Outlook 2007

2006: half-empty glass

Editorial December 31, 2006

Two thousand and six will be remembered more for what could have taken place but never did, rather than for what did actually happen. There were many more opportunities to make things happen than in 2005, and yet, we as a nation squandered them.

The year had its "usual" share of tragic disasters, both natural and man-made, but they were of a lesser scale than the tsunami in Aceh, which consumed much of our time, energy and attention in 2005. The earthquake in Yogyakarta, the tsunami in the Central Java coastal town of Pangandaran, the unstoppable mudflow in Sidoarjo, East Java, and this month's massive floods in the northern part of Sumatra were tragedies that were experienced on a grander, national scale, but they did not place as many demands on us as the tsunami did.

World oil prices were more stable and, by the start of the year, we had already grown accustomed to the new high levels. Most of the oil shocks happened in 2005, though the economy still reeled from their effects throughout much of 2006, as evidenced by the high but rapidly falling inflation rate.

On the security front, the year saw the absence of any major terrorist attack. And the peace process in Aceh acclerated and we had a peaceful and orderly local elections there this month.

Internally and externally, the political and economic climate was conducive for Indonesia to start focusing on the one single issue that matters most to us, that is improving the general welfare and standard of living of the nation's people.

President Susilo Bambang Yudhoyono won the 2004 election on this very issue. In 2005, he had the Aceh tsunami and the oil price shocks as valid excuses for not delivering on his election promises. In 2006, he faced none of these obstacles; yet, he still falls miserably short of delivering.

Let us not deceive ourselves with rosy macroeconomic figures. Yes, inflation is down, interest rates have dropped significantly, the rupiah is strong -- against the dollar which is weakening globally. The national gross domestic product is still growing at 5.5 percent, though slower than in 2005.

Against these figures, the number of families in poverty increased and the jobless rate -- including underemployment -- remains unchanged. Investment, both foreign and domestic, plunged, and bank lending to corporates, an indicator of the economy's health, slowed down.

What is so horrifying is not the rates but the absolute numbers. The World Bank says as many as 110 million people, or nearly half of the population, is living in poverty -- defined by per capita expenditure of US$2 a day. And the number of unemployed and underemployed people is estimated at more than 40 million.

The President should not shoulder all the blame for the bad year. In a democracy -- where power is widely shared and not concentrated in one person -- the legislative body, the judiciary and even the media should bear some of the responsibility.

The year once again saw how we as a nation became consumed by petty political battles, which were pushed to the front of the national agenda. The heated battle over the pornography bill, the debate over the application of sharia (Islamic law) in the regions, polygamy and a sex scandal involving a politician, the controversy over rice imports, and the annulment of laws or articles of new legislations, some of which have not even seen the light of day, were the headlines of 2006.

These are issues that serve to measure the extent of one's political power, rather than issues that would bring about meaningful changes to the lives of the people. Still we picked them and got them on the national political agenda.

Indonesia is giving democracy a bad name because we use our freedom to argue and fight endlessly, but never to do anything of substance, let alone to deliver the goods.

Take President SBY as an example. He had his battles with the business community over electricity rates (he backed down), with the unions over labor law reforms (he backed down), and with the House of Representatives over just about every piece of legislation. He even had an open battle with his own vice president, Jusuf Kalla, over the appointment of a new commission -- supposedly to oversee the work of his Cabinet.

While our leaders and the national elite fight their petty battles, the situation at the grassroots level is barely improved, and for many it even deteriorated. But they rarely made headlines, so they escaped our attention completely.

This week, SBY reportedly criticized a TV news program for focusing on bad news only. What he did not seem to grasp is that all this bad news, particularly crime stories, are symptoms of a very sick society. With the levels of poverty and unemployment being what they are, it should not be surprising.

And what we see on our television screens is only a small fragment of reality. It is actually much worse in real life, Mr. President. Many crimes and tragic stories go unrecorded.

You may not like hearing so much bad news, and you can certainly hit the remote control and look for programs more pleasing to your ears, but, as the saying goes, Mr. President, you ain't seen nothing yet!

