IMF's role in post-election Indonesia<\/p>\n
By M. Sauri Hasibuan<\/p>\n
JAKARTA (JP): The multifaceted crisis in Indonesia is the
\nresult of an improper macroeconomic framework established by the
\ngovernment. This framework has a dominant mode of thinking which
\nasserts that the proper operational objective in public policy is
\nto promote the highest possible rate of economic growth. Such
\npolicy-makers contend that the best way to promote such growth is
\nthrough the infusion of new input in the form of new investments.
\nWith a deregulated banking system and a liberal money market,
\nenterprises have over-borrowed domestically as well as offshore.<\/p>\n
This article will briefly analyze the role of the
\nInternational Monetary Fund (IMF) in the Indonesian economy and
\nwill raise several concerns. Where have all the billions gone?
\nWho lent what and to whom? What did the money do there?<\/p>\n
In Indonesia the collapse of the exchange rate set off a chain
\nof events, beginning with the monetary crisis and the rapid
\ndepreciation of the rupiah. In turn, there was an economic crisis
\nwith enterprises, including banks, faced with an inability to pay
\ntheir debts and to continue operations. This fueled a social
\ncrisis with massive underemployment and poverty and then there
\nwas the continued political instability.<\/p>\n
It is a cruel irony, because prior to mid-1997, on average
\nIndonesia enjoyed 7 percent growth each year, a factor that led
\nIndonesia, together with other economies in Southeast Asia, to be
\ndubbed "economic miracles". Such was the positive outlook that
\nthe "country doctors" (to borrow Paul Krugman's term) at the IMF
\nand the World Bank, by nature of their position, considered
\nIndonesia the next Asian model.<\/p>\n
A very important footnote, however, needs to be put to this
\nvery rosy picture, namely that wealth distribution has been
\nwidely uneven in the country. Large sections of the private
\nsector, notably farmers and other small-scale producers have
\nlargely missed out on sharing the fruits of the "miracle"
\ndevelopment. Farmers and other small-scale producers constitute
\nabout two-thirds of the private informal sector of the economy.
\nWithin the remaining one-third of the private formal sector there
\nhas also been substantial maldistribution of economic resources.<\/p>\n
Furthermore, maldistribution of investment was coupled with
\ndisproportionate benefits of growth for the urban sector compared
\nto rural areas. Such a factor was unavoidable because a priority
\nin investments is toward projects and activities that can produce
\ngrowth in output and services.<\/p>\n
It is the urban industrial sector and relatively large
\nenterprises that have the capacity to produce the needed growth.
\nSuch logic may be correct in the short-term, but is not correct
\nin the long run. Nor can such growth become sustainable, because
\nby definition the basis is narrow. Growth for a time may be
\nuplifted through injections of substantial investment funds
\n(including World Bank and IMF money) through the banking system.
\nBut as the crisis has so clearly demonstrated, such "bubble"
\ngrowth can be sustained only for a relatively short period of
\ntime. In difficult times like these, nobody wants to be held
\nresponsible for the money they borrowed from domestic sources or
\nabroad, as many of these companies belong to the former
\npresident's sons' or the ubiquitous minister's nephew.<\/p>\n
The real critique of the IMF, and one we should worry about,
\nis the accusation that it has failed to understand the root
\nelements of the Indonesian crisis, ones described in the
\npreceding paragraph. Having assisted Indonesia for quite a long
\ntime, the IMF and the World Bank should have realized that fund
\nutilization in the past was channeled into various governmental
\nagencies, and had minimum supervision.<\/p>\n
Big projects and investments had to receive approval from the
\nelite and politically connected businessmen. Many of these
\nbusinessmen only acted as sleeping partners, extracting fees and
\nremaining in the background without making significant decisions.
\nSmall-scale producers, street vendors and most notably farmers
\nhardly enjoyed the benefits of the funds. What happened here is
\nthat the private sector knowingly or unknowingly, willingly or
\nunwillingly, accepted a fallacious framework for its activities.
\nThe government, the IMF and the World Bank bureaucratic elites
\nhave together been responsible for this fallacious framework.<\/p>\n
The crises in Indonesia exemplify the operational philosophy
\nof complete separation of the government and the private sector
\nin the pursuit of society's economic objectives. The reason why
\ndomestic enterprises have been able to borrow from abroad without
\ntighter control from monetary authorities is that the government
\ndoes not, and thinks it should not, monitor how much money has
\nbeen borrowed from abroad. It was not the business of a
\ngovernment to monitor such debts or credit movements by the
\nprivate sector. Such monetary movement was left to the market. As
\na consequence, Indonesia has one of the most liberal monetary
\nregimes in the world.<\/p>\n
The operational philosophy of separation provided a
\nlegitimate basis for non-transparency in transactions involving
\npublic funds. Transactions involving government funds were
\nstrictly government business; outside parties did not need to be
\ninformed of such matters. An attitude of non-transparency opens
\nthe doors for inefficient practices, including the practice of
\ncorruption, collusion and nepotism (locally known as KKN), which
\nwas found to have occurred in the past during disbursement of IMF
\nand World Bank funds.<\/p>\n
In the case of IMF money, a large proportion of the funds must
\nbe distributed to the most vulnerable elements of society. Social
\nsafety net programs cannot be implemented effectively unless all
\ngovernments operate in a transparent and accountable manner at
\nall levels. To the greatest extent possible, the public must have
\naccess to such information. The government should ensure public
\naccounts are open to public scrutiny. The role of civil
\nsociety is most crucial at the national and local levels, where
\nparticipation should be fostered by providing access to decision-
\nmakers and public hearings on matters of importance. Indonesia
\nmust slowly free itself from dependence on IMF and World Bank
\nfunds.<\/p>\n
Apart from the IMF program, the next government will have some
\nimportant decisions to make about the nature of Indonesian
\ncapitalism. The bank restructuring agency is now sitting on
\nUS$33.8 billion of assets acquired from the owners of a handful
\nof failed banks. These must be sold off. To these might be added
\nassets of the New Order's regime and families. The next
\ngovernment will also need to develop and implement a competition
\npolicy, something Indonesia has never had.<\/p>\n
The condition of the Indonesian economy suggests that cronyism
\nand corruption, whether organized or disorganized, can levy
\ndevastating costs on the economy. It also reduces investment with
\nits potential for arbitrary actions by state officials. Moreover,
\nit reduces competition by granting permits to the highest bidder
\nrather than to the most efficient user.<\/p>\n
In the meantime, there will be demands from indigenous
\nIndonesians for a bigger share of government contracts and credit
\nschemes. There is also the question of who really owns
\nIndonesia's vast natural resources, now that they no longer
\nbelong to the New Order's cronies and children. To a large
\nextent, therefore, the next government will need to do much more
\nthan just steer the IMF's chosen course. It must decide what kind
\nof economy Indonesia is going to have.<\/p>\n
The writer is the business development manager of PT Airindo
\nBersih Jaya.<\/p>",
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