OECD growth ideas and our national remedies

Thursday, July 31, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Some analysts and many politicians in Parliament may reject the Organisation for Economic Cooperation and Development (OECD) economic policy recommendations for the Indonesian government last week as another one-size-fits-all formula, simply a copy of the "infamous" list of dos and don'ts within the Washington consensus on the virtues of liberalization, deregulation, privatization and free markets.

Even without the upcoming parliamentary and presidential elections next year, the OECD reform recommendations -- which include a further easing of restrictions on foreign investment, further market liberalization, more flexible labor regulations to make it easier for companies to lay off workers, and privatization of state companies -- have always been difficult.

The tone and central theme of the first Economic Assessment of Indonesia by the Paris-based OECD feel very much like the annual report on the Indonesian economy the World Bank used to prepare for the now defunct Consultative Group on Indonesia creditor consortium.

The OECD study seems still too focused on the common formulae and strategy across widely differing developing country conditions, acutely short of country and context-specific solutions.
Having said all that, this doesn't mean the OECD policy options, including those on the need for bigger investment in infrastructure, health and education, are irrelevant to our economy.
On the contrary, evidence has shown that successful economies -- those which are able to post high growth for a long period -- have pursued almost all the policies recommended by the OECD.
They have by and large been implemented by such successful emerging economies as South Korea, China, Thailand, Singapore, Malaysia, Vietnam, India and, to a certain extent, even Indonesia.

These successful economies have many things in common: macroeconomic stability, fiscal discipline, fairly effective government, market-based incentives, adequate investment in infrastructure, health and education and engagement with the global economy.

The main issue for our government is how to sequence and set priorities of the needed reforms so as to make them economically feasible and socially and politically acceptable.
The biggest challenge for the government is to focus on narrowly targeted reforms, proceeding step by step, to discover local solutions.

Several economists cited the gradual reform approach launched by China's Deng Xiaoping in 1978 -- crossing the river by feeling for the stones -- which created the most spectacular period of steady, high economic growth and poverty reduction.

It is the job of both the government and Parliament to devise the right recipe, the right growth concept and strategy most suitable to our economic condition and political complications, using the policy recommendations of the OECD only as the ingredients.

Take for example the recommendation for the easing of labor regulations, one of the reform measures all foreign investors have asked for since 2003 because the labor code has been seen as too rigid, hindering new investment and consequently job creation.

In the absence of an adequate social safety net and unemployment insurance system, however, the government should tread carefully in easing the labor regulations, otherwise the pace of job destruction will exceed job creation.

The gradual reform of the labor code should be designed, however, to protect people, not jobs. This requires measures to make it easier for workers to acquire new skills and enter new trades.
Put another way, labor reform should include programs designed to increase labor mobility across the various sectors of the economy. Most important is that the necessary rules and institutions are well placed to safeguard the basic rights of labor and defend workers against exploitation, abuse, underage employment and unsafe working conditions.

Likewise, the OECD view on the importance of foreign direct investment (FDI) is quite legitimate. An adequate inflow of FDI is vital not only because of the financial capital it brings but, sometimes more important, the concurrent transfer of skills, innovation and ideas to the national economy. FDI brings in knowledge about foreign production techniques, foreign markets and international supply chains.

Just look how our banking industry as a whole has benefited from local bankers who once worked for foreign banks such as Citibank, Standard Chartered, ABN Amro, HSBC, etc.

Then again, the main challenge here is how to strike the right balance between national interests and the need for foreign capital and expertise and for the exposure of national businesses to international competition. The government needs to put the demand it puts on foreign investors in balance with the alternatives provided by other countries competing for foreign capital and expertise.