Let us end the year on this somber note, in the hope that we can all make some time for self-introspection. And let us promise ourselves that we, all of us, will try to do a better job in 2007. Happy New Year.

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Indonesian economy gathering momentum

Outlook 2007 December 31, 2007

Sanjeev Sanyal, Singapore

Indonesia's economy is gathering momentum. The gross domestic product (GDP) growth accelerated to 5.5 percent yoy in the third quarter from 5.3 percent in the previous quarter. Manufacturing grew by 5.3 percent while construction grew 8.4 percent during the quarter. The transport and communications sector was especially strong at 13.5 percent.

Interestingly, the economy gathered pace despite a slowdown in domestic consumption to 2.8 percent from 5.6 percent in the previous quarter. Gross fixed capital formation also slowed to -0.3 percent from 1.2 percent in the second quarter. However, growth was helped by an acceleration in net exports as well as some accumulation of inventories. Despite these demand-side indicators, we feel that domestic demand conditions will be strong enough into 2007 to support an acceleration in growth.

There are a number of reasons why we feel that growth will accelerate next year. The most important factor is that interest has declined very sharply over the year, reversing the equally sharp monetary squeeze seen in the latter half of 2006.

As monetary conditions ease, we expect the private sector to feel far more confident about borrowing to consume or invest. As shown in the chart below, the absolute level of bank credit to the private sector has been growing strongly for several months now (even if the year-on-year growth rate has not yet recovered).

The second reason for expecting growth to pick up is that the Government's finances are now looking very strong. The public debt-to-GDP ratio will fall below 40percent in 2007 and the government can take advantage of low interest rates to borrow and invest in infrastructure.

The country's infrastructure is now creaking from the lack of spending since the Crisis and there has been a lot of talk about pushing investment into the sector. Unfortunately, actual spending has lagged due to procedural delays. However, we now hear that the experience of rebuilding Aceh and other disaster affected areas is smoothening the procedures so that we can expect a more generalized spending program in the next two years.

As had been widely expected, the inflation rate declined sharply in October as the statistical base effect of last year's fuel price hike was absorbed. However, trend in prices has proven to be even weaker than what had been anticipated in subsequent months with consumer price index rising barely 5.2 percent yoy in November (core at 5.9 percent).

One important factor is that food prices have been especially well behaved this year but almost all other categories (expect clothing) saw at least some declines in yoy inflation. The acceleration in the economy will probably improve pricing power in some categories next year but overall, inflation should remain subdued at 5.4 percent (unless oil price flares up again).

This is a very reasonable level by Indonesia standards and should allow the central bank to keep reducing rates into early 2007. We expect the benchmark rate to be reduced from 9.75 to 8.5 percent in a series of 25 basis point cuts.

Non-oil exports have been reasonably strong going into 2006, while non-oil imports have been weak and volatile. This has allowed Indonesia to run a sizeable merchandise trade surplus this year's resulting in a current account surplus despite growing services imports.

Although we do expect non-oil imports to pick-up next year as the economy accelerates, we feel that the trade balance will rise moderately next year's good enough to keep the current account surplus over US$7 billion. We feel that a current account surplus of this level (i.e. 2percent of GDP), rising foreign exchange reserves and an external debt-to-GDP ratio of 35 percent suggests an economy that is now robust enough to survive fairly significant external shocks. In other words, there is scope for another sovereign upgrade by rating agencies in 2007.

With external accounts in surplus and the US dollar weakening, Rupiah will probably be under some pressure to appreciate. However, Bank Indonesia's behavior in 2006 suggests that it will have a preference towards accumulating foreign exchange reserves. We expect foreign exchange reserves will stand at $43.3 billion at the end of this year, compared to $34.6 billion at the end of 2005 (despite accelerated repayment of debts to the International Monetary Fund).

It is likely that the central bank will continue to prefer further accumulation of reserves in 2007 and this will hold back the rupiah. In our view, this is a prudent approach given the history of this currency (especially with simultaneous reductions in interest rates and the risk that portfolio inflows could reverse in the second half if bond investors decide to take-profit).

From a macroeconomic stability perspective, Indonesia has finally recovered from the Asian Crisis: public finances look healthy again, external debt is manageable, the exchange rate appears stable and even inflation appears tamed.

