Bank Bali fiasco: Tip of the iceberg

By Sidesh Kaul

JAKARTA (JP): In the wake of the Bank Bali scandal, pundits at the International Monetary Fund (IMF) and the World Bank feel that a "full and transparent" investigation of the issue could set things right and should be a precondition for further aid.

This is an extremely naive approach adopted by the IMF and World Bank and lays bare either their limited understanding of the problems that are plaguing the system or their frustrations in making substantial progress in the area of financial reform. The recent Bank Bali scandal is only the tip of the iceberg and the root of the problem lies somewhere else.

For decades on end diverse interest groups have manipulated and been beneficiaries of the weak Indonesian financial system. The rot in the Indonesian banking system is too deep to be corrected in a few months, and once again concerns are being raised about the government's strategy of adopting an approach to financial sector reform that is cosmetic and shallow.

Hopefully, the one good purpose that the Bank Bali scandal serves will be to open the eyes of governmental agencies and motivate them to widen the scope and gambit of the reform program. It is now evident that the Bank Bali scandal can best be classified as symptomatic evidence of bigger rot. Unless the government and IMF give the highest priority to infrastructure and policy reforms, there will be many more Bank Balis in different forms in the days to come.

There is no point in marching forth to corporate recovery if the banks are not healthy yet. The aim of the current restructuring program is to ensure that banks are back on their feet but surprisingly little effort is being made to usher in policies and reforms that would strengthen the financial infrastructure.

It is not too difficult to conjecture the possible reason for this reluctance. Banks were important political instruments in the hands of the New Order regime, and were an important component of the patronage dispensation machine. While on the face banking policies and regulations mirrored those of more developed countries, enough flexibility was designed into the system to enable wily manipulation.

The concern being raised in this essay is why would beneficiaries of largess be motivated to implement policies that would jeopardize their own existence? While there is the temptation to take an extreme and idealistic view of the reform process, in reality, policymakers would have to design a path for reform that would seamlessly accommodate the diverse, and often conflicting, forces in order to ensure a more stable and consistent reform process.

However, these very same policymakers would have to shy away from the temptation of politicizing the reform agenda. The most important of these interest groups are the entities who have enjoyed the patronage from the New Order in the past and who will deploy every weapon in their arsenal to derail any attempts at reform that could pose a threat to their largess.

Soeharto built this network of economic patronage that runs through corporations, the Army, the bureaucracy and the Armed Forces in exchange for a loyal power base that legitimized his authoritarian rule.

Over the years, this network of patronage has been institutionalized and reached a stage where it is now an accepted norm. The patronage extends deep into Indonesian society and business and is today the biggest threat to reform. It is not going to be easy to wean this group from the easy lucre of rent- seeking opulence. There are, however, other groups that are exerting pressure on the reform process as well.

There is a group of people who seek a decontrolled and market- oriented financial system as opposed to another group that seeks a more interventionist and protectionist approach to policies.

Nationalists who seek a greater economic role for the pribumi (indigenous) and favor the expansion of state enterprises in high technology sectors. An army that has its own investments to protect. Conglomerates who thrive on the cocktail of cheap and abundant resources, monopolies, plentiful capital and state patronage. Bureaucrats who are loathe to scrutiny and change or any process of reform that would divest them of their source of power.

Industrial groups in Indonesia have historically sought financing on the most favorable terms and have aligned themselves with one or the other of the influential interest groups to obtain special favors and privileges. With the passage of time, these industrial groups have grown in influence and one cannot underestimate their capabilities at influencing policymaking. These are the groups that conduct interplay with each other and in the context around them to generate the environment in which reforms have to succeed.

It is important here to understand that the level of power and influence that an interest group wields, in the Indonesian context, is relative and changes with time. The rise and relative dominance of one interest group does not necessarily imply that other groups were ineffective or dormant.

At a time of dire economic crisis in the mid-60s, technocrats were the prominent influential group. This group played a dominant role in stabilizing the economy and then rehabilitating it in the period up to 1973. During this period, other influence groups with a notably interventionist or nationalistic bent of mind silently accepted the bold changes of market-oriented technocrats (noteworthy of mention here are the raising of deposit interest rates in 1968; the Investment Credit program of 1969; removal of foreign capital controls and unification of the exchange rate in 1970). Rival interest groups quietly acquiesced by adjusting to the new landscape and reinforcing their power base.

The various pressure groups had their own forts that dotted the Indonesian bureaucracy and were, from time to time, able to extract their own pound of flesh irrespective of which interest group was leading the way.

Although the technocrats made important progress in bringing in economic reform, they were not administrators. The system through which the technocrats' plans were executed and implemented was still rife with corruption and to which they turned a blind eye.

Dissent was often silenced with the lucre of rent-seeking opportunities -- a method that continues to this day. The weeding out of patronage and corruption is central to this theme.

The Bank Bali scandal was not an anomaly thrown up by the system automatically. The concern here is that there may have been several instances of system and fund abuse that we just don't know about. Today, there is the imminent danger of the Bank Bali case once again degenerating into a mudslinging fight while the more important issues of systemic failure and accountability get sidelined.

The return of the stolen funds is no ground for pardon. Just a little over a month ago, a member of the domestic staff at the presidential residence was caught red-handed for stealing the President's precious collection of Mont Blanc pens. Retribution and corrective action was swift and decisive. Ironically, when millions of dollars are stolen from the state, there is neither any accountability nor decisive action. What kind of justice is this?

In Indonesia, there is a greater reliance on people than on systems and accountability, which is scoffed at. It appears that Indonesia has not rid itself of its paternalistic attitude to governance and accountability.

Politics of patronage and convenience still prevail and is today the biggest stumbling block toward real reform. A cursory examination will reveal that this flaw is endemic and is prevalent in all walks of Indonesian society -- be it government or business.

The network of patronage has to be mercilessly dismantled before any real reform can bear fruit and the era of reform must start with the ushering in of legislation that would weed this malaise out. The old paradigm of "all roads lead to Rome," i.e. the centralization of all crucial decision-making authority being vested with the President, would have to be replaced with adequate checks and balances.

There must also be a rigid system of accountability that periodically makes public the successes and failures of governmental, bureaucratic and ministerial endeavors.

The judiciary would have to be staunchly independent. The development of a strong and vibrant bureaucracy would be paramount to the efforts of cleaning the system up. The bureaucracy needs to be revamped and staffed with qualified personnel, and the system needs to be exorcised of all unqualified puppets and courtiers. Strict laws have to be framed which would address issues of conflict of interest, especially of those who hold public office.

The task seems daunting and perhaps too idealistic, but a beginning has to be made in this direction before Indonesia is pushed to the brink of a revolutionary style upheaval. Auditors, who are being flown in from different parts of the globe to investigate the Bank Bali scandal, serve the limited purpose of increasing our understanding of where the system failed. This is simply not enough and more needs to be done.

The writer is a commentator on economic and political affairs based in Jakarta.