Addressing economic, emotional insecurities

James Castle, Castle Group, Jakarta

There is no doubt that the Sept. 11 tragedy in the United States will have a profound effect across the globe. While it is too soon to determine the full impact, no country will be left untouched. Indonesia is already feeling the pain.

The immediate impact on the world economy, which was sliding into recession well before the attack, has been severe. Business conditions everywhere are significantly worse than they were prior to the terrorist attack. This is certain to make it even harder for Indonesia, still struggling to recover from the impact of the 1997 Asian financial crisis, to regain its confidence and put its economy back on solid footing.

A further consequence in Indonesia has been to energize small, but aggressive, bands of radicals, already hostile to the globalization process, to threaten dramatic action against America and its allies which have attacked Taliban strongholds in Afghanistan.

Such groups tend to be specifically hostile to U.S. policies in the Middle East, but clearly are more generally disturbed by growing democratization and economic progress around the world, and the diminishing ability of self-appointed religious leaders to dictate to their followers.

The practical result in Indonesia has been to increase the sense of physical insecurity, which always brings a great financial cost. Companies and individuals spend more money making their homes and places of work safe, and less money on improving their businesses and consuming products that are the lifeblood of domestic demand.

Consequently, domestic demand, the key element of the limited economic growth in Indonesia since 1997, has dropped, further endangering economic recovery prospects.

On a broader front, investors, both foreign and domestic, have been generally hesitant to commit large amounts of money to Indonesian projects because of the political uncertainty of the past several years.

It is a cruel blow to the country that the security situation should re-emerge as such a threat, just as the new government of Megawati Soekarnoputri seemed to be bringing some political and policy certainty to the domestic scene.

This threat takes both physical and political forms. There is the physical threat against the life and property of both foreigners and Indonesians working in international companies. This makes both investors and their employees feel insecure and unwilling to commit new resources to Indonesian companies or projects. This further weakens the market for domestic companies that often sell significant amounts of goods and services to foreign investors and their employees.

Indonesian exporters, already badly hurt by the drop in global demand, have found that orders from Indonesia are among the first to be canceled because political uncertainty creates a delivery risk in the minds of buyers.

Threats to physical security also devastate the tourist industry, one of Indonesia's major foreign exchange earners. This, in turn, weakens the currency, which helps fuel inflation. Higher prices then mean that Indonesians buy less, which means that Indonesian companies sell less, a vicious cycle of economic decline.

These blows to exports, tourism and the currency, make the privatization of state enterprises and the sale of IBRA assets even more crucial to the country's recovery. Because despite the international problems, investors remain highly interested in these assets. And the hard currency payments from these sales will generate even more cash for the national budget because of the weaker rupiah.

On the political front, challenges from "radical Islam" can only weaken the carefully crafted, centrist coalition between secular reformers and moderate Islamic elements that the Megawati government was able to put together less than three months ago.

Much of the political capital needed to mollify critics of economic reform now must be spent dealing with critics of government's close relations with the U.S. Indeed, Indonesia's participation in the global economy is being fundamentally challenged.

The government is so concerned about the impact of the anticipated global recession that Coordinating Minister for Economic Affairs, Dorodjatun Kuntjoro-Jakti, has announced his intention to convene a national gathering of academicians and entrepreneurs to prepare its response.

The government has said it will present the results of studies conducted by multilateral agencies like the World Bank, the International Monetary Fund, the Asian Development Bank and other international sources as raw material for this meeting.

As important as these matters are, it is to be hoped that the government will also invite religious and other social leaders to such an event. This is necessary so all social groups, not just business people and professionals, will be more aware of the dangerous economic waters into which we have now been forced to venture.

All segments of Indonesian society should be mobilized to help overcome the current domestic crisis.

The country's unresolved problems caused by 1997 Asian crisis -- huge national debt, bankrupt companies, a moribund banking system and a rotting infrastructure -- are bad enough. Wise leadership and open communication are needed to facilitate recovery and avert further decline.

Full participation in the global economy and close relations with the U.S. are the solution, not the problem. The events of Sept. 11 and its aftermath should not be allowed to distract the country from this basic truth.