However, it does not yet seem to have regained the economic dynamism that characterized many South-East Asian countries before the Crisis. Over the last decade, investor attention has drifted away to China, India and even Vietnam. Nonetheless, Indonesia's industrial sector is at last showing some signs of competitiveness.

Manufactured goods exports rose 18 percent yoy in the first eight months of the year and, if sustained, they will probably bring back much needed fresh investment. A Special Economic Zone in the Riau islands is under implementation and this may trigger a revival. This could be an important step towards bringing back dynamism to the Indonesian economy.

The writer is senior economist of Global Markets Research, Deutsche Bank. This is a personal view

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The good fortune for domestic and International investors

Outlook 2007 December 31, 2007

Frank van Lerven, Jakarta

These were the returns on stocks for the year 2006 as recorded by Dow Jones and MSCI on Dec. 12, 2006:

World (in US$): +17.4 percent

Europe (in Euros): 14.4 percent

Asia Pacific : + 8.4 percent
U.S. (broad market): +12.3 percent

Asia Pacific excl. Japan: + 21.9 percent
Indonesia: +48.9 percent

These fine returns were preceded by similar, positive returns for every single year, going back to 2003. So, global and domestic investors are now looking at four years of positive returns, most of them in double digits! The JSX (the Jakarta Stock Exchange) has been going from one high to another (now 1,755), but the Dow Jones (now at 12,310) has also reached an all time high. To put this in perspective, the S&P 500 at 1,412 is still off its high, reached in 2000 (1,553), and the Nasdaq 2000 (currently trading at 2,437) is still far off its 2000 peak (5,049)

"Will investors be able to find investments providing similar returns in 2007, and if so, where?" is certainly a question on many investors' minds. By the same token, a prudent investor would be justified in asking another question: "After four years of sun, is there any chance of rain in 2007?" And when the possibility of "rain" is a realistic perspective, investors in the JSX need to be aware that: when it rains here, it pours!

In speaking with Indonesian friends in these last weeks, I definitely pick up that the "chase for high returns" is alive and well. Bankers advise Indonesian investors to consider investing in the JSX, China, Emerging markets and any other markets that have recorded 30 percent plus annual returns in recent years. Also, most analysts in the U.S. have become increasingly positive and confident about the markets, projecting returns in the 8-12 percent range. One of them is Abbey Cohen of Goldman Sachs, who earned some reputation as a bullish analyst in the late '90s.

The economy moves in cycles, and over time, will show phases of: Expansion, contraction (recession) and recovery. Generally speaking, stock prices go up in the phase of expansion, as the world has been experiencing for a couple of years now, but fall in the phase of contraction (recession).

Many studies have been done on the actual returns that private investors make, compared to the funds they invest in. And study after study shows that there is a big difference: Where funds make money, private investors often do not. The reason is: The majority of private investors join the bull market at the end of its run, and then sell when the bear market is about to end.

There are reasons for caution and one of them is the length of the current bull run. According to some commentators, the current bull run in the U.S. equity markets is almost unprecedented, as it is the second lengthiest since World War II and has lasted 89 percent longer than average (according to Ned Davis Research Inc.)!

This "fact" may carry a bias, depending on how one defines bull market, but it is indicative of a notion all investors should be aware of: We had a good run, lasting four years, and these runs do end! The indices presented here, the Dow Jones, FT World Index (both in U.S. dollar and Euros) and the JSX, all clearly show the good run investors have had. The Dow Jones index, going back to 1920, provides a truly long-term perspective.

Indonesian investors have had the best of all worlds for the last couple of years: Excellent returns in the JSX, excellent returns when investing overseas, and excellent returns in investing in property at home!

So, could we be at the end or in the latter phase of a bull run? Or, put in more economic terms: Are we getting close to the Peak of the phase of expansion? And is there a chance that the U.S. economy is heading for recession after a couple of years of strong growth rather than the "soft landing" that most analysts are expecting?

If a true recession scenario in the U.S. materializes, it will be bad for equity investors, wherever in the world you invest! Less than expected earnings will be the news of the day, and the U.S. market will head south. Recession in the U.S. will mean that the U.S. consumers have no money to spend, and this will immediately affect the global economy.

