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A tale of two economic plans.

Management is doing things right; leadership is doing the right things. Peter Drucker.

01/10/03

As the New Year kicked off a few days ago, there are two interesting developments in two different countries on how their governments set their plans to overcome economic problems faced by the two countries. In the US, President Bush laid down his plan in his speech in Chicago last Monday, revealing a $674 billion package that is aimed at spurring economic growth while at the same time creating much bigger budget deficits for the future. President Bush also proposed eliminating taxes on corporate dividends paid to shareholders, a measure that could cost the government $300 billion over 10 years. In his speech, Bush stressed the priorities of his economic plan: To create jobs, increase economic growth and create more economic opportunities.  Deficit is a secondary issue.

In a different economy, Indonesia - a country that has long suffered from economic crisis – is also presented by its government with a new economic stimulus: Reducing subsidies on vital goods such as rice, oil, gas and electricity in order to keep the government budget balanced.  The policy, as explained by the coordinating ministry of economics and finance, Mr. Dorodjatun Kuntjoro-Jakti, is aimed at stimulating economic growth. The order of priorities is: Deficit, economic growth and other unclear targets.

The Bush’s plan, which is basically focused on his tax cut proposal, is negatively viewed mainly by the Democratic Party which so far does not have a clear and sensible plan except their critic that the Bush’s economic plan only benefit the rich people and the whole plan is simply wrong. Senate Democratic Leader Tom Daschle, for instance, took to the airwaves to deride Bush's tax cut plan as "the wrong idea at the wrong time to help the wrong people."

"The president's plan won't help middle-income families, it won't contribute to economic growth, it won't make our homeland more secure, it won't expand educational opportunity for the young or strengthen Social Security for the elderly," he said. "Instead, by putting us deeper into deficit and debt, it makes all of those things harder to achieve."  Source: CNN.

While Senator Harry Reid of Nevada, the Senate's assistant Democratic leader, on the NBC News program "Meet the Press" said, "When they direct their tax programs to benefit the very, very, very few and eliminate the majority from any benefit of these tax cuts, it is class war."

But the Republicans in Congress said the analysts' statistics were a diversion, because many middle-income and lower-income people do not pay any federal income taxes.

Senator Rick Santorum of Pennsylvania, the third-ranked Republican in the Senate, for instance, said, "You've got to start out with the fact that about 37 percent of the people in this country don't pay federal income taxes.  Those are the folks you're going to have to give tax cuts to." Source: New York Times.

And today, on Jan 10, Vice President Dick Cheney said that about 35% of the people who invested their money in stock market are the folks who have annual income below 50 thousand dollars.  About 45% of the people who invested their money in stock market have annual income below 100 thousand dollars. These numbers suggest that the tax cuts on stock dividends not exclusively benefits the riches but also the middle class people.

The former US presidential candidate from the Green Party leader and Consumer advocate, Ralph Nader also raised objection to the Bush’s plan saying that the lower class should be the focus of economic plan by increasing the minimum wage.  Nader, In the Crossfire program aired by CNN, said, “"Why do you have to stimulate the economy when there's huge unused capacity, when there's plenty of capital around, and when interest rates are at historic lows? The issue is to stimulate economic demand. And the way you do that is you start a public works program by paying for it by getting rid of the huge hundreds of billions of corporate welfare that CATO and Heritage and other think tanks have documented and decried. And second, you [increase] the minimum wage.”

Defending the issue of raising minimum wage, Former U.S. Rep. Bob Walker, in the same program, said,  "I think in a stagnant economy that to impose extra costs on small business will simply drive that small business out of the market and will decrease the number of jobs in the country."

There is no street demonstration so far protesting the Bush’s economic plan.

While the Bush’s economic plan is under critic mainly from politicians from a different political Party, the Megawati’s economic policy is under fired from the mass people. Tax cut and subsidy reduction are two opposite issues. While the former will tend to stimulate more investment and spending, the latter will do just the opposite.  Subsidy reduction is never a popular issue. Remember the long debates on subsidy on agriculture products between the US and European Community which had slowed down the Uruguay Round in the 80s and early 90s?  

But why Megawati opted for such unpopular policy. The policy is not only a suicidal political move, but also economically is subject to criticism.

Already the subsidy reduction which means an increase in prices of vital goods sparked protests across the country. About 10,000 students and workers staged a noisy but peaceful rally in Makassar, South Sulawesi province against steep increases in fuel and utility charges.

In Jakarta hundreds of students picketed the parliament building, urging legislators to ask the government to cancel the price increases.  On Thursday, Jan 9, thousands of workers and students staged protests in 19 cities and towns across Indonesia in the biggest challenge to the price hikes so far.  Similar protests were staged in Ambon and Indonesia's second largest city Surabaya.  Source: The Jakarta Post.

In Bandung in West Java province and in Central Java's Semarang, protesters torched effigies of Megawati. Demonstrations had also hit the cities of Surabaya in East Java province, Denpasar in Bali, Medan in North Sumatra and Makassar in South Sulawesi. Source: The STUFF.

