Abdurrahman should not repeat Soeharto's failings

In an interview with The Jakarta Post, the economist and political observer of Indonesian economic and political affairs Dr. Howard Dick, identified "a strike by capital" as the root of Indonesia's current dilemma.

Excerpts of the interview with the associate professor at the Department of Economics and Management at the University of Melbourne. was conducted by The Jakarta Post Melbourne-based contributor Dewi Anggraeni.

Question: How would you sum up the massive capital exodus?

Answer: During the financial crisis of 1997-1998 many of Indonesia's leading business families systematically stripped their legally incorporated and often listed companies. The modern sector melted down as assets were liquefied and transferred offshore as private family capital.

The banking system was systematically looted of funds to finance this massive transfer of capital. What was left were piles of memorandums of understanding (MOUs), which the government was obliged to take over. It was socialism by default.

Contributing to the meltdown of the modern business sector was the alienation of the Sino-Indonesian business elite after the May 1998 riots in Medan, Jakarta and Solo (Surakarta). Leaders of the old regime bear a terrible responsibility for this. While the Sino-Indonesians are still doing business in Indonesia, they are now more wary than ever of investing fixed capital.

Q: Can some patriotism be revoked in those businesspeople to have them repatriate their funds?

A: It makes little sense to blame business for shunning Indonesia. Business is basically a profit-seeking activity. Firms prosper or fail on their profit performance. They have little choice but to accept the constraints of the business environment.

Foreign investors behaved very differently when the crisis hit Thailand and Korea. They rushed in and bought. But in Indonesia they fled and stayed away.

Q: How do you explain this rather idiosyncratic behavior?

A: In Indonesia, foreign investors now face a high political risk, which translates into a high country risk. This offsets the attractions of cheap labor and cheap asset prices at the highly depreciated rupiah exchange rate.

Foreign investors already committed to Indonesia can do good business but Indonesia remains unattractive to new investors. There are many alternatives, even within Southeast Asia.

Q: Given the stalemate in efforts to improve the banking sector, would you say the Indonesian Bank Restructuring Agency is hamstrung or lacking in political will?

A: It is hard to sell banking assets at a good price when foreign and domestic investors are unwilling to pay good prices. Then there are all the complications of political interference.

Q: Can you give examples?

Let us look at a scenario. If you are going to buy a bank, you are going to do the required amount of research on the bank. You will want to identify all the assets and liabilities of that bank. Assets and liabilities of former owners, patrons, and any other deals that may have been done, and what efforts have been made to withhold, or suppress information on these activities.

In Indonesia, as we know, there is a problem with transparency. That's what threw up the whole Bank Bali scandal, for example. Naturally, people will be reluctant to buy banks, if they are not confident that they really know the financial positions of what they are buying, and the degree of control that they can exercise over the assets that they do buy.

That is part of the problem of marketing these assets in an environment where there is not a great deal of foreign interest in the Indonesian financial sector.

Q: Some observers say the Indonesian economy is not so bad at the moment. Export of electronic goods went up from 9 percent to 17 percent, and consumers are spending...

A: That is right, the economy is better than we might have feared in the circumstances. Consumption spending has recovered and exports are buoyant. These are good signs for an early stage of recovery. However, to have a sustained recovery, we need more incoming investment.

Q: Is the current recovery not enough to push growth?

Recovery is a process. In 1997-1998 the country's economy had a sharp contraction which very few countries ever experience. Naturally, the contraction created a lot of access capacity. So the economy has the potential to grow reasonably quickly for three or four years without much new investment. You can meet the growth demand simply by using working capital to hire more labor and purchase materials using the existing capacity.

However, this cannot go on forever. The question is, when in some industries the capacity limits are reached, are the owners of those industries prepared to spend more to expand them?

If they are not, there is not going to be more growth out of those industries.

Q: When do you think they will reach saturation point?

A: They won't all reach it at the same time. Some, like the electronics sector are growing much faster than others, some are very sluggish. Take the property sector, urban office space for example, they will take a lot longer. It is going to be an uneven process.

Q: Can Indonesia improve its economy without injection from outside?

A: Investment is eventually necessary to expand capacity and to upgrade technology and skills. It does not have to be investment by foreign multinationals.

Indonesia's more serious problem at the moment is that it has scared away domestic capital. Much of the domestic capital that fled Indonesia at the time of the Asian crisis is still parked overseas. Some of this has filtered back to top up working capital, or in the guise of foreign investment, but many businessmen, especially Chinese-Indonesians, are wisely diversifying their portfolio by leaving funds invested overseas, in Singapore, in Hong Kong, in Australia, in Canada, and so on.

