Entrepreneurship key to sustainable high growth

Monday, February 25, 2008, Vincent Lingga, The Jakarta Post, Jakarta

Entrepreneurship, hardly a popular subject of scientific study at universities here, was the central theme of Djisman S. Simandjuntak's oration at a ceremony inducting him as professor of economics at the Prasetiya Mulya business school in Jakarta last week.

Djisman cited the acute lack of entrepreneurial firms from 1997 to 2005, when the number of companies decreased by 1.1 percent a year, as one of the main weaknesses of Indonesia's economy.

From 1977 to 1996, the economy grew robustly (over 7 percent annually), and the number of enterprises, small, medium and big, increased by an annual average of 6 percent. But the pace of economic growth fell sharply from 1997 to 2005, along with the financial crisis and the decrease in the number of entrepreneurs.

Studies by the World Bank and various business institutes in Europe and the United States have found a positive correlation between a broad base of entrepreneurship and economic expansion.
Entrepreneurs contribute greatly to producing and commercializing high-quality innovations, spurring productivity growth and enhancing employment creation and dynamics, because creativity and innovation are at the heart of entrepreneurial behavior.

Entrepreneurship is important for the continued dynamism of the modern economy because it is entrepreneurs that are capable of identifying business opportunities and staking out their capital in business start-ups, against all the risks.

Yet many countries like Indonesia erect regulatory barriers that make it extremely difficult to start up a new firm. Costly regulations hamper the creation of new firms, especially in industries that should naturally have high entry rates, and consequently force new entrants to be larger.
Little wonder many SMEs in Indonesia continue operating in the informal sector (underground economy), thereby denying them easy access to low-cost bank financing and other public services and facilities.

The Jakarta city government, instead of creating an enabling environment for micro and small enterprises, has been working hard since early this year to kill the entrepreneurial spirit by evicting sidewalk entrepreneurs.

The Doing Business 2008 report from the World Bank, which rated 178 countries according to their performance in 11 categories for the ease of doing business, ranked Indonesia at 123rd. Among ASEAN countries, our performance was among the worst, better only than the Philippines.

Regulatory and administrative costs obviously hinder entrepreneurial activity, dampen investment and research and development, and stunt firm growth. They can push firms out of business by absorbing too much time and resources.

Even difficult exit conditions that make it costly for firms to wind down, such as lengthy creditor claims on assets or too rigid labor regulations on severance allowances, can discourage business start-ups.

Culture is another important factor for building up an entrepreneurial society, influencing career preferences and shaping attitudes toward risk-taking and reward.
Djisman cited an important role for the government in nurturing entrepreneurship, through formal education and training (including continued education), and fostering entrepreneurial attitudes.

In major developed countries, business schools at major universities also function as incubation centers for small entrepreneurs, where innovations and creative ideas are developed and converted into commercial products.

But in Indonesia most university graduates are acutely short of entrepreneurial qualities. Hence, they look mostly for paid jobs in the private or public sectors.

A recent survey by the Central Statistics Agency found more than 700,000 university and vocational college graduates remained unemployed in 2007, more than double the number in 2006. But the actual number of jobless university graduates could be much larger because many simply do not bother to register with local manpower offices as job seekers.

Entrepreneurship thrives mostly among SMEs. Even in industrialized countries, SMEs still account for more than 85 percent of enterprises and some 65 percent of total employment, according to the secretariat of the Organization of Economic and Cooperation Development.

The role of small businesses cannot be underestimated. Nor can the challenges they face, particularly in a world where markets are globalizing and large-scale enterprises dominate so much of the government's policy making.

Yet, if the government focuses more on SMEs, so much could be achieved and a broader equity could be improved in the owners of economic assets. By encouraging more SMEs to flourish, we can realize other economic and social objectives, such as expanding worker skills and alleviating local pockets of poverty.

There are lies, damned lies and statistics

Wednesday, February 13, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Conferences on corruption or climate change and political party conventions are all headline-generating events. The National Press Day celebrations, like the event in Semarang last Saturday, are spectacular occasions for media coverage.

