Download Dr. Haryo

Economic Reforms in Indonesia
after the 1997/98 Economic
Crisis
Hadi Soesastro
Haryo Aswicahyono
Dionisius Narjoko
Challenges: Weak Investment
Performance
• Megawati’s administration was able to restored
macroeconomic stability,
• But microeconomic performance was dismal.
• Weak Investment Performance: Recorded
foreign direct investment (FDI) continued to be
negative in the first half of 2004.
• Indonesia is the only crisis-affected economy in
Asia in which, Investors—foreign and, more
importantly, local—are still essentially holding
back
FDI
Domestic
Recession Deregulation
2003
1999
1995
1991
1987
Oil Boom
1983
1979
1975
1971
1967
Billions of $US
45
Crisis
30
15
0
Background
• SBY assumed power under the backdrop of
favourable environment
• Institutional Setting
– greater authority has shifted from the President to
Parliament.
– key economic ministers are less connected by shared
views and constituencies.
– decentralization has shifted much responsibility to the
regions.
• As a result, policy decision-making has become
fragmented  policy uncertainty
First Attempt: Infrastructure Summit
• Investment requirement: 5% -10% of GDP
(around $140 billion)
• Financing gap  need private sector
participation
• Government held infrastructure summit, offer 91
projects ~ $22.5 billion to private sectors
• Organized by Coordinating Minister for
Economic Affair (Aburizal Bakrie), KADIN and
BAPPENAS
• Great interest from domestic and foreign
investor (oversubscribed). However none of the
projects were realized
Why Infrastructure Summit Fail
• Coordinating Minister did not have clear strategy
– No strategy regarding 14 regulations necessary to
provide a sound legal basis for private sector
participation
– Government guarantees regarding project risks
– Pricing Policies
– General investment climate
• Coordinating Minister did not have enough
authority and capacity to force the technical
ministry to tackle those problems (eg, 14
regulations, pricing policies, guarantees)
Second Attempt: Investment
Package
• Under the Coordinating Minister for Economic
Affair (Boediono)
• Approach: IMF Style
– Substantive sectoral reforms with clear objective
– Clear Time table
– Clear on who is responsible for each reform
• Content: general investment policies (eg
licensing procedure, investment law); customs,
excise and duties policies; taxation; labour; and
small and medium enterprises (SMEs)
Why Investment Package Fail
• Also failed, why?
– No clear mechanism to evaluate the progress
of the reform
– No clear incentives weather the reform is
implemented or not
– The coordinating minister does not have
enough authority to force the implementing
agencies (Technical ministries, DPR) to
implement the reform
Toward Explanation: why the
reform failed
• The success of reform is a result of the interplay
between:
– The determinants of why policy is not implemented
• Regulators do not know what is ‘best-practice’.
• Governments face political resistance from vested interests.
or Governments do not want good policy, because they rely
on the rents from bad policies
• Government want a good policy but does not have enough
resource, capacity and/or authority to implement the reform
– Actors involved:
• Within government: president, coordinating minister,
technical ministers, local government.
• Outside government: parliament, chamber of commerce,
various interest groups.
• Applying this framework:
– During SBY period:
• President, Coordinating ministry, chamber of
commerce, and some reform-minded ministers
may know the best practice, but has low authority
• Technical ministries, the parliament, and other
interest groups in general do not know the bestpractice, derive considerable rents from bad
policies, but have strong authority.