The fundamental problem is how to restore the confidence of Indonesia's own business class. If that is achieved, foreign investment will follow. If local joint venture partners are reluctant to invest, it is hard to persuade foreigners to do so!

Q: The Consultative Group on Indonesia has approved a new loan of US$4.8 billion and a grant of $500 million. Many in Indonesia are worried that the country is only sinking further into debt. Do you think this attitude is too conservative, and should they be more daring?

A: If Indonesia is confident of continuing economic recovery, then it is sensible to speed up the process by borrowing now and repaying later. If recovery is likely to be shortlived and the exchange rate to sink again, then borrowing is not such a good idea.

Either way, borrowing should be for productivity-raising activities that enhance the nation's capacity to repay. There must be concern if borrowing is being used just to top up the budget.

Q: Is borrowing not being used to top up the budget at the moment?

A: To some extent it is being used to reduce the amount of the budget deficit to the point accepted by the International Monetary Fund (IMF), reducing the disparity between domestic revenues and domestic expenditures. In a recession that is a sensible thing to do. And the obvious way to cover that is by borrowing. The question is, from what source do you borrow from?

You can borrow domestically, or internationally. If you borrow internationally, you do expose the country to foreign exchange risks. So if there is a downside risk of some future devaluation, then the repayment terms on those loans will increase. That is not a risk you run if you borrow domestically. Such as issuing bonds.

However the capacity to issue bonds in the domestic market is limited in the present climate, so it makes sense to go offshore, especially if you can get a concessional interest rate.

At the moment it is not so bad, because the high ore prices are helping to cushion Indonesia. On the other hand, there are predictions that the high ore prices will not last. So there is a cloud on the horizon there.

Q: What do you think of the structural reform demanded by the IMF?

A: The big question is whether the IMF reforms can in fact be implemented. Is there the political will? Is there the political capacity? The content of the reforms should be debated. Like it or not, the IMF is now a player in domestic politics, having taken on some of the coordinating functions formerly performed by the coordinating ministers in the formulation of policy.

As in Thailand, political negotiation is necessary and should be seen to be occurring. The danger is that the IMF becomes a foreign scapegoat for the failure of the government's own policies.

In other words, the government evades responsibility. It is a kind of "moral hazard". The answer to "who runs Indonesia?" is "the government runs Indonesia". But if the government is seen to be incompetent, blame the IMF!

Q: How do you see the three to five year prospects? What do you think might happen?

A: Who knows! There is still a lot of "downside risk", but there is also still tremendous potential. Realizing the potential requires better government than we have seen so far. Confidence will be restored when business sees steady progress towards achieving at least some policy objectives.

Since the Asian crisis and the downfall of Soeharto, the new paradigm is to call for institutional development. In Indonesia this means especially a clean government and the rule of law. Both are highly desirable, but also impossible to achieve in the short-to medium term. There are no quick fixes.

Nevertheless, because popular aspirations for a clean government and the rule of law are so high, the lack of progress towards them breeds disillusionment with the political process and politicians. This is dangerous, because the only realistic alternative is a return to authoritarianism.

Some observers believe that, at the moment, Indonesia suffers from "too much politics". I would be more inclined to say that Indonesia suffers from inefficient politics.

At the time of reformasi (political reform), expectations of democratic government were unrealistically high, institutions, especially the legal system, had been utterly corrupted, and the new politicians lacked experience. This was not an environment to produce good, workable politics.

Not surprisingly, a lot of mistakes have been made. The question is whether the politicians are in fact learning and whether people are adjusting to more realistic expectations.

My concern would be that too many political leaders are continuing to act irresponsibly. What is more important at the moment? To achieve some modicum of good government, to restore public confidence in the political system, and to rebuild foreign confidence in Indonesia? Or is it to impeach Gus Dur and bring in a new government that is likely to be no more competent?

Logically, public interest should override party interest. But it requires a high degree of political maturity to act accordingly.

Instead of mature political leaders, Indonesia seems to have a number of leaders who are behaving as though rules and laws and responsibilities do not apply to them, or to their husbands and wives, or to their children, which is exactly the trap which Soeharto fell into.

In the 1950s mature leaders like (first vice president) Mohammad Hatta faced the same problem with many of his colleagues. I do not have a solution. I do know that it is terribly important that the President set a good example of being a wise leader, and not fall into the same trap.

He should defend the integrity of the democratic political process. Megawati's great strength and much of her appeal is that she does always conduct herself with dignity.

However, even America has these problems. Clinton did not set a good example to the nation of being presidential. He demeaned himself and the office, while his Republican opponents demeaned themselves and the political process in their furious efforts to prevent him from governing.

The other day I read someone quoting Churchill that the only defense of democracy is that the alternatives are all so much worse!