President Susilo Bambang Yudhoyono, who attended the press gathering, knew its importance, its ability to generate a vast amount of publicity and TV footage.

But statistics? What a boring and dry subject. Hence, most of the mass media simply ignored the national conference on statisticians, which Yudhoyono opened in Jakarta early last week.

It is glad to know that the President, amid his tight schedule, could still spare some time to open the national conference of the Central Statistics Agency (BPS). Yet more encouraging is that he fully realizes and reiterates the importance of reliable and accountable statistics for the policy and decision making processes.

A statistics office, being a government institution, is often suspected of engineering or tampering with figures to satisfy particular parties. During Soeharto's authoritarian rule the BPS was often accused, though never with any strong evidence, by government critics of fixing data or figures to massage the performance records of the government in all fields.

A fitting aphorism commonly attributed to Benjamin Disraeli states: "There are three kinds of lies: lies, damned lies and statistics."

Even now when the BPS has publicly been perceived to be strongly independent, the agency still often comes under attack from critics. More recently, for example, several analysts rejected the government's claim of a significant reduction in poverty figures as being based on flawed data provided by the BPS.

But Yudhoyono rightly reaffirmed the crucial role of the BPS in gathering reliable and accountable data which is needed for policy making, pointing out that complete, reliable data gathered with a credible methodology represented 50 percent of the whole process of policy making.

"I always believe the data collected by the BPS through surveys or censuses even though the data does not bode well for the government," the President said.

Reliable data indeed underlies our knowledge and hence our actions. The point is that the role of statistics goes well beyond the production of figures. It touches upon people's everyday lives.

When a government prepares a new budget, when businesses decide on investments, stock brokers make recommendations to clients, even when families decide which school their children should attend, all their decisions are mostly based on some sort of statistical information which is converted into knowledge and use to inform their decisions or choices.

Even one of our democratic tools, general elections, depends on statistical data on voters and the reliable counting of ballots.

The main challenge for the BPS is maintaining quality data under heavy demands: The process of defining and gathering the statistics, ensuring relevance, veracity and comparability, supplying the right metadata, such as definitions, sources and disseminating and updating, all in a fast-moving technological environment.

We live in a data-rich world in which ordinary people have become familiar with notions like inflation, imports, gross domestic product, or interest rates.

Statisticians do not take decisions but they do an important job as statistics represent a fundamental tool in developing knowledge, which in turn is vital for making evidence-based decisions.

Needless to say the government should always help safeguard the independence of the BPS and give it adequate resources to improve the quality of its surveys or censuses, which in turn determine the reliability and quality of its statistical data.

Without sound data, advice sounds rhetorical, and policy prescriptions ideological.

Many of our problems -- a sudden steep rise in the prices of certain commodities or services or an unexpected shortage of food -- are often caused by policy measures that were based on inaccurate statistical information which in turn caused an incorrect analysis.

The BPS undertakes methodological surveys and research on various aspects of our economic and social life and produces statistical data on a national, provincial, regency basis for use by the government, the people and businesses in making decisions.

Certainly, a number of critics sometimes wonder whether all of the statistical data work is nothing more than statistical overindulgence. We do not rule out the risk of statistical overload and of attaching too much importance to certain figures to create a perception or impression as desired.

While the importance of quality data cannot be overestimated, quite often it is the handling and interpretation of the data by both users and suppliers that causes problems.

One can see a half-empty glass as a half-full glass or the other way around.

But obviously what counts most is to know how to treat numbers and to develop the knowledge we need to act on them. Good decisions depend on good judgment. But there are too many things, the uncertainties of life, that we do not know.

Corrupt governance damages Soeharto's economic legacy

Monday, January 28, 2008 Vincent Lingga The Jakarta Post Jakarta

Only an economic crisis could bring down President Soeharto, a political analyst once commented in the early 1990s when the authoritarian ruler began serving his sixth consecutive term with an ever stronger autocracy.