Economists are notoriously bad at predicting markets and psychologists-financial planners, such as myself, do not do better. So, trying to read the newspaper of 2007 does not make sense. However, what does make sense is to identify trends and topics that constitute the key factors influencing where the markets are heading in 2007, and developments in the U.S. will lead the way!

Right now, (time of writing, mid-December) the indicators do seem to point to the "soft landing" scenario and a continuation of the bull market for stocks. Some of the bullish indicators are:

o An unprecedented amount of take-over activity in both Europe and the U.S.

o Lots of cash ("liquidity") around.

Note: One of the trends of 2006 was "Private Equity funds" and "Hedge funds" flexing their muscles

o reasonable P/E ratios, e.g. for the U.S. at 15, Europe at 14 and Asian markets (excl. Japan) at 16.

o Continuing high growth in China, which may positively affect the Japanese economy

The indicators, which point to, at least, slower growth are:

o Lower economic growth figures for 2007 for most developing countries

o Slowing housing market in the U.S.

o Longer term U.S. bonds return less interest than short term bonds (the so called "inverted" yield curve), indicating that investors expect that interest rates will come down, and this would happen when growth slows.

Another factor is the U.S dollar! In the latter part of 2006, the U.S dollar started to drop further against the Euro and the Yen. Few analysts truly understand the specific timing of this downfall, as the U.S dollar has for a long time been seen as "overvalued". However, a further sharp decline would render the financial markets unstable.

So, investors who want to keep some kind of control over their investments should pay attention to:

o how the "slower growth" scenario in the U.S. unfolds. Interest rates staying at current levels in the U.S. (5.25 percent), or coming down slightly, inflation declining from 2.4 percent now to under 2 percent, probably mean that "the soft landing" is in place. A sharp decline in interest rates and inflation can cause turbulence in the stock markets.

o how the U.S dollar fares; if e.g. the Euro-U.S dollar conversion rate stays close to where it now stands (1.33), there would not be any negative effect, but if the rate moves beyond 1.4, this benign picture would alter.

If the "soft landing" in the U.S. materializes, there is, indeed, little to stop the Indonesian stock market from going further, and making new highs in uncharted territory. Interest rates in Indonesia will most likely continue to come down, and this will continue to make stocks attractive

The writer is CFP and FPC qualified financial planning professional.

INVESTMENT STRATEGIES FOR 2007:

Step 1: Assess your base currency

Is it the U.S. dollar, the Euro, the GBP or perhaps the IDR? As currency fluctuations are highly unpredictable, it is a sound advice to:

o Invest at least 50 percent of the stock section in your base currency (example: U.S. dollar holders investing in the U.S. stock market)

o Invest 90-100 percent of the fixed interest section in your base currency (example: Euro holders investing in Euro denominated bonds)

Step 2: Asses your tolerance for risk and diversify between asset classes

Stock markets are volatile and can experience downturns of 40-50 percent. Can you tolerate this kind of volatility and how much time do you have to recover from losses?

A guideline for allocating between the asset classes, considering your risk profile is:

Low risk : 80 percent fixed interest-20 percent stocks

Medium risk : 40 percent fixed interest-60 percent stocks

High risk : 20 percent fixed interest-80 percent stocks

Step 3 for U.S dollar, Euro, GBP investors:

o Invest 70-80 percent of your stock section in the U.S. and Europe (and most of it in the market of your base currency) and 20-30 percent in Asian markets and/or Emerging Markets;

o "Spread" the maturities in your fixed interest section by investing in bonds with short-, medium and long-term maturities. Alternatively, invest in well managed bond funds and/or inflation indexed bonds consider low risk "fund-of-fund" hedge funds", to replace part of the fixed interest section.