But, despite the mounting protests, the government still strongly defends its policy.

"The government will not change its policies in the case of the price increases in fuel and electricity and telephone rates because this is a joint political decision together with the House of Representatives," Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti said after a Cabinet meeting. .

Djatun also said that gradually the government must reduce subsidies to zero by 2004 in order to pave the way for larger development allocations, which in turn were expected to stimulate the economy. Source: The Jakarta Post.

The basis for the government policy of reducing subsidy on fuel apparently based on the research conducted by the Institute for Economics and Social Research, Faculty of Economics, University of Indonesia (LPEM-UI). The study shows that poor Indonesians only spend 0.2 percent of their total incomes on fuel and electricity consumption, compared to some 8 percent spent by middle-class Indonesians. This year, the subsidies on fuel products are estimated at Rp 13.2 trillion (US$1.5 billion), far below the Rp 43 trillion set for last year.

Reactions from economists are somewhat mixed. Commenting on the government decision to raise fuel prices, telephone rates and electricity charges policy, economist Sjahrir said that economically the decision is a must. However, he stressed that the real problem actually is the government is lack of credibility.

“… And you cannot blame people for that. Let's look for more rational things at the micro economic level, like the people who work in the textile industry.

Now more and more smuggling of textiles is happening. They can't think about exporting, even in the domestic market they have problems in selling their textiles. And now they also have to face the fact that while the government is not able to stop the smuggling, it instead increases the tariffs of electricity. For sure that will be a double jeopardy for them,” said Syahrir.  Source: The Jakarta Post.

Economist Didik J. Rachbini said the government had unfairly shifted the burden of the economic crisis to the people, who had been unable to raise their incomes because the government had failed to spur economic growth.  The Indonesian Consumer Foundation (YLKI) said it will create serious economic hardship for the people and urged Indonesians to protest. While economist Muhamad Ikhsan said that the increased prices were inevitable, as they had been postponed several times.

Real Issues

For five years, majority of Indonesian people have suffered economically and socially. It is estimated that there are more than 40 millions of people are living in poverty and about 38 millions of people are unemployed (or equivalent to an unemployment rate of 35%).

The massive private debts committed by unethical and corrupt business people, which become public debts after the government intervention, had limited the government’s options for raising funds in order to balance its budget. Ironically, until now there is none of the bad business people arrested and have their personal assets seized. On the contrary, President Megawati issued a controversial decree that rules out criminal charges against business people who have finally “settled” their huge debts to the state. How and how much exactly these debtors paid their debts are remained mystery to the public. 

In a similar context, the public will never understand why the House of Representatives Speaker Akbar Tanjung and Bank Indonesia Governor Sjahril Sabirin, despite the fact that the two were convicted in graft scandals, are still not jailed.  President Megawati also defends the Attorney General, Abdul Rachman, who had been accused of failing to include a villa in a posh Jakarta neighborhood and a number of bank accounts in his compulsory report to the Public Servants Wealth Audit Commission (KPKPN).  Ironically, a former prosecutor who first revealed Rachman's alleged financial wrongdoings, Kito Irkhamni, has been jailed and charged with embezzlement.

Economic policy does not live in a vacuum.  Any economic plan in Indonesia will be ineffective unless it also deals with the most dangerous disease in the nation: Corruption.  But as it turns out, Megawati’s government is just as weak as the Suharto’s regime on this issue. Reducing subsidy has nothing to do with corruption eradication. In fact, it may trigger more corruption as the government has more money to be corrupted.

Majority of people know who are the villains, but the government apparently shuts down any opportunity to punish them. It is this psychological condition, coupled with the prolonged economic hardships, that has driven the people’s outrage over the government policy to reduce subsidies on vital goods.

So, who is to blame? Just like any success or failure of a team or a nation, all praises or blames are rest upon the shoulder of the top leader. If the Bush’s economic plan fails to create jobs and revive the US economy, he will be in trouble in the 2004 election.

Politically, the Indonesian government policy is a suicidal move, unless it could really bring jobs to the people in the short run. Muslim scholar Nurcholis Madjid for instance already said, “They can criticize Megawati all they want but don’t topple her from the presidency. Just don’t elect her again in the general election in 2004.”  Source: Tempo Interactive.

But common people knew that Megawati, a former household wife, does not have a strong political goal driven by her personal ambition like Hillary Clinton in US or Margaret Thatcher in UK. As Rizal Mallarangeng, a political analyst and informal adviser to Megawati, said, "We are dealing with somebody who does not have any political ambition.  She became president because of the force of events, not because she drove events to achieve her ambition." (In Megawati in the Middle by Ellen Nakashima Washington Post Foreign Service Thursday, December 12, 2002; Page A30).

No wonder why her leadership is so weak. When Megawati is also surrounded by incompetent and corrupt aides, the problems become much more serious. While Megawati may be a weak leader, it is the people around her - from Cabinet members, family member, advisers and including other powerful group that backs her - who are actually the sources of the problem.

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