Addressing economic, emotional insecurities

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.