Lease out Batam to save economy<\/p>\n
By Steven Susanto and Hario Suprobo<\/p>\n
JAKARTA (JP): Past success in developing the country was made
\npossible by a large inflow of foreign capital. The capital
\nallowed us to exploit domestic resources for the benefit of a few
\nmembers of privileged families through the widespread abuse of
\npower and facilities in the form of corruption, collusion and
\nnepotism. Personal gains were the single focused pursuit of most
\nkey decision-makers in the public and corporate governance.<\/p>\n
Business institutions functioned as the most effective vehicle
\nfor generating personal gains at the expense of their liquidity
\nand profitability, as indicated by sluggish productivity
\nimprovement and depreciating exchange rates.<\/p>\n
The deteriorating solvency of public and private enterprises
\nwas disguised by the continued inflows of overseas capital and
\ndomestic liquidity expansion from the banking industry. The
\ninsolvent domestic institutions were accidentally exposed by the
\nlarge-scale outflow of capital in the second half of 1997 which
\nwas triggered by the spillover of the currency crisis in Thailand
\nand weakening economic fundamentals. The extreme depreciation of
\nthe rupiah introduced the crisis.<\/p>\n
The crisis resulted in an enormous compression of domestic
\ndemand leading to high unemployment and low rates of capacity
\nutilization. The huge rupiah depreciation has ignited rapid
\ninflation and swelled the rupiah value of external debts. A
\nsevere liquidity squeeze due to a domestic scarcity of external
\nfinancing ruined the balance sheets and the profit and loss
\nstatements of domestic financial institutions and nonfinancial
\ncorporations with considerable foreign currency exposure.<\/p>\n
Massive withdrawals of funds from the banking industry have
\ndried up cash reserves of an increasing number of banks, leading
\nto a worsening solvency in financial markets on top of the major
\nstagnation in the real sector.<\/p>\n
A shameful episode was then colored by dreadful social turmoil
\nin mid-May. Substantial losses on the economic front tragically
\nadded up within a very short time. The social unrest crippled
\ndistribution networks and expedited shortages of essential goods,
\nin addition to dramatic deterioration in the investment climate.
\nMost domestic and foreign investors headed for the exits
\nfollowing the crash. They continue to stay away from the
\ncountry's battered economy and its dire markets. Indonesia has
\nlost the confidence of both domestic and international investors
\nand producers.<\/p>\n
Production is expected to stagnate further and aggregate
\noutput is forecast to fall by 10 percent. We fear that the
\neconomy is sliding into deeper stagflation due to the large-scale
\nflight of domestic and foreign capital out of the country, which
\nadopted an open capital account regime. Moderate modification of
\nthe regime is worth considering in a bid to escape the potent
\npossibility of another radical and preposterous slide in the
\nrupiah.<\/p>\n
A renewed slide in the rupiah is already apparent and has
\ndealt a serious blow to the domestic and foreign currency markets
\nas well as stock and bond markets. Fears of a looming depression
\nhas hit market sentiment and caused both domestic and foreign
\ninvestors to remain sidelined. Bearishness seems to last long and
\nhas weighed down the markets. The shattered markets resulted in
\nthe decline in asset prices that magnified the drying up of
\nprivate financing and instability in financial markets across the
\nboard. Consequently, the country is presently lurching toward
\ndefault.<\/p>\n
The existing stocks of basic products may not be sufficient to
\nmeet domestic needs for the next five months. Domestic production
\nand distribution are expected to fall sharply since an increasing
\nnumber of companies have closed down their operations after
\nlaying off their employees.<\/p>\n
We are doubtful that banks can remain sound in view of their
\nilliquid and unprofitable performance which has led them to a
\nstate of insolvency. Our GDP continues to shrink at an
\naccelerating pace to exacerbate stagflation. Excessive
\nunemployment and spiraling inflation have become alarming, and if
\nprompt measure are not initiated the rate will become intolerable
\nin a few months.<\/p>\n
Without a quick resolution of the crisis, widespread hunger
\nwill cause further large-scale social turmoil and the country
\nwill be subject to further devastation, loss of property and
\nbusiness, and threaten people's lives.<\/p>\n
We believe that Indonesia must be reformed and recapitalized,
\nand that both programs should be implemented simultaneously.