President Soeharto's regime fell along with the economic collapse in May, 1998. That showed how crucial his economic achievements had been in maintaining his political legitimacy for some 32 years despite a stunted political system.

In March, 1967, Soeharto took over from Sukarno a bankrupt economy ruined by a decade of mismanagement and succeeded in developing it within less than 15 years into one of the economic miracles in East Asia.

The conventional explanation for Soeharto's popularity until his miserable fall in 1998 was that his authoritarian rule delivered growth, stability, security and lifted tens of millions people out of absolute poverty, though at the cost of democracy. That was what he mostly did during at least the first 15 years of what later turned out to be his autocratic rule of 32 years.

Soeharto's forceful reassertion of state power was indeed key to restoring order and stability -- the prerequisites to economic development -- because his rise to power coincided with a state breakdown and economic chaos.

But Soeharto left behind an economy in shambles causing one of the most massive destructions of wealth in modern history and plunging almost 35 million people into dire poverty.
Assisted by a strong economic team of like-minded, U.S-educated professionals under the leadership of Widjojo Nitisastro, Soeharto, immediately after taking over from Sukarno, launched what was then termed the New Order economic management and anchored in basic-needs policy measures.

With the full trust and support of the president, the closely knit team designed and implemented the whole sequence of economic policies -- from the stabilization and rehabilitation in 1967-1969 to the development stage, thereby securing policy coherence and consistency.

Soeharto's New Order regime, as his administration was eventually popularly known, succeeded within one year in controlling inflation which exceeded 600 percent in 1966 and restoring some order in government finances and international trade.

The new government regained the confidence of international creditors under the auspices of a creditor consortium called Inter-governmental Group on Indonesia (IGGI) which was later changed into Consultative Group on Indonesia and reintegrated the country into the global economy.

Encouraged by the foreign investment law that was enacted in 1967, foreign capital and technology began flowing in to the country, tapping its rich natural resources, notably oil and gas and other minerals as well as forests and fisheries and import-substitution manufacturing industry.

Luck was on also Soeharto's side. The quadrupling of the international oil prices set off by the political instability in the Middle East in 1973 pumped windfall profits into the state coffers.
With the influx of foreign investment, combined with a surge in oil revenues, steadily increasing foreign development assistance from IGGI donors and, yet more importantly, prudent economic management, the government accelerated infrastructure development and bolstered the pace of economic growth.

With the state coffers flush from the oil windfall and foreign aid and investment pouring in, the government built more roads, dams, power generation, telecommunication and transport infrastructure.

Being himself the son of a farmer and familiar with abject poverty in the rural areas, Soeharto put agriculture and rural development on top of his policies right from the outset when his first five-year development plan was launched in 1969.

He allocated a great portion of the state budget for building irrigation networks, the provision of agricultural extension services and fertilizers, pesticides and the development of high-yield rice strains.

He was honored by the United Nations Food and Agriculture Organization in Rome in 1985 for his outstanding achievements in making largely populous Indonesia self-sufficient in rice supply.
Soeharto poured a similarly huge investment into the development of education by building more schools, into health by building more rural health service centers and promoted family planning to control population growth.

This strategy -- basic-needs economic programs with emphasis on agriculture and rural development anchored by prudent fiscal and monetary management -- generated an annual average economic growth of more than 7 percent from 1968-1980. Growth declined to about 5 percent a year from 1981-1988 due to falling oil prices and a weakening global economy but rose again to an annual average of almost 7 percent between 1989 and 1996.

The broad-based growth lifted tens of millions of people out of dire poverty.
However, Soeharto's economic management began to suffer from market-distortion policies in the mid-1980s as his six children who entered the business world demanded monopolies in various sectors. Assisted by Soeharto's business cronies (mostly Chinese Indonesians), the Soeharto extended family and his relatives built up an economic empire at the cost of prudent economic management.

