Bank Bali fiasco: Tip of the iceberg

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.