Survey of recent developments

Abstract

The new government of Susilo Bambang Yudhoyono (SBY) has been performing well relative to the standards of recent governments. The confidence of the business community in Indonesia’s near-term future continues to improve, resulting in rapid growth of investment activity, steady gains on the stock market, and a return of private capital inflow. City skylines are again decorated with cranes for the construction of apartment buildings, shopping malls and the like, while expenditure on cars and motorcycles, cell phones and air travel is growing rapidly. The rate of economic growth is now not far below that typically achieved in the Soeharto era.

Macroeconomic management is broadly on the right track. The budget deficit is small enough not to pose a problem of fiscal sustainability and, although the monetary authority continues to make things difficult for itself by pursuing conflicting targets, prices remain reasonably stable. At the microeconomic level, how-ever, there are still plenty of causes for concern, the most serious of which, perhaps, is the dissipation of Indonesia’s current oil price windfall in wasteful and extraordinarily costly subsidies to domestic consumption, notwithstanding the recent increase in domestic fuel prices.

Little has been achieved in relation to privatisation, and the government has scant enthusiasm for it. Paradoxically, it is encouraging heavy private sector involvement in infrastructure, which would otherwise be provided by state enterprises. Such involvement will be difficult to achieve, partly for the same reasons that privatisation has been hindered, but not least because the government has yet to come to grips with the implications for pricing of infrastructure services if such activities are to be made profitable—a prerequisite for private sector involvement. Problems with infrastructure as they manifest themselves at lower levels of government are illustrated and analysed in this Survey by a short case study of West Java province and its capital city, Bandung.

There has been a great deal of anti-corruption activity, resulting in several high profile arrests. But this falls far short of what is required to achieve significant improvement in the performance of the public sector, broadly defined, on which healthy and sustained growth of the economy depends heavily. The government has been slow to appoint new people to the top levels of the bureaucracy, and reformist ministers have also been frustrated by civil service rules and regulations that make it exceedingly difficult to appoint the best available individuals to these and other important positions.

Notes

¹No complaint seems to have been made to the Business Competition Supervisory Commission, whose responsibility it is to try to ensure ‘healthy’ competition among firms to the benefit of consumers (Thee 2002).

²Money supply growth was reduced to 12–15% p.a. in the five months through April 2005, compared with 18–23% from April through October 2004. The money aggregate reported here is currency in the hands of the public, which is by far the largest part of base money (i.e. the monetary liabilities of the central bank). Recent data on the latter are difficult to interpret because of the increase in demand for it artificially generated in mid-2004 by non-uniform increases in banks’ required reserve ratios.

³For a discussion of Indonesia’s disappointing inflation performance relative to neighbouring countries, see Fane (2005, in this issue).

⁴Although given considerable emphasis, this item is relatively small—less than Rp 0.5 trillion (GOI 2005a: 42–3, 50).

⁵One justification for halting the projects was to cut the demand for imports in view of the sudden emergence of high capital outflow, but the impact on the current account would have been far too slow relative to the rapid change in the capital account for this to be effective. The better way to deal with the sudden capital account deterioration would have been to allow the exchange rate to adjust to the new circumstances. In reality, it is arguable that there was also a political explanation for stopping the projects: namely, to try to force Soeharto to curtail the rapacity of his family members and their business cronies.

⁶The Bank is not unaware of the importance of proper pricing—noting, for example, that ‘low tariffs discourage local water companies from expansion and adequate maintenance’ (World Bank 2005: 46). But the minimal degree of emphasis given to this issue in its report belies its crucial importance.

⁷Earlier in 2005 a number of textile factories in the Bandung area became bankrupt and were forced to close as a result of flooding, which is said to be becoming increasingly severe over time. Other factory owners suffered serious financial losses.

⁸The former connect provincial capitals with each other; the latter connect provincial capitals with district capitals and municipalities.

⁹A large new dam is planned at Jatigede, but this plan has been on the books for many years without coming to fruition, apparently because of the unwillingness of the central government to fund it.

¹⁰So much so that part of the new road collapsed shortly after it was opened to traffic.

¹¹Implausible though it may seem, Bappeda Bandung (2004: 16) reports that only about 70% of the city streets actually possess drainage channels: ‘Overall, the drainage system in Bandung is still not well planned.’

¹²In a city with a population of 2.8 million in 2004, the number of piped water connections was just 143,250, according to the Bandung municipal water supply company (PDAM Kota Bandung).

¹³Only about 20% of the population of Bandung municipality live in houses connected to the sewerage network. Even so, there is only a single treatment plant, and it can only handle sewage produced by about 15% of the population. A considerable quantity of raw sewage therefore flows directly into the local river system (Bappeda Bandung 2004: 16).

¹⁴These performance shortcomings are discussed in detail in Bappeda Bandung (2004: chapter 2).

¹⁵The population growth rate was around 3.8% p.a. during the 1990s, and the current city development plan envisages growth at 2.5% p.a. in the decade to 2013.

¹⁶Attempts to do so may meet with violent resistance: see, for example, Harsanto (2005).

¹⁷For some case studies of a new CEO acting to reform business enterprises in the Indonesian context, see Djohan (no date).

¹⁸One explanation for having such a large team may be the desire to control cronyism in high-level appointments.

¹⁹A hopeful sign is the recent announcement that the government is looking to revise Law 43/1999 on public servants in order to be able to speed up the process of discharging officials found guilty of corruption (Witular 2005a). Getting rid of individuals for poor performance is virtually impossible, however. The best that can be done is to deprive them of their structural positions, leaving them employed but without any function and without any subordinates. This results in the loss of entitlements to the various allowances that went with the previous position.