A matter of will
Many people assumed that the economy would automatically recover as soon as the government of President B.J. Habibie won the approval of major aid donors for its handling of the economy. It is now clear they could not have been more wrong. Two weeks since the government signed the latest letter of intent with the International Monetary Fund, the rupiah's exchange rate -- the barometer measuring people's confidence in the economy -- still hovers between Rp 14,000 and Rp 15,000 to the dollar, with no sign of improving any time soon.
The President does not seem to have any problem convincing aid donors to come up with large cash pledges. In the past three weeks, the Asian Development Bank has disbursed $1.5 billion, the World Bank $1 billion, Japan has come up with a plan to help finance Indonesia's export and import activities, and the United States has started mobilizing food aid for Indonesia. The World Bank has also appealed to other donor governments to come up with more cash at a meeting of the Consultative Group on Indonesia in Paris later this month.
In normal circumstances, such a strong international vote of confidence from foreign governments and official lending agencies would have been sufficient to convince private investors, local and foreign, to follow suit. Alas, this is not the case now. Investors need a lot more convincing from the government than mere pledges of economic reforms given to aid donors. While donors may base their aid on compassion, investors are motivated by profit. That means some form of basic guarantee of the safety of their investment is needed. Habibie may have met many business leaders, but he has done very little to create a climate conducive for them to invest once again in Indonesia.
For one, there is the question of the prohibitively high interest rates that would kill off most investment plans. The government has kept interest rates high as part of its policy to try to strengthen the rupiah's exchange rate. Initially this was to be a temporary, shock-therapy measure. But with the rupiah remaining stubbornly low, high interest rates are now becoming a permanent feature of the economy at the expense of investments. The repercussions of this will be felt in the years to come.
An even bigger deterrent to investors is the uncertainty of doing business in this country. The wave of protests and riots that led to the resignation of Soeharto in May undermined investors' confidence. But even with Habibie firmly embedded in power and the protests becoming rarer and smaller, and with the military firmly in control, investors are still reluctant to resume their activities in Indonesia. This is because confidence in the new government, and its ability to provide the minimum guarantee for conducting business, is low.
Habibie may have promised a lot in his meetings with various business leaders, but he has not regained their confidence. The May riots have left a sour aftertaste among entrepreneurs whose businesses were destroyed. How the riots' aftermath is handled reflects the government's ability to uphold the law and to protect the business community. Foot-dragging in the investigation into the riots is not helping the government's cause to win back the confidence of the business people.
The revival of the private business sector must be made part of any government strategy for an economic recovery. Habibie must appease investors as much as he has convinced foreign aid donors. He cannot ignore investors, of whatever ethnic background, for they are the ones who create wealth and jobs in this country. Investors, as we have seen, are not asking for much. They just want a greater legal and political certainty. This should not be hard to provide, but it needs political will. This, sadly, is lacking in the present administration.