From The Jakarta Post

Wide gap persists between macro and micro-economy

Umar Juoro, Jakarta

Macroeconomic stability has gradually been restored after the shock of the fuel hikes in October 2005. Inflation, at least on a month-to-month basis has been showing a declining trend, even though on a year-on-year basis it remains high. Inflation in the coming months is likely to decline even further especially on a year-on-year basis. Similarly there is a declining trend in interest rates. The fiscal deficit is also low. By the end of the year, it is quite likely that inflation will be around 8 percent and the Bank Indonesia rate will be around 10.5 percent, or even lower.

However, in the fiscal policy front, there is a serious problem in catching up with the improvement in the macro economic condition. The ability to spend, especially for capital expenditure, remains disappointing at the level of the central and especially local government, even though there is some improvement compared to last year. This is a serious problem because government expenditure is a bridge that links the macroeconomic condition and microeconomic activities, both at company and household levels.

As companies have experienced strong pressure from higher costs triggered by the sharp increase in fuel prices last October, the purchasing power of consumers in general is also seriously declining. Certainly, a reduction in interest rates would help companies, but this is limited to the sector that is sensitive to interest rates, such as construction, especially in housing development and ownership.

With a declining interest rate, banks would be more aggressive to allocate credit to housing development and ownership to catch up with the target for credit growth. Banks will also be much more attracted to allocate credit to the commodity sector, such as plantation and mining companies to benefit from the high commodity prices, especially coal and crude palm oil, even though this seems opportunistic rather than based on a solid strategy.

However, the banks might not be as aggressive as before in other consumer lending such as car loans and credit cards. The loans for motorcycles might still grow considerably, considering the clear demand for a reliable means of transportation for lower income households. However, car loans and credit card loans might be relatively stagnant, and may even decline, mainly because of the change in priorities for consumers and relatively high of delinquency rate for credit cards. In general, the banks still face problems of where to allocate credit, because there are not many companies that are considered bankable.

The manufacturing sector in general is still struggling with high costs and declining consumer purchasing power. Meanwhile, infrastructure development is being hindered by the indecisiveness on the part of the government over risk sharing and other promises to make things easier for investors. Mining and oil and gas sectors are still not able to attract significant investment mainly because of the unattractive fiscal regime and cumbersome regulations.

On this issue, the government should not pretend to be able to implement most of what they want as promised in the policy packages. It is good enough if the government focuses just on key projects and issues that narrow the wide gap between the macro and microeconomy.

From the experience under Megawati's administration it is clear that macroeconomic stability alone cannot guarantee high growth and job creation. Macroeconomic stability that was not connected with the microlevel, and especially the problem of increasing unemployment, could have been the main factor behind her failure to get reelected in 2004.

A similar situation could happen under President Susilo Bambang Yudhoyono, unless his administration is able to bridge the gap between the macro and microeconomy resulting in a significant reduction in unemployment. Political analysts might say that his popularity remains relatively high, so that even with high unemployment he could still be reelected in 2009. This view certainly ignores the high expectations of voters for improvement in the economy.

The assumption that improvement in macroeconomic stability would be followed by the improvement in the investment climate will not hold true unless the government does some serious work in the field. This is not easy and it requires certain experienced people to do it, something that this administration is seriously lacking.

This means the administration should focus more on the implementation of the programs already introduced and on recruiting capable and experienced people who are able to implement the programs. Similarly, each region has a different capability in implementing the program. A general approach cannot work. Yet most importantly, there is the need for firmer leadership from the President himself.

Closing the gap between the macro and microeconomy, under current conditions, cannot be done in a general fashion. There is a need to sharpen priorities, to focus on delivery, to gather capable institutions and people to do the job, and the willingness and boldness of the leader to take action with some risks. Otherwise, the economy will just float around and expectations will dissipate.

The writer is chairman of the Center for Information and Development Studies (CIDES) and a senior fellow at the Habibie Center.
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