Corruption, collusion (between Soeharto and his business cronies) and nepotism increasingly seeped into Soeharto's administration as he became even more authoritarian and increasingly depended on a patrimonial power structure.

His economic management further suffered from more bad policies in the early 1990s after Soeharto diluted the role and influence of U.S.-trained technocrats, who quietly showed their uneasiness with the ever-expanding rent-seeking activities of his children and relatives.
He replaced the technocrats with nationalists and technologists led by B.J. Habibie, then notoriously as a big-spending minister behind several high-tech yet commercially unfeasible projects.

The corruption became a brake on growth and a drain on Soeharto's legitimacy.
Yet, the economy was still able to continue growing amid all the bad governance practices due to the steady flow of foreign soft loans from sovereign and multilateral creditors and foreign direct investment and favorable global economic conditions.

However, as the East Asian economic crisis -- which began in Thailand in July, 1997 and spread to Indonesia later in the same year -- panicked foreign investors and creditors rushed to pull out their money. This capital flight bared all the weaknesses of the economy, triggering first the melting of the rupiah and then the collapse of the financial system, causing an unprecedented destruction of wealth.

So fragile had been the foundations of the economy left behind by Soeharto that growth deteriorated to a contraction of almost 14 percent in 1998 and the rupiah exchange rate plunged to as low as Rp 10,000 to the dollar from Rp 4,000 in late 1997.

More than 25 years of steady growth generated new challenges in income inequality and weak institutions and a basic need for democratic system of checks and balances.

However, pressures from his greedy family members and relatives and business cronies and his patrimonial system made Soeharto blind to these new concerns and eventually caused his downfall, leaving behind a soup of a broad-based economy floating on a corrupt bureaucratic system as his legacy.

Obituary: Sadli among New Order's architects

Friday, January 11, 2008 Vincent Lingga, The Jakarta Post

Modesty was the foremost impression of many who met the professor Mohamad Sadli -- despite his role among the nation's decision makers and his wealth of knowledge.
Born in Sumedang, West Java on Jan 10, 1922, he died at the Cikini General Hospital in Central Jakarta late Tuesday at an age of 85.

Perhaps the most outstanding member of, and spokesman for, the so-called Berkeley Mafia -- the selected group of Indonesian economic scholars educated at the University of California, Sadli was one of the few technocrats who always spoke their mind even under Soeharto's authoritarian rule.

He is survived by his wife Prof. Saparinah Sadli, whom he married in 1954. Former leader of the national women's human rights body, like her husband she was also a professor at the University of Indonesia.

Sadli and his economist colleagues, including Widjojo Nitisastro, Emil Salim, Ali Wardhana and J.B. Sumarlin played a key role in fashioning Indonesia's economic development for more than three decades until the mid-1990s.

Sadli contributed to his nation, more than any other, through his decades at the university and government. He continued contributing to public policy debates long after he left both institutions, through newspaper articles and comments he regularly made until the last few months of his life.

Indeed, few have written more economic and socio-political analyses or have given so generously of their time and energy toward the interests of their nation.

As chairman of the Technical Committee for Capital Investment, the embryo of what is now known as the Capital Investment Coordinating Board, in 1967-1973 Sadli was responsible for promoting foreign direct investment immediately after the enactment of the 1967 foreign investment law (recently replaced by the new investment law).

His impeccable integrity and high ability to candidly and honestly explain the full perspective of Indonesian economic prospects and challenges and its social and political problems has been widely regarded as responsible for regaining foreign investor interest in Indonesia soon after the anti-Western campaign by the then president Sukarno in the mid-1960s.

He simultaneously held another important portfolio as the minister in charge of manpower development in 1971-1973, before being appointed the minister for mining in 1973-1978, after which he had remained outside the government. He continued making his great contribution to the national economy through his lectures and analyses in various newspapers and periodicals.

Different from most of his economist colleagues, Sadli was an engineer, graduating from the School of Engineering at the Gadjah Mada University in Yogyakarta in 1952, before he pursued his graduate economic and engineering studies at the Massachusetts Institute of Technology in 1954-1956 and post graduate economic studies at the University of California in Berkeley. He went on to gain a PhD in economics at the Jakarta School of Economics, University of Indonesia, in Depok in 1957.

