Economic reform without misery?<\/p>\n
By Omar Halim<\/p>\n
This is the first of two articles examining the prospects for
\nIndonesia's economy in light of the signing of a reinforced
\neconomic program mid this month by President Soeharto and the
\nInternational Monetary Fund (IMF) managing director Michel
\nCamdessus.<\/p>\n
JAKARTA (JP): President Soeharto signed on Jan. 15 an
\nagreement revising and strengthening an earlier economic program
\nwith the IMF.<\/p>\n
The basic aims of this program are to:<\/p>\n
* Restore confidence in the Indonesian rupiah as quickly as
\npossible.<\/p>\n
* Include all extra-budgetary resources in the budget and bring
\ntransparency into the budgetary process.<\/p>\n
* Rationalize public expenditure, limiting it to "those items
\nthat are of vital importance to the country".<\/p>\n
* Take the initial steps toward undertaking reforms to strengthen
\nthe long-term competitiveness of the Indonesian economy.<\/p>\n
Before commenting on this program, it is imperative to comment
\non the need for Indonesia to seek the assistance of the
\ninternational community.<\/p>\n
In seeking assistance to resolve a major problem, which it
\ncould not fix on its own, a country should be prepared to cede
\npart of its sovereignty, since in return for obtaining outside
\nresources and support it has to undertake certain corrective
\nmeasures that it could not, or did not want to, take on its own.<\/p>\n
But it should not have to undergo the humiliation of having
\nthe managing director of the IMF glaring down, with folded arms,
\non the head of state signing the agreement to obtain that
\nassistance.<\/p>\n
Unlike other ASEAN countries, such as Thailand -- and as
\nSumitro Djojohadikusumo and Mohammad Sadli have concluded -- the
\ntremendous lack of confidence is no longer a reflection of the
\neconomic problem alone -- it is rooted in the political
\nfoundations and other problems faced by the country.<\/p>\n
The IMF package alone is therefore no longer sufficient to
\nrestore confidence.<\/p>\n
As the performance of the rupiah -- after the President had
\nindicated his willingness to run for another term and implied the
\ntype of person he would like to have as vice president --
\nrecently showed, it is where the country and the economy are
\nheading in the next five years that will determine whether
\nconfidence will return.<\/p>\n
It is therefore imperative that a regime which could elicit
\nfull trust, be elected to lead the country in the next crucial
\nfive years.<\/p>\n
This regime should comprise leaders who are widely accepted
\nand respected, by the different groups and layers of Indonesian
\nsociety, and supported by technically competent people. They
\nshould be able to undertake essentially three types of reform:<\/p>\n
* Economic and financial reform (to be undertaken immediately).<\/p>\n
* Political reform<\/p>\n
* Reform of the judiciary.<\/p>\n
With the prospect of such reforms in the next five years, the
\ncountry would be turned into one that would be governed more
\ntransparently, rationally and with fairness. There seems to be no
\ndoubt that confidence, especially among Indonesians, would
\nreturn.<\/p>\n
Capital flight would stop and new capital, local and foreign,
\nwould flow into the country. The rupiah would strengthen
\nconsiderably in expectation.<\/p>\n
Economists and financial traders have been attributing the
\ncollapsing rupiah to the US$65 billion corporate debt overhang.<\/p>\n
It has no doubt been putting a lot of pressure on the rupiah,
\nbut, it is argued here, that it is a supplementary influence in
\nthe free fall of the Indonesian currency.<\/p>\n
The lack of confidence has substantially decreased the supply
\nof U.S. dollars to be exchanged for rupiah, and the need for U.S.
\ndollars to service corporate debts and, presumably, small-scale
\ncapital flight, has resulted in the increasing volatility of the
\nthin U.S. dollar market.<\/p>\n
The magnitude of capital flight is hard to determine, but a
\npolitical change would no doubt assuage capital owners.<\/p>\n
With regard to corporate debt, a moratorium and other
\narrangements have been proposed.<\/p>\n
Despite the understandable reluctance of the government to
\nassume these debts, it is imperative that it acts immediately to
\ncalm the situation.<\/p>\n
For example, the government could bring together the
\nIndonesian debtors to assess the extent of their indebtedness and
\nto strengthen their collective bargaining position.<\/p>\n
In this way, they could be brought together with the creditors
\nin order to arrange for possible rollover, moratorium, discount
\nor other mutually acceptable solutions.<\/p>\n
This should alleviate considerably the need to purchase
\nforeign currencies. Then the rupiah might strengthen further to
\nlevels closer to Rp 4,000 or Rp 5,000, and remain stable.<\/p>\n
The high interest rate policy would not, under this condition,
\nbe required to stabilize the exchange rate. Reasonable interest
\nrate levels could be used, at an appropriate time in the future,
\nto stimulate investment, and consumption, which would in turn be
\nsources of economic growth.<\/p>\n
This stability would enable the economic agents to plan their
\nactivities, particularly the manufacturers who produce goods for
\nexport.<\/p>\n
At present, it is conceivable that exports have decreased
\nbecause of the uncertainties caused by the huge swings in the
\nexchange rate.<\/p>\n
With a significantly depreciated rupiah -- as long as the
\nimport content of their products is relatively low -- they should
\nhave a considerably strengthened competitiveness in international
\nmarkets.<\/p>\n
But exports would not increase sharply overnight, especially
\nthose whose markets were other ASEAN countries. Exports should,
\nin the long-run, be a crucial demand component for Indonesian
\nmanufacturers as an engine of growth.<\/p>\n
Consumer demand, in light of the sharp deceleration of the
\neconomy anticipated for this year, will no doubt decrease
\nsubstantially.<\/p>\n
Investment demand, in light of decreased consumer demand,
\nshould also plummet, and there could even be a disinvestment.<\/p>\n
The decrease in consumer demand and investment will
\nparticularly be exacerbated by the banking sector being in
\na shambles.<\/p>\n
The writer is a research fellow at the Center for Strategic
\nand International Studies. He retired from the United Nations two
\nyears ago.<\/p>",
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