** Forum Nasional Indonesia PPI India Mailing List ** ** Untuk bergabung dg Milis Nasional kunjungi: ** Situs Milis: http://groups.yahoo.com/group/ppiindia/ ** ** Beasiswa dalam negeri dan luar negeri S1 S2 S3 dan post-doctoral scholarship, kunjungi http://informasi-beasiswa.blogspot.com **Jakarta can't spend a way to prosperity
By CHRISTOPHER LINGLE Special to The Japan Times UBUD, Indonesia -- Indonesia's chief economic minister, Boediono, along with Finance Minister Sri Mulyani Indrawati and Bank Indonesia Gov. Burhanuddin Abdullah are credible and competent bureaucrats. They put forth an action agenda of economic reforms designed to reinvigorate the local investment climate and to speed up the resolution of disputes with foreign investors. But President Susilo Bambang Yudhoyono should worry about the advice his new economic team has given him. News reports indicate that they are offering a noxious cocktail of wishful thinking, nonsensical nostrums and macroeconomic mumbo jumbo. According to Boediono, Jakarta will accelerate and boost spending to stimulate the economy. Part of the plan is for the government to spend 10 trillion to 15 trillion rupiah during next year's first quarter. If the government's game plan is for these steps to boost real and sustainable economic growth, it is easy to predict failure. After all, if prosperity and recovery could be conjured up by increased spending by governments then no country on earth would be poor! In all events, front-loading government spending into the present cannot have a greater benefit than were it left to a later date. The fantasies of economic textbooks aside, the real world provides no evidence for government spending permanently stimulating higher real economic growth. As it is, the problem with the Indonesian economy is that government officials control too many resources taken from private-sector actors. As the Indonesian government has a poor track record for probity and efficiency, it is better to refrain from taking so much away from the private sector, which can use it more effectively. But these woeful results differ only as a matter of degree from public-sector failures in other countries. As elsewhere, the incentives faced by public officials do not motivate them to do the right thing. Unlike private-sector actors, public officials spend someone else's money on someone else. This makes them less cautious. And if the money is badly spent or lost to waste or corruption, it is unlikely that bureaucrats will be fired or politicians held directly accountable. The private sector will increase investment only if economic fundamentals improve. And neither the amount of government spending nor its timing changes anything real about the economy. There is also an illusion that lower interest rates engineered by the central bank can boost economic activity. While there can be a temporary spurt of higher growth, it inevitably and always gives way to rising consumer prices. This is because, in the real world, something must first be produced to provide income to resource owners that provides them with the capacity to consume. New or more government spending involves an attempt to allow consumption without the prior supporting supply conditions being in place. What happens is that increased spending by households or businesses is based upon paper debt or artificially cheap credit. The extent to which this approach works to raise overall production is not sustainable because the government cannot borrow indefinitely and the central bank must stop prices from rising. When either the government or the central bank or both throttle back on their expansionary policies, the economy will adjust back to its previous position. And so it is that sustainable economic growth requires more saving, which allows increased investment in capital as the basis of greater specialization and an expanded division of labor. These investments allow labor productivity to increase so that real wages can rise. This process can provide the basis for sustainable increases in both production and consumption. Without the support of increased earnings by increased productivity, economic booms based on spending are illusory and temporary. The usual result of artificially low interest rates and deficit financing to manipulate demand is an orgy of politicized overspending and high public debts that lead to recession and inflation. As such, consumption should be seen as the result and not the cause of growth. An exception can arise if expansive central bank policy leads to excessive credit expansion that creates an artificial and temporary sense of increased prosperity. But either inflation or overexpansion will cause profitability to collapse to the extent that businesses must contract production and employment levels. Cutting interest rates under the dictate of central banks or finance ministers also has an obvious downside. Low interest rates hurt retirees that rely on past savings for consumption, and reduce the incentive to save more. Less saving is undesirable from an economic viewpoint since there are fewer real funds available for long-term investments. Monetary and fiscal stimulus will not solve Indonesia's economic problems because the aim is to boost demand artificially. It is far better to leave households and businesses with greater control over their earnings and spending as the basis of more sustainable investment that will create new jobs and more wealth. Christopher Lingle is senior fellow at the Center for Civil Society in New Delhi and professor of economics at Universidad Francisco Marroquin in Guatemala. The Japan Times: Jan. 6, 2006 (C) All rights reserved [Non-text portions of this message have been removed] ------------------------ Yahoo! Groups Sponsor --------------------~--> Clean water saves lives. 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