It was his engineering background that perhaps enabled Sadli to consistently come up with straight, direct-to-the point answers to almost any economic issues, unlike most other economists who tend to ramble with long explanations and without much substance.

While a champion of the market economy as the most efficient mechanism for resource allocation for the benefit of the people, Sadli recognized the constantly competing camps of market efficiency and social justice, comprehending the inter-linked nature of economics and politics.

For more than four decades until 2006, he still wrote regularly for Kompas and Tempo and Business News bulletin and became perhaps the most widely-quoted analyst, because he made himself available to journalists with his valuable commentaries on economic and political issues.

Sadli was one of the technocrats who saw the great importance of developing adequate capabilities for industrial associations to hold policy dialogs with the government on an equal footing.

On an invitation, he became the secretary general at the Indonesian Chamber of Commerce and Industry in the early 1980s. There he remained for almost 10 years, acting as the chief of the chamber's policy think-tank (research department) which, from time to time, made policy recommendations and came out with sharp analyses of government policies and state budgets.

Rest in peace Pak Sadli.

It really isn't such a bad investment climate

Wednesday, December 12, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The public debates over the role of tax holidays in attracting investment that Chairman of the Investment Coordinating Board (BKPM) Muhammad Lutfi revived last week could distract the government from the real reforms needed to reinvigorate the economy.

After a limited Cabinet meeting last Wednesday on economic policies chaired by Boediono, Lutfi told reporters the many investors in capital-intensive industries might flee Indonesia to Singapore or Malaysia because the latter two countries offered tax holiday facilities. Lutfi was quoted by Kompas daily as saying a bio-diesel producer in Riau was considering moving its plant to Singapore, which offered a 15-year tax holiday.

Boediono asserted the next day the government had no plan to provide tax-holiday incentives to investors, arguing that such a facility was not the main factor considered by businesspeople in making investment decisions.
Boediono said most investors looked primarily at the quality of the investment climate -- the political and macroeconomic stability, policy predictability and legal certainty.

He said the government, therefore, was still focusing its reforms on developing good governance practices in areas such as tax administration, customs service, licensing bureaucracy and other components of regulatory and legal frameworks.

Tax incentives, Boediono added, were now limited to tax allowances offered to particular investment ventures in the form of a deduction from taxable income -- up to 30 percent of the investment amount -- and accelerated depreciation of fixed assets.

He said the tax holiday offered during the 1980s failed to significantly attract the kind of investment the government wanted to promote in designated sectors and locations.

In fact, many investors, in collusion with BKPM and tax officials, had misused the tax holiday facility by manipulating the dates of the start-up of commercial production, thereby extending the period of the tax relief.

Indeed, the tax holiday incentive has never ranked prominently in the list of grievances aired by domestic and foreign investors in opinion surveys. Their main considerations for investment decisions covered the main factors Boediono cited above.

After all, tax is paid from profit or income. And most companies lose money anyway in the first year of operation.

Investors in the country often complain about tax issues relating to inefficient and corrupt tax administration and taxation regulations that put taxpayers at a disadvantage vis-a-vis tax officials.

The tax holiday incentive has a negligible impact on investors' decisions when such basic issues as the effectiveness of the judiciary and the ability to uphold and enforce contracts still rest on uncertain ground as they do in Indonesia.

It is these non-economic factors, in addition to excessive red tape, not tax policies, that have been the main reasons behind the lack of foreign direct investment in the country.

Reform measures in tax administration, customs services, labor regulations and strong law enforcement -- currently the main target areas of government reforms -- will have a much larger impact on attracting investment.

Low corporate income tax rates contribute significantly to attracting investment. The 30 percent tax allowance incentive the government recently gave to 52 companies could also help direct investment to particular locations or business areas.