Step 3 for rupiah investors:

o Invest 50 percent of your stock section in the Indonesian market and 50 percent "overseas", predominantly in the U.S., Europe, and then Asian markets

o Invest at least 80 percent in Indonesian bonds with medium and long maturities and up to 20 percent in US$/Euro fixed interest funds (to diversify)

Step 4: Assess your appetite for truly high-risk investments (speculation)

If you have a desire to speculate, to get truly high returns, give this part of your financial assets a name: "the gambling envelope". Then consider:

* High growth markets such as India, China, entering these markets using mutual funds

* Playing stock index and currency futures

* Trading in options

* Investing in one stock

Be realistic with your expectations about returns in the Chinese stock market; this market may be overbought at current levels. Consider the Japanese stock market, as this has been the one market that did not perform in 2006, and so may be well positioned to catch up with the other global markets in 2007!

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Restoring Indonesia's economy to a higher growth path

Outlook 2007 December 31, 2007

Christopher Lingle, Ubud, Bali

Over the 25 years up to 1996, Indonesia experienced average annual economic growth of 7 percent while poverty declined from 40 percent of the population in 1976 to 11 percent. But this stellar performance came to a rude end during the economic and financial turmoil that swept across East Asia beginning in 1997.

Since then, attempts to restore Indonesia's economy to a sustainable path of high growth have met with limited success. As it is, annual GDP growth since 1997 averaged only 2.6 percent if 1998 is included when the economy shrank by 13 percent. Only recently has per capita income reached its pre-1996 peak.

Jakarta has taken steps that should be applauded, For example, sales of publicly-owned assets, reduced fiscal deficits and less government control of the economy helped push the ratio of public-sector debt to GDP down from a high of 94 percent in 2000 to 39 percent this year. Consequently, debt servicing payments fell from 24 percent of the total budget in 2000 to 11 percent of total government expenditure.

All these steps have helped reduce sovereign risk. As such, credit-rating agencies raised credit-rating risk on government debt with Indonesian sovereign debt now rated by Moody's as B1 and by Standard & Poor's as B+.

But improvements on the macroeconomic side have not been matched by gains on the microeconomic side. For example, unemployment has risen every year for the past 10, increasing from 5 percent to 11 percent of the labor force and underemployment is estimated to be 40 percent of the workforce.

Initially, Indonesia's economic rebound was hindered by the heavy costs of recapitalizing a collapsed banking system that were the most expensive in the world, costing 15 percent of GDP. But the biggest problem is that investment never staged a full recovery. From the late 1980s to 1997, Indonesia attracted more than US$23 billion in FDI. But since 1997, there has been a net outflow of $8.0 billion.

If there is any hope for a return to the glory days, Bank Indonesia and the central government must abandon conventional macroeconomic dogma. In particular, policy choices based on the mistaken beliefs that household consumption, government spending or exports are drivers of economic growth, should be jettisoned.

These misguided macroeconomic myths induce the central bank to tamper with interest rates to create an artificial and temporary boost in economic activity. A similar intent drives higher fiscal spending, often based upon new public-sector debt. But by themselves, neither more consumption nor higher public spending will bring a sustained rise in prosperity.

As it is, economic booms based on public spending or artificially-low interest rates are illusory and temporary. Sustainable economic growth requires increased real earnings and should be supported by increased productivity that comes from more and better investments.

But the private sector will invest more only if economic fundamentals improve. Neither the amount of pieces of paper money nor the amount of government spending or its timing can change anything real about the economy.

For its part, Bank Indonesia operates under a mistaken belief that economic growth can be fine-tuned or manufactured by fiddling with interest rates. It uses the BI rate to act as a reference for bank rates and bill sales. Lower rates are expected to induce banks to lower their rates and lend more to households and businesses to boost consumption and investment as a prelude to higher economic growth.

Artificially-low interest rates (or increased government spending) can trick consumers or business leaders into being more confident. But when temporary stimuli dry up or are reversed, new borrowing or investment inspired by higher future expectations will be unfulfilled.

A reversal of policy-induced stimuli is inevitable and occurs when consumer prices begin to rise. Then, ill-advised investments must be liquidated so that unemployment rises as the economy slows down.

In all events, lower interest rates cut both ways. Lower deposit rates discourage some amount of savings. And since the stock of real savings out of long-term income is the basis of sustainable economic growth, less saving leads to economic underperformance.

