Our Ado about CGI (Part 2 - Finished)

In his article on CGI in Kompas, economist Iman Sugema says that a group of economists has convinced the government that CGI was still needed; and that even today a lot of people still believe that we must seek advise from westerners--a legacy, he alleges, that has been passed on to us since the days of colonialization and which reflects the impotence of the educated to get out from the trap.

Ironically, though, the next thing suggested is for Indonesia to look for domestic sources of financing. While this may answer the question on how the country can borrow better, it already assumes that the poor country does need to borrow, like fish needs water before it can live.

Behind the suggestion lurks a fallacy that such debt is harmless because "we owe it to ourselves." Iman’s suggestion contains two fundamental errors. While most of the arguments here rest on Robert Murphy’s (see footnotes), they add up to my arguments in the previous posting.

First, it ignores the fact that not all Indonesians are equal. Most Indonesians are non-taxpayers. Any debt incurred by the government can only be paid back through taxing its subjects. By taxing us. With the notoriously low taxpaying rate this country is, only a “handful” of tax-paying citizens will suffer on net while more people get away Scotch free.

(Here, I am not implying the government should tax more or should tax more people. I almost go along with Tata Mustasya when he, quoting Adam Smith, reminds that the government ought to practice easy taxing—except that I have to add here that his good reminder will probably just evaporate into air, since virtually nobody reads Smith anymore, the paradigm of our age having been such as to maintain the disastrous doctrines summoned once by Lord Keynes while most economists today preoccupy themselves in molding them so as to meet postmo needs.)

Second, it reflects too common a failure in seeing the perils of debt. Deficit spending is no mere accounting exercise. When our government buys, it eats up resources. And these resources might have been devoted to other purposes, e.g. to the production of capital goods.

It makes a difference if the government, with tax revenue of say Rp 500 trillion, decides to spend Rp 500 trillion versus Rp 1,000 trillion. If the government decides on the later case, it will reduce the amount of gross investment, and, in effect, production in future decades will be lower than otherwise.

Should we overlook the fact that foreign individuals and governments are financing our wastefulness by buying RI bonds? Does domestic borrowing mean “we owe it to ourselves?” Apparently, not so.

At least Binny Buchori is being more careful in her article saying that if Indonesia needs to borrow, it has to advance with some conditions: all debt will have to comply with international conditions on aid effectiveness--namely that the disbursed funds should be for the need of Indonesia, not to procure goods or services from crediting countries, and that it takes the form of untied loans. Well, I say, her idea on struggling for debt reduction is worth trying.

The most pertinent question the Indonesian people must address is: do we need to borrow? Why, what should we borrow for? To date, no clear explanations have ever been given as to why our government has repeatedly borrowed. We do not know what items within the state budget have required repeated borrowing. Thus investigation and scrutiny are in order.

As far as we are concerned, we must demand ourselves to stop thinking in aggregates. We must be clear with this fundamental issue before our government can, if ever, walk down the borrowing path again.

Sources:

Binny Buchori, Setelah CGI Berlalu, Kompas 31 Jan. 07,
http://www.kompas.co.id/kompas-cetak/0701/31/opini/3277750.htm

Iman Sugema, Agenda Pasca-CGI, Kompas 30 Jan. 07
http://www.kompas.co.id/kompas-cetak/0701/30/opini/3275732.htm

Robert Murphy, Government Debt Has No Upside, Jan 16, 06,
http://www.mises.org/story/2006

Tata Mustasya, Ilusi Tentang Pemerintah, Kompas 29 Jan.07, http://www.kompas.co.id/kompas-cetak/0701/29/opini/3263582.htm

Our Ado about CGI

As soon as the media released the news about the government's decision to discontinue the Consultative Group on Indonesia forum, the next days’ edition of the same media harbored comments from anybody who is somebody in the political and economic realms on the very issue. High time that the government made that decision. Politically it should count as a plus. It’s a brave move, an official release from the ministry of finance went on to say. In this post I’d like to use the momentum to share a bit on the unseen, as well as to *celebrate* my own comeback to the blogosphere. ;p)

At first blush, the decision to kiss the CGI goodbye would seem a bravado all right, except a nullifying remark from the minister herself that Indonesia would still resort to its three biggest lenders—which right away enjoy automatic leverage in terms of bargaining position.

Today is already the tragic tomorrow when effects of the policies committed in the near and distant pasts by the “know-all” government and its mighty lenders materialized in … complications. New policies, meanwhile, are in the pipelines, not to mention the ones being contrived as most Indonesians are still in the slumber land.

Back to the drawing board; with both the government and its lenders equally perplexed at the scantily meager results after the so much money has been thrown away, the decision then serves as a sort of point zero, from which the government and its lenders refresh stamina from near fatigue and past failures that can thus be ushered to the dustbin of history, reserved for antiquarians.

New officials come while old ones go. By nature, none of them can outlive the life of an institution called a state. For which mortals can go in debt forever and get away with it forever? Only a state, which can mortgage its land through borrowings to be paid through the nose by its citizens (even unborn ones).

Any discerning economist and citizen would notice there’s been no shift nor alteration whatsoever in our government’s paradigm and attitude in the decision. The heart of the problem has been the disastrous lack of understanding of what fiat money is and the misguided attitude toward deficit.

Practically every macroeconomics textbooks in the world says it is okay to have budget deficits. There is nothing wrong with them per se. In actual fact: even a single, one-time budget deficit that gets perpetuated is a disaster whose consequences are as necessarily certain as chickens would come out of chicken eggs.

And even if our government decided on a balanced budget starting today to infinity, the burdens from past deficits would haunt us for the rest of our lives :((