But even such tax incentives would be meaningless if the tax administration is largely inefficient and corrupt.
The government is well advised to realize that special incentives, such as tax allowances for investment, are not substitutes for good governance and sound macroeconomic policies.

Unfortunately, Indonesia is still ranked very low in most of the key building blocks for good investment climate.
The World Bank 2008 Doing Business report, which rated 178 countries according to their performance in 11 areas relating to ease in doing business, ranked Indonesia in 123rd place. Even among ASEAN countries, Indonesia's performance was among the worst, better only than the Philippines.

Investors prefer good governance because this factor reduces the costs and risks of doing business and minimizes barriers to sound competition. The rationale is that strong and consistent law enforcement is key to minimizing government policy-related costs and risks as those regarding regulations on taxation, customs, labor, local autonomy and basic infrastructures.

Strong legal certainty in turn helps build the credibility and certainty of government policies, which is important for both domestic and foreign investors because direct (not portfolio) investment is basically forward-looking or long-term in nature.

Investors expect risks associated with changes in such factors as market competition and customer behavior but the government can offset these risks by helping maintain a stable and secure regulatory environment for doing business. Not by granting tax-holiday incentives.

Anti-monopoly body shoots Temasek, hits govt

Wednesday, November 21, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The market may simply ignore the Business Competition Supervisory Commission (KPPU)'s ruling against Temasek, its subsidiaries and Telkomsel. It will most likely be business as usual for Telkomsel, which was found guilty of breaching the anti-monopoly law on Monday by a panel of KPPU judges.

The KPPU ruling that Temasek and its subsidiaries shall divest themselves entirely of their stake in either Indosat or Telkomsel will not either have an adverse impact on the shares of these two mobile operators.

After all the market has become too familiar with the many questionable or even absurd rulings of the Indonesian antitrust body. In fact many of the KPPU's previous decisions in high-profile cases, though seemingly constructed from well-documented evidence, have been overturned by appellate courts either on technical or procedural grounds.

We understood that some bizarre rulings were unavoidable during the first few years after its launch in 2000, as KPPU staff and commissioners were still learning the ropes of their jobs. But the KPPU should have by now built up an adequate body of expertise to competently judge anti-monopoly cases.

However, its latest verdict, on the high-profile antitrust case against the Temasek group and Telkomsel, which is majority-owned by government-controlled Telkom, raises a lot of questions not only about its technical competence but also the integrity of KPPU commissioners.

Certainly, Temasek will appeal to the district court and the Supreme Court, though entering the court system in the country may plunge the Singapore government-owned investment company into another imbroglio.

The problem is that, unlike in many developed countries, there are no specific district courts here assigned to handle antitrust cases, which usually involve complex business deals. Hence, there is not a single court which has enough judges with an adequate body of expertise to examine cases related to the law on business competition.

But simply paying the fines and divesting its indirect stake in either Indosat or Telkomsel means acknowledging it has committed business sins and such an admission will damage its reputation all over the world.

A ruined reputation would adversely affect Temasek investment operations overseas on which this government's investment holdings have relied increasingly for incomes.
The KPPU ruling indeed puts Temasek in a very delicate position.

Therefore there is no other alternative for Temasek but to fight it out up to the Supreme Court, even with all the uncertainty about the legal proceedings and final results.

Since the KPPU ruling also requires divestment, this case may also be eligible to be filed with the World Bank's arbitration body, the International Center for the Settlement of Investment Disputes (ICSID) in Washington. The question, though, is whether Temasek -- which in the perception of the Indonesian government and general public is synonymous with the Singapore government -- is willing to pursue such a lawsuit at the risk of causing severe strains on bilateral relations.

But the KPPU's decisions are also a rebuke to the Indonesian government, as they reveal how utterly incompetent it has been in appointing directors and commissioners (supervisors) to Indosat and Telkomsel.

The fact is the government-controlled Telkom owns 65 percent of Telkomsel and 14.5 percent of Indosat, while Temasek, through its subsidiaries, holds only around 19 percent of Telkomsel and around 31 percent of Indosat. In addition, the government also owns a golden share in Indosat that provides it with a veto right over major corporate actions.