Unfortunately, the belief in voodoo macroeconomics does not end with monetary policy. Earlier this year, chief economics minister Boediono announced that public-sector spending would be accelerated in order to stimulate the economy. His game plan predictably failed because the timing of government spending, per se, cannot boost real economic growth.

Frontloading government spending cannot have a greater benefit than leaving it to a later date. But never mind timing, fantasies of economic textbooks aside, the real world provides no evidence that government spending permanently stimulates higher real economic growth. If prosperity and recovery could be conjured up by increasing government spending, no country on earth would be poor!

As such, monetary and fiscal stimulus will NOT solve Indonesia's economic problems because they boost total demand artificially. It is far better for households and businesses to be given greater control over their earnings and spending as the basis of sustainable investment so more new jobs and more wealth are created.

A third recommendation for changing Indonesia's economic policy orientation is to shift away from an obsession with export-led growth and recovery. While increased foreign demand for goods and services is a good thing, it is a poor substitute for having a healthy and competitive domestic sector of the economy.

In all events, the advantages from trading are NOT from exporting. Adam Smith view discredited this notion in his withering attack on mercantilism and imperialism in the 18th Century.

Instead, the advantages of trade are in allowing producers and consumers to buy from least-cost providers. As such, imports are a better motivator of growth since they enhance efficiency and increase real purchasing power as a basis for sustained economic growth.

And greater competition induces domestic producers to be more innovative and efficient. When such improvements bring gains in labor productivity, higher wages contribute to rising household incomes and greater consumption. Productivity gains also boost profits as unit costs decline whereby enhanced shareholders wealth boosts domestic consumption.

Then the benefits extend to the international sector since businesses can import inputs or intermediate goods that lower operating costs. Falling costs and rising productivity will then enhance the ability to export without any government policy interventions.

In the end, President Susilo Bambang Yudhoyono faces a clear choice in the approach to economic policy. He can make populist promises of redistribution that bring temporary economic gains and electoral gains. Or he can provide the leadership to promote policies that lead to sustainable economic growth.

These choices are incompatible. Up to now, he and his team deserve praise for pushing through some unpopular measures to help sort out government finances.

Their job in the future can be made easier if citizens understand that attempts to promote employment through deficit spending involve NO net gains to the economy. This is because salary payments to a new government employee create tax obligations that kill off private-sector jobs since businesses have less to spend.

The best-case economic scenario for more government spending is a "zero-sum game" whereby gains exactly offset losses. But administrative costs and deadweight losses of government spending tend towards a "negative-sum game" whereby overall losses exceed overall gains.

As such, net employment growth can only occur through undertaking by private sector actors. This can be facilitated by introducing more market-based economic reforms can reduce the barriers to business while increasing labor market flexibility.

It would also help if government interferences and regulations are inventoried so unnecessary interventions can be eliminated. Currently, the costs of doing business in Indonesia are high and uncertain since both domestic and foreign investors face a bureaucratic swamp of red tape and corruption.

Understanding that Indonesia's economic future can be brighter if better policy choices are made. It shows that whether future economic performance involves greater poverty or more prosperity is a matter of public-policy choices. As such, pessimistic and fatalistic notions like a "poverty trap" as a natural condition can and should be discarded.

Economic Minister Boediono, Finance Minister Sri Mulyani Indrawati and Bank Indonesia Governor Burhanuddin Abdullah had considerable success. For example, they oversaw economic reform to reinvigorate the local investment climate and speed up dispute resolution encountered by foreign investors. And they took steps to restore public balance sheets so the ratio of Indonesia's public-sector debt to GDP is the lowest in ASEAN (except for Singapore with zero debt).

They or their successors have to muster sufficient political will to do more to enhance the opportunities for job and wealth creation in the second largest democracy. A first step in this direction involves the realization that policies of Bank Indonesia and the central government are the main cause of macroeconomic instability and sluggish growth.

The writer is Senior Fellow at the Centre for Civil Society in New Delhi and Visiting Professor of Economics at Universidad Francisco Marroquin in Guatemala.

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Economy, not politics

Editorial January 04, 2007

We have a guarded optimism about Indonesia's economy in 2007. According to the available macroeconomic indicators from last year, there should be nothing to worry about in 2007: low inflation, falling interest rates, steady rupiah, rising stock prices and a higher rate of government spending. However, looking at the political realities, there is every reason to worry.

