Jakarta is flooded (with money)

Feb 7th 2007
From Economist.com


The case for more and better public spending

MUCH of Indonesia’s capital, Jakarta, was under water this week, after heavy rains overwhelmed drainage systems. At least 36 were left dead and around 340,000 homeless. The disaster underlined the need for more and better public works, from drains and water pipes to electricity and roads.

In the aftermath of the 1997 Asian economic crisis Indonesia had a good excuse for public neglect: lack of money. It was laden with debt, and no-one was keen to lend more. But things have changed. Successive governments have worked hard to improve national finances, through reforms including deep cuts in fuel subsidies last year.

A World Bank study due next week is expected to conclude that Indonesia now has plenty of cash available to invest―but seems to have lost the knack of doing so.

The bank thinks 2007 could be a year of great opportunity, if Indonesia can only take advantage of its improved finances and get moving on economy-boosting public works. It takes a similar view of the Philippines, South-East Asia’s other giant democracy.

Indonesia’s public debt has fallen below 40% of GDP, cutting interest obligations. The country recently declared “independence” from the International Monetary Fund, having paid off the last of its loans. The Jakarta stockmarket and the rupiah have been strong, reflecting foreign investors’ renewed interest. This week, as the government was preparing to issue up to $2 billion in bonds, it got a boost from Moody’s, a credit-rating agency, which said it was considering an upgrade.

But despite all the improved fundamentals, the World Bank reckons that Indonesia's investment in infrastructure, both public and private, amounts now to only 3% of GDP, against 5-6% before the Asian crisis.

President Susilo Bambang Yudhoyono is fond enough of drawing up grand plans for public works. But politics keeps them on the drawing board. Stephen Sherlock, a political scientist, says vital legislation gets stuck in frequent stalemates between president and Parliament, both of whom need to approve it.

Another obstacle to investment, strangely enough, is Mr Yudhoyono’s campaign against corruption. For fear of being hauled before a new anti-corruption court, civil servants have become reluctant to sign documents authorising public spending.

A third problem is the decentralisation that was a key part of Indonesia’s democratisation. Provincial and municipal governments now get 40% of all tax revenues, but have not yet worked out how to spend the money efficiently. The World Bank reckons they have cash to the tune of 3% of GDP idling in their bank accounts.

Things are much the same in the Philippines. Quarrels between presidency and parliament have meant that this year’s budget has only just been passed. All public works will be halted again soon, ahead of congressional elections in May, for fear they might be used for electioneering. This week attempts to auction the national electricity grid to private investors failed for a fourth time. As in Indonesia, firms are deterred by inadequate, outdated laws and weak property rights.

Unlike, say, Brazil, where there is a strong case for taxing less and leaving more money in people's pockets, South-East Asian countries tend to tax lightly. There would be plenty of space for private investment, as well as public, if only regulation and administration worked better. Indonesia and the Philippines have thrown off authoritarian regimes only recently: it is understandable if they go a bit heavy on the checks and balances. But the price of these is sluggish government, and lost opportunity.