Asset redistribution must put people first

Several commercial banks have failed to repay liquidity support to Bank Indonesia, the central bank, because their debtor companies defaulted on repaying their debts. Economist Kwik Kian Gie discusses the possible redistribution of assets after the acquisition of the banks and their debtor firms by the government.

JAKARTA (JP): Some experts have disclosed that redistribution of assets is possible now because thousands of companies will come into the government's possession after the failure of many major commercial banks to repay the liquidity support they received from Bank Indonesia.

Based on the new bankruptcy law, it will be easy for the banks to confiscate assets of the debtor companies which failed to repay on their borrowing. Because the banks have been confiscated by the government, the latter will suddenly own thousands of firms, according to experts quoted by Kompas daily in its Aug. 27 edition.

Affected by the stagflation (stagnant growth-high inflation) economy, the debtor companies are now suffering from huge losses; some of them have even stopped operation. Because their assets are calculated on the basis of a discounted cash-flow method while their debts are carrying interest rates of up to 60 percent per annum, their cash flow is nil and their net worth negative.

With liquidity support provided by Bank Indonesia reaching about Rp 140 trillion (US$11.6 billion), the number of companies to be confiscated by the government may reach thousands or even tens of thousands.

Redistribution of assets is unknown in noncommunist countries, where income redistribution is introduced, particularly through taxation. Redistribution of assets is generally introduced through the nationalization of existing companies by a country transforming its political system from capitalism to communism.

Indonesia is, of course, not a communist country and is even opposed to communism. But economic depression, stagflation, poor management and supervision of banks, pragmatist and reactive monetary management and avaracious rent-seeking parties are driving the Indonesian economy toward a communist system. With the realization of the situation, some figures are welcoming the possible redistribution of assets because, caught up in their emotional euphoria, they see the possibility of acquiring companies at low prices.

Redistribution of assets is actually a completely new ideology, whose implementation in Indonesia does not guarantee prosperity for the people. If the assets of the confiscated companies were distributed freely to the people or cooperatives, how should the criteria be set for those eligible to receive them? If they were sold at certain prices, how could the poor afford to buy them?

The possible answer is that the assets should not be distributed to individuals but should be instead controlled by the state, so their benefits could be equally enjoyed by the people.

It is true that such a case should not necessarily mean the implementation of communism because some companies have no bad debts. But the majority of firms in the country have their debts going sour.

According to government officials, the state's ownership of the troubled companies and banks will be temporary as their shares will be offered to the public through the Jakarta Stock Exchange. If that is the case, only rich people will be able to buy them, whereas the most eligible targets of asset distribution should be the poor, whose deprivation has stimulated the international community to provide $14 billion in aid through the International Monetary Fund (IMF) and the Consultative Group on Indonesia (CGI).

Perhaps, foreign investors will be willing to buy the companies' shares if their assets are calculated on the basis of a 10 cent-for-the-dollar method. But if that is the case, the government will never recover the entire amount of its liquidity support for the troubled banks.

The Indonesian economy would also return to its condition during the colonial period, when economic activities were dominated by Dutch companies. After independence, the firms were nationalized or their management Indonesianized.

During the New Order era, the government persuaded foreign investors to enter Indonesia by offering various incentives. Indonesia was then open for the operation of foreign companies under a modern term of globalization.

The government, therefore, was very active, participating in various international organizations, such as the Asia Pacific Economic Cooperation (APEC) forum, while the private sector, particularly its conglomerates, was establishing close links with foreign investors and creditors until their offshore debts reached $80 billion.

The debt-supported ballooning economy exploded when many of the companies' debts matured at the same time. Now comes the idea to sell companies to foreign investors at low prices, bringing Indonesia's economic development in a full circle: Colonization- nationalization-Indonesianization-globalization-foreignization (just like colonization). But technocrats will no doubt argue the fine point that foreignization and colonization are not interchangeable.