\nHowever, the latter is more important than the former in terms of
\npriority. Recapitalization constitutes the necessary condition,
\nbut it is not sufficient and therefore should be complemented by
\nreform. Recapitalization is more urgent since it would keep the
\nIndonesian economy from collapsing in the immediate future.<\/p>\n
Reform should nevertheless be carried out to address
\nfundamental weaknesses in the public, corporate and financial
\ngovernance as highlighted by the crisis. Economic fundamentals
\nmust be good to justify any investment. The ingredients of the
\nIMF-supported programs that aim at reforming the economy are
\nlaudable and beneficial except for the contractionary measures on
\nwhich the IMF insisted. The IMF, through its multibillion dollar
\nbailout in exchange for the contractionary measures the
\ngovernment has to adopt, only offered a dangerous pill that may
\nin fact kill off the patient.<\/p>\n
The economy is in worse shape because of the policy slippages
\nadvised by the IMF. As a result, the government has tripled
\ninterest rates to a mind-boggling level that brought semi-
\ncollapse to the financial and real markets. The growth-impairing
\nmeasures only serve to deepen the crisis as Indonesia swallows
\nits bitter and damaging pill from the IMF. The contractionary
\nmeasures have caused job losses and an economic impasse.<\/p>\n
The government should expand the shrinking economy by applying
\nexpansionary measures. The ongoing contraction has to be offset
\nby expansionary policies to bring the country out of its
\npredicament. The country is presently gripped by deepening
\nstagflation that has resulted in escalating poverty.<\/p>\n
The contractionary fiscal and monetary policies threaten the
\nsaliently susceptible supply of essentials. We suggest that the
\ngovernment cease exercising contractionary strokes which cause
\nfurther contractions of the economy, and instead commence
\napplying expansionary fiscal and monetary measures to expand the
\neconomy. It is an odd hoax from the IMF office to declare that
\nthe Indonesian economy is overheated in the present era of rising
\nunemployment and idle and dormant production capacity.<\/p>\n
The inevitable need for expanding the shrinking economy leads
\nus to the second program of recapitalization, which is more
\nurgent than the first program of reform in terms of time,
\nattention and resources. The country needs considerable funds to
\nexpand its beleaguered economy and finance its recovery.<\/p>\n
The years of easy money disappeared when confidence in
\nIndonesia ebbed and one key to regaining confidence is a robust
\nexpansion of the economy. The unnecessary tightening of monetary
\nconditions has to end to avoid nationwide calamity since the
\nsystem will run out of the energy needed to feed its people in
\nless than five months.<\/p>\n
Although we disagree with the idea of printing more money, we
\nnevertheless believe that only through a large-scale fund
\ninjection can Indonesia escape from its most daunting peril.<\/p>\n
Last month's large capital outflow, which resulted in the
\ndramatic compression of domestic demand, has to be compensated
\nfor by a large capital inflow to fuel the sluggish economy and
\nactivate inactive resources. It is quite risky to rely solely on
\nthe US$43 billion fund that the IMF brokered to bail out
\nIndonesia's ailing economy because of its insistence on
\ncontracting our economy through contractionary policy slippages.<\/p>\n
In addition to the inadequate amount of the bailout fund and
\nits emphatically slow and tough disbursement, we view that it
\nwould be wiser to always rely on our internal resources as the
\nmain base and treat external aid as additional revenue to allow
\nthe Indonesia government to determinate the fate of this country
\nand its people.<\/p>\n
To reverse the ongoing contractionary spiral before the system
\ndisintegrates, we conclude that the magnitude of capital inflow
\nshould be at least $50 billion. The amount of required capital
\ninflow would compensate for the abrupt and enormous withdrawal of
\ncapital out of the country through capital outflows.<\/p>\n
The amount of financial energy that disappeared is projected
\nto surpass $100 billion since our gross estimate on the total
\namount of foreign direct investment in Indonesia since 1967 is
\nabout $90 billion and the size of private sector external debts
\nabove $75 billion.<\/p>\n
To meet the resolution, we explored the following question:
\nWhat available but marketable resources do we have?<\/p>\n
After reviewing and exhausting all viable alternatives from
\nall internal resources that can generate fresh funds in the
\nneighborhood of $50 billion to $100 billion in less that five
\nmonths from now, we eventually arrived at the most viable
\nsolution.<\/p>\n
We should lease out Batam island to any prospective tenants.
\nIn addition to Batam island, we could also prepare Bintan island
\nto ensure that the amount is sufficient to reactivate the
\nlethargic and inactive wheels of development.<\/p>\n
Our lack of national credibility rules out a lot of realistic
\npossibilities of raising some $50 billion in five months to
\nsalvage the country from its internal blowout. However, because
\nof limited time and budget constraints, we view Batam island as
\nthe only leasable asset that meets our urgent need for reversing
\nthe increasing contraction of the economy.<\/p>\n
Needless to say that this major breakthrough ought to go hand
\nin hand with the privatization of state-owned enterprises which
\nthe government is endorsing.<\/p>\n
The writers are members of FEUI 1978 group who based this
\narticle on a discussion within the group. Members of the group
\nenrolled in the University of Indonesia's School of Economics in
\n1978.<\/p>",
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