How could the government-appointed directors and commissioners, which make up the majority of the boards at both mobile telecommunications companies, allow Temasek to collude with Telkomsel in abusing its market dominance and committing other monopolistic acts?

But all in all, we should give credit where credit is due. The KPPU should be commended for its ruling that each buyer of the stake Temasek and its subsidiaries will sell either in Indosat or Telkomsel cannot acquire more than five percent.

This ruling at least will kill the rumor that a big foreign investment company, eagerly looking for investment opportunities in telecommunication in Indonesia, was behind the KPPU move on Temasek.

However, national and foreign investors eying stakes in Indosat or Telkomsel should have patience because, based on the KPPU ruling, Temasek shall complete its divestment within two years after the KPPU rulings become final and binding. This means more than 27 months from now (after all of the appeal process is completed) or even much longer if Temasek brings the case to the ICSID in Washington.

Oil prices only going up, analysts warn

Wednesday, November 14, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Shell International BV analysts Choo Khong and Peter Snowdon forecast here Tuesday that international oil prices would go nowhere but upwards, and that fossil fuels -- oil, natural gas and coal -- would continue to dominate the energy mix until 2025.

"What matters is not the actual number, whether it is US$100 or something else, but the direction of oil prices, which is firmly upwards with some volatility," noted Choo when presenting Shell Global Scenarios to 2025.

They shared the views of the International Energy Agency that China and India, given their sheer sizes and robust economic growth, would play increasingly important roles in the international energy markets.

The Shell report says that China, having doubled its oil demand over the last decade to 6.4 million barrels per day at the present time, has become the world's second largest oil consumer, accounting for almost 40 percent of the increase in global oil demand.

Yet more worrisome in terms of oil demand is that the energy intensity of China's economic growth, like that of most other developing nations, will continue to increase until the next decade, reaching as high one barrel of oil equivalent for each US$1,000 of output.

So what governments do in the policy field now in order to improve energy efficiency will determine the global energy landscape, energy security and rate of climate change ten years down the road, Snowdon said.

"Measures to improve energy efficiency are the cheapest and fastest way to curb demand growth," he said, while urging governments to put in place incentives and policies that stimulate energy efficiency measures and investment in fuel conservation.

According to the Shell report, the annual increase in proven oil reserves in the world has slowed down from 4.5 percent in the 1980s to one percent in the 1990s, and new oil discoveries have been getting smaller in size.

Hence, Snowdon added, there is now a tightening in the supply-demand balance.
The message from the IEA's World Energy Outlook, which was issued last week, is even starker.

It warned that if governments around the world stick to existing policies, the world's energy needs could well be more than 50 percent higher in 2030 than today, with China and India together accounting for 45 percent of the increase in global energy demand.

Snowdon said that fossil fuels -- oil, gas and coal-- continue to dominate the energy mix worldwide. Of these, coal is set to grow most rapidly, driven largely by power-sector demand in China and India.

The IEA predicts that the consuming countries will come to increasingly rely on imports of oil and gas from the Middle East and Russia, while net oil imports in China and India combined will jump from 5.4 million barrels/day in 2006 to more than 19 million barrels/day in 2030, which is larger than the combined imports of the U.S. and Japan today.

According to Shell, the question now is which price mechanism can be relied upon to generate the appropriate signals, investment and technological developments.

The IEA is more blunt in its policy recommendation, urging governments to let market forces do their job more effectively by removing fuel subsidies that hide the true energy costs.

In many countries, including Indonesia, oil prices often do not reflect the real and full costs of the energy because of government subsidies, thereby hindering the viability of investments in energy efficiency and renewable energy.

Government subsidies keep the gasoline price in Indonesia half the price as that paid by people in Singapore.

But because of the generous subsidies for oil fuels, the oil market in Indonesia has failed to function well as there is no significant demand response to price signals.