes. 

In leading the country for prosperity, Indonesian policy makers remains almost always in a defensive posture, completely lacking any initiative or even desire, to be competitive. During a period where Indonesia was one of only three growing economies in the world, the resilience was comforting and yet the monetary authority – Bank Indonesia – failed to effectively lower interest rate to some more decent level. 

This is a recognized problem and the importance of managing the interest rate was again reiterated and prioritized during the confirmation hearing for the Governor of Bank of Indonesia last week in DPR. 

The interest rate is now at some 6.5% - but effective rate is closer to 9%, for some reason Bank Indonesia lost control of this a while ago. Growth is paced at some 6% so presumably it leaves some room, except that with inflation higher than expected in this quarter – now estimated at 6.2% - I’m wondering what sort of monetary acrobats will be performed now to expect Bank Indonesia to do now what it had been unable to do in the few months?

The fact that Indonesia remains a high cost economy is probably the most critical of its shortcomings. The tax code is overwhelmingly complicated and scandalously unreliable. Massive, systematic graft involving blue chip companies and large state owned enterprises is a regular feature on the headlines. As an instrument of growth, the tax code is getting to a point where its ridiculousness prohibits growth and effectively hampers future potentials. 

Most recently the tax office introduced a new VAT for e-commerce transaction. I made a few calls to check if anyone have any figures, how much exactly do the government expect to earn from an E Commerce Tax but nobody seems to know the size of the market. For most of the local players, the wealth of internet transaction remains elusive. Fresh tax will make it even less attractive. For all the promises of a domestic technology industry, the Indonesian Government is pretty much ready to nip it in the bud.

Red tape and bureaucracy in Indonesia is at par with third world communist countries like Cuba and Vietnam – and it’s not getting any better. Nowhere to be competitive in a global market, particularly when placed in a region with serious competition from countries like Hongkong, Singapore, Taiwan and Australia.

On the budget side, the economy has its own problems. Most ridiculously, I’d point to the failure of the Government to actually execute the budget. Being a third world country and all, we could forgive Indonesia for being unable to afford a Formula One track or to build a decent sewage system – those things cost money and Indonesia don’t really have that much money. 

However, when the Government failed to spend the money that they already have and authorized to have, that’s a whole different kind of failure. For the first quarter of 2010, this failure of the Government TO SPEND money is costing Indonesia minus 0.6% so far (H1, 2010, 32.7% budget realized) 

Over the years, Indonesia consistently failed to build proper infrastructure to support growth – harbors and roads to enable exports, market infrastructure etc – year after year the successive government failed to meet their own targets for building infrastructure and this only adds to the high cost economy.

The need for infrastructure in China, for example, was recognized early on and the Chinese government – unburdened with Democracy – pushed for gigantic infrastructure upgrade across the Nation. Singapore is smaller than Jakarta so it’s probably easier but even to a comparable geographical size Indonesia failed completely. Jakarta is in danger of failing completely on regular basis with flood, traffic jam and lack of decent public transport. The traffic jam of Jakarta alone is costing Indonesia IDR 47T – USD 4bn – and minus 0.5% growth, annually. 

The meeting with the President this week recognized these problems and specific instructions were issued to accelerate government spending for infrastructure and special industries.

The instructions – which were read out loud during the press conference – were telling. Among them, the President reminded the Governors that they are really, actually, are part of a National Government. The President elaborated specially that Indonesia is not a federation of smaller nations and all regional leaders are really part of the local government.

Obviously there have been some serious mix up earlier and the importance of governing was lost in the confusion. This is expensive. 

Several Presidential Decrees were tabled for revisions, at least one of them specifically dealing with the cumbersome procurement procedures for state apparatus. The bureaucracy is eating into itself and the Government now feels the pain.

The truth is, much of Indonesia’s recent economic numbers is probably nowhere near as good as what it seems. The largest chunk of the growth comes from consumer spending – last year’s good news was adrenaline fueled with the world’s largest democratic election. The globally enforced rapid rate cut (for Indonesia, from the high teens two years ago) introduced the much needed jump of optimism and the celebration put a gloss over the less handsome side.

Unemployment remains high – Indonesian industry grows not fast enough to employ the productive age – so as the working class make more money than before, there are also more people without jobs out there. Tax collection remains woefully low. Some political elites – an economist – warn against foreign debts but the truth is, Indonesian debt in proportion to the budget is not getting any worse.

Presumably, the same elites are willing to pay more taxes to finance growth but so far this is an unreliable conviction. While the number of registered tax payers climbed over the years, large conglomerates and even state owned enterprises remains opaque and worrisome in their corporate behavior.

Groups like the Bakrie group were free to enjoy various special treatments from the Government while at the same time imposing a preposterous amount of burden on the national budget. The Lapindo disaster in East Java is an ongoing national catastrophe and there’s no end in sight in how to compensate for the expenses incurred. At the same time, a group of Bakrie families were caught in a serious scandal of misrepresentation of their financial statement, at some USD8bn I’d hazard that this isn’t merely an accounting error.

If the government had somehow lost control over the private sector for however reason, it’s also losing control upon its own definitive role to govern and impose law and order. Indonesian DPR managed to pass only four out of more than 70 proposed legislations this term. The ridiculous got an upgrade when DPR decides now that they are installing a finger printing system for the honorable members – presumably to ensure their presence in chambers. 

Dealing with this seemingly systematic failure, it’s hard not to worry, if the Government really is able to do what it says it will do. It’s August now and we have only five more months in 2010, with a looming price increase and a holiday season in sight. The holiday season will just make consumer spending go higher but eventually they would have to go back to work and face higher prices later.

The electricity price hike was announced last month but quickly revised – the industry lobby claimed the hike was unrealistic and would eventually fueled inflation, the Government blinked and it’s now back to the drawing table. 

The price for basic staples were substantially higher, even before the holiday, part weather and part superstitious. This country doesn’t always make sense and it’s just getting harder to believe its promises.

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