The year 2007 marks the third year in office for the current administration. In most democracies, the third year for an administration should be one of the best performing, but we doubt whether this applies in Indonesia. Although we are still two years away from 2009, when the country will have both legislative and presidential elections, many members of the government already seem to be focused on 2009, instead of working on the task at hand.

Therefore, we don't expect the government to make any daring moves to mend the structural problems in the country's economy, like it did in 2005 when it raised fuel prices by 143 percent to reduce subsidies. It remains to be seen whether the government will dare to touch on two of the most important but thorniest issues facing the economy: labor inflexibility and a rice import ban. These two issues are too important to ignore, especially if the country hopes to address the chronic problems of massive unemployment and rising poverty.

Despite improving economic growth last year -- as a result of higher-than-expected exports and government consumption -- the unemployment figure likely remained the same, or even rose, because, according to the World Bank, the current levels and sources of growth are not creating enough new job opportunities.

Available data show overall unemployment edging up from 10.3 percent in February 2005 to 10.4 percent in February 2006, and labor force participation falling from 68 percent to 66.7 percent, meaning that more and more people have been ejected from the formal sector into the informal sector. Worse still, youth unemployment, already high, rose even further from 28.7 percent to 30.6 percent. These unemployed young people represent a bulk of new voters, and therefore politicians wishing to ensure their support at the ballot box would be wise to figure out ways to provide them with jobs.

These troubling unemployment figures should sound an alarm for the government. The administration's failure last year to amend the 2003 Labor Law, which makes hiring and firing workers unacceptably expensive, penalized workers who do not have formal sector jobs, as well as investors. Such an investor-adverse labor law discourages investment in labor intensive sectors, which would otherwise provide a comparative advantage for the country.

It is therefore necessary for the government and the House of Representatives to address this issue. If they cannot amend the law, they should at least take measures to compensate for the legislation, like passing regulations that would provide more flexibility in severance pay and the outsourcing of labor.

Unlike labor issues, the ban on rice imports has a more direct and damaging effect on the poor. Maintaining the rice import ban means penalizing the 80 percent of the population who are net consumers of rice. Many of these people are poor, including rice farmers themselves. Keeping the ban, which only allows imports of certain amounts of rice and only by appointed importers, is a political move rather than an economic one, to protect political interests, likely for financing campaigns ahead of the 2009 elections.

If the government cannot or will not do anything about the rice import ban, it will have to work especially hard from the fiscal side to address the issue of poverty. Again, the government's almost heroic decision to cut a fuel subsidy that benefited the rich more than the poor, and to compensate the poor with direct cash transfers, was a good example of a fiscal move that benefited the poor. This policy marked a shift from a commodity-based to a direct subsidy.

We would like to suggest that the government continue shifting from commodity-based to direct subsidies. In the 2007 budget, subsidies account for 2.9 percent of gross domestic product. Many of these subsidies are commodity based, including the fuel subsidy and subsidies on electricity and fertilizers.

At the same time, the government should improve direct subsidies for the poor by refining the targeting and moving from unconditional transfers to conditional ones; for example transfers associated with educational attainment. This way, the government could kill two birds with one stone, reducing poverty and at the same time improving education.

As more and more people are lifted from poverty, and more and more unemployed people get jobs, it bodes well for the government and improves the chances of reelection in 2009. Jobs, food and low prices will make people happy, and will keep the government in office for another five years. Politicking will not do much to impress the people. After all, using a phrase from Bill Clinton, "It's the economy, stupid."

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Regional media in RI comes to life

Headline News January 04, 2007

Dr. David T. Hill, a professor of Southeast Asian Studies at Murdoch University in Australia, is on sabbatical at National University of Singapore. Dr. Hill, who likes to call himself a student of Indonesian studies with an interest in the Indonesian media, spoke with The Jakarta Post's Harry Bhaskara in Singapore about his recent research on the media in Manado and Jayapura.

How do you see the development of the media in Indonesia?

