Jakarta can't spend a way to prosperity
By CHRISTOPHER LINGLE
Special to The Japan Times
UBUD, Indonesia -- Indonesia's chief economic minister, Boediono, along
with Finance Minister Sri Mulyani Indrawati and Bank Indonesia Gov. Burhanuddin
Abdullah are credible and competent bureaucrats. They put forth an action
agenda of economic reforms designed to reinvigorate the local investment
climate and to speed up the resolution of disputes with foreign investors.
But President Susilo Bambang Yudhoyono should worry about the advice his new
economic team has given him. News reports indicate that they are offering a
noxious cocktail of wishful thinking, nonsensical nostrums and macroeconomic
mumbo jumbo.
According to Boediono, Jakarta will accelerate and boost spending to stimulate
the economy. Part of the plan is for the government to spend 10 trillion to 15
trillion rupiah during next year's first quarter.
If the government's game plan is for these steps to boost real and sustainable
economic growth, it is easy to predict failure. After all, if prosperity and
recovery could be conjured up by increased spending by governments then no
country on earth would be poor!
In all events, front-loading government spending into the present cannot have a
greater benefit than were it left to a later date. The fantasies of economic
textbooks aside, the real world provides no evidence for government spending
permanently stimulating higher real economic growth.
As it is, the problem with the Indonesian economy is that government officials
control too many resources taken from private-sector actors. As the Indonesian
government has a poor track record for probity and efficiency, it is better to
refrain from taking so much away from the private sector, which can use it more
effectively.
But these woeful results differ only as a matter of degree from public-sector
failures in other countries. As elsewhere, the incentives faced by public
officials do not motivate them to do the right thing.
Unlike private-sector actors, public officials spend someone else's money on
someone else. This makes them less cautious. And if the money is badly spent or
lost to waste or corruption, it is unlikely that bureaucrats will be fired or
politicians held directly accountable.
The private sector will increase investment only if economic fundamentals
improve. And neither the amount of government spending nor its timing changes
anything real about the economy.
There is also an illusion that lower interest rates engineered by the central
bank can boost economic activity. While there can be a temporary spurt of
higher growth, it inevitably and always gives way to rising consumer prices.
This is because, in the real world, something must first be produced to provide
income to resource owners that provides them with the capacity to consume. New
or more government spending involves an attempt to allow consumption without
the prior supporting supply conditions being in place.
What happens is that increased spending by households or businesses is based
upon paper debt or artificially cheap credit. The extent to which this approach
works to raise overall production is not sustainable because the government
cannot borrow indefinitely and the central bank must stop prices from rising.
When either the government or the central bank or both throttle back on their
expansionary policies, the economy will adjust back to its previous position.
And so it is that sustainable economic growth requires more saving, which
allows increased investment in capital as the basis of greater specialization
and an expanded division of labor. These investments allow labor productivity
to increase so that real wages can rise. This process can provide the basis for
sustainable increases in both production and consumption.
Without the support of increased earnings by increased productivity, economic
booms based on spending are illusory and temporary. The usual result of
artificially low interest rates and deficit financing to manipulate demand is
an orgy of politicized overspending and high public debts that lead to
recession and inflation.
As such, consumption should be seen as the result and not the cause of growth.
An exception can arise if expansive central bank policy leads to excessive
credit expansion that creates an artificial and temporary sense of increased
prosperity. But either inflation or overexpansion will cause profitability to
collapse to the extent that businesses must contract production and employment
levels.
Cutting interest rates under the dictate of central banks or finance ministers
also has an obvious downside. Low interest rates hurt retirees that rely on
past savings for consumption, and reduce the incentive to save more. Less
saving is undesirable from an economic viewpoint since there are fewer real
funds available for long-term investments.
Monetary and fiscal stimulus will not solve Indonesia's economic problems
because the aim is to boost demand artificially. It is far better to leave
households and businesses with greater control over their earnings and spending
as the basis of more sustainable investment that will create new jobs and more
wealth.
Christopher Lingle is senior fellow at the Center for Civil Society in New
Delhi and professor of economics at Universidad Francisco Marroquin in
Guatemala.
The Japan Times: Jan. 6, 2006
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