The most interesting development in Indonesian media in the past few years has been not so much in the capital but in the regions, which up until very recently had largely being ignored by analysts and academics. The loosening up of the government regulation concerning the press and the media had seen a tremendous explosion in both the volume and the quality of the kinds of media products available. This is where the most dynamic development will take place in the future.

Could you give an example?

In Manado, we had an economy which was to a large degree independent or semi-independent of the Jakarta national economy. The production of export crops, which enabled the region to survive the economic crisis of 1997, meant that there were funds available for investment in the media very quickly after the liberalization of the media.

Now we have three daily newspapers of varying quality but still in a town of perhaps several hundred thousand people. To have three reasonably healthy papers is a tremendous achievement compared to Australia, for example, where we have a very heavily concentrated media ownership and where a town of the same size as Manado may not have any newspapers.

Are these newspapers effective?

The media has responded to local demand. Formerly, I suspect the people in Manado may well have felt that the news that was important to them was not covered by the Jakarta dailies, just as people in Australia feel when they live in a small town. The national papers which are owned by very few people don't pay attention to local politics, local news.

How do you see this in the framework of the 2000 law on regional autonomy?

What we are seeing in Indonesia is a part of all these shifts to regional autonomy. Recognizing the importance of regional economies, we are now seeing a more buoyant or vibrant media at that local level. Manado is just one example, but I think it is also a good example because we see in Manado not just the print media but also the electronic media.

During the latest pilkada (regional elections) there were two private television stations covering local political events. Politicians, candidates going out to speak with community groups, were able to get their message to the local community without having to go through Jakarta and kind of come back to their own community.

What is the significance of that?

I think that is a really important foundation. For a healthy local level democracy, you have to have a local media, and you should also have a local political life and a relationship between media and politics.

How does it relate to the growth of democracy?

If you have one or two papers, one or two television stations, it doesn't mean you will automatically guarantee a local democratic climate, but it is very difficult to have a democratic climate if you don't have a wide range of views circulating in that local context.

So that is one of the reasons why the local media is important for Indonesia's future because it is important in encouraging democratic institutions, a democratic culture not just in the parliament in Jakarta.

Why did you choose Manado and Jayapura?

Up until a few years ago my concentration has been on Jakarta and on the national print media, and my research partner Professor Krishna Sen from Curtin University and I decided that we needed to be able to compare the national situation with other examples. We had spent the 1990s in Yogya so we thought we already had a reasonable comparison with one town on Java.

Manado was very different in a number of ways, very different ethnically and religiously. It was also interesting because it was on the periphery physically, almost as far from Jakarta in a sense.

We chose Jayapura partly because it was what we call a border area and again precisely because we anticipated that it would be so different to Java as well as Manado.

I suspect the kind of dynamic that we can observe in Manado could also be observed in, let say, Makassar or Banjarmasin or Padang.

How did you find Manado and Jayapura?

They are very different. In Jayapura there is still no commercial television, there are some radio stations, but more modest, and the print media, I think, are subject to economic and political pressure.

One of the features, for example, in Jayapura, in the print media, which we see also to a degree in Manado, but functioning in a slightly different way, is the importance of government funding. If we open a newspaper in Jayapura, there are about half a dozen with a variety of different views, most of those newspapers are quiet heavily dependent on advertising, which is exclusive advertising, or sponsorship, which is sometimes explicitly stated and sometimes less evident.

Sometimes it is simply an article which was written about a government policy actually paid for by the local government, but that kind of income is so important to the newspapers that there is that possibility that the local government can manipulate the content of the media very directly. I am not sure if it is happening, I am just speculating this is a potential venture.

What challenges do you see facing journalists in the regions?

I think it is a much harder struggle for the journalists in the regions. Their salary is very low, in a sense they get very little support, they don't have the same kind of model of professional behavior. In Jakarta, for example, the journalists have exemplary models of how to be a good journalist. You have people like Goenawan Mohammad or Rosihan Anwar.

The journalists in Jakarta, if they want to go and cover some events, they also have the model of the international journalists. The AJI (Alliance of Independent Journalists) does exist, but it has a handful of people. I think the AJI in Jayapura has something like 18 members.

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