Tue, 07 Nov 2000

Carrot, stick approach will continue after U.S. election

Expect the U.S. to continue being forthright on Indonesia's reforms, whoever becomes the next U.S. president, says Shanghai- based economist Mari Pangestu in an e-mail interview:

Question: Ties between Indonesia and the United States are currently strained. Will this worsen and affect trade ties?

Answer: This is difficult to predict. I hope not; Indonesia has more to lose if the bilateral relations worsen ... the U.S. is a very important market for our goods; the U.S. directly and indirectly weighs in on much needed aid and assistance to Indonesia, decline in U.S. tourists and worsening of an already uncertain investment climate for U.S. investors ...

Any serious damage to these facets of bilateral economic relations will slow down and seriously affect the already fragile economic recovery process.

The situation need not get worse if efforts are made by both sides, beginning with the Indonesian side for dialog to be opened up ... It could get worse if the xenophobic and nationalist sentiments are stirred up to the point that there is an uncalled for tragedy -- such as causing physical harm to U.S. citizens. Tensions would (then) rise and the U.S. administration would be under a lot of pressure domestically to play hard ball with Indonesia, including (applying) economic sanctions.

How will the election results affect the strained relations?

It would be in the interest of either a Gore or Bush administration to "mend fences", however, this will depend on what transpires in the meantime and whether the situation worsens to make it politically difficult for the administration to do so.

I have not heard Gore specifically mention Indonesia, but Bush advisors have been quoted as saying that they will invigorate U.S. ties with countries in Southeast Asia, including Indonesia, and are committed to the unity of Indonesia.

Will the U.S. use its position as opinion leader among international financial institutions to influence their stance on Indonesia?

The U.S. will do so if it thinks it is necessary. The outstanding issue of disarming and disbanding pro-Indonesian East Timorese militia gangs and accountability for atrocities in East Timor including the killing of UN workers in Atambua are priority issues not just for the U.S. but also other donor governments.

Both the U.S. and multilateral agencies have changed their approach toward Indonesia to one from a behind the scenes diplomacy to a more direct and public approach of criticizing and pressuring for economic and political reforms ... However, as in the last two years, unless there is a deterioration of the situation, the carrot and stick approach will continue.

Aid is conditional upon progress in reforms; there can be room for maneuver if the multilaterals and major donor countries believe that the government has tried to do its best.

The U.S. remains one of the most important markets of our exports; how will the election results affect this?

There will be no immediate effect ... But in the longer run, analysts feel that whether it is Bush or Gore victory, (given) their promise of a fiscal stimulus package, interest rates in the US could rise and growth slow down a little.

Since it will be difficult for Indonesia to match the increase in the interest rates, the rupiah will remain weak vis a vis the dollar. Whilst this will be good for exports, it is also adding to the cost of imported components and contributes to domestic inflation. Furthermore, slower growth in the U.S. will affect demand for our goods.

(There is) another issue in the long run ... Both candidates have emphasized trade expansion ... Bush has prioritized free trade agreement with the Americas and U.S. business is also expecting Bush to bring in some of the more dynamic Asian Pacific economies into the North American Free Trade Agreement (NAFTA).

Whilst the timetable for the realization of these agreements is probably some years away, a shift of focus to the "south" will hurt Asia in general. If Indonesia is not one of the dynamic economies that will be incorporated into NAFTA, it will lose out ... As for Gore and the democrats, their focus has been to have labor and environment standards to be included in trade agreements, and they are likely to continue to push this in the World Trade Organization agenda ...

The recently signed bilateral agreement with Jordan includes labor and environmental standards and Charlene Barshefsky of the U.S. Trade Representative (Office) has indicated that this will be the template for US trade treaties in future.

Are there any other points you'd like to make?

Whether it is Gore or Bush who wins, they will continue the present U.S. approach toward Indonesia of being forthright and public about lack of progress in reforms, and democracy. ...

Nationalist sentiments probably do come from ... attempts to divert attention away from domestic problems or the efforts of (government) opponents to utilize it against the government.

But there is also a genuinely felt wider sentiment, and anxiety about globalization (which) is perceived to have caused the crisis. The sentiment continues to be that now Indonesia's fate and sovereignty are further being sealed by outside forces.

We do need to recognize these underlying anxieties, but ... not through xenophobia ... We will pay a high price in terms of growth and the ones who will suffer most will be the poor. A pragmatic approach must be reached (through) greater public education about the risks and costs of engaging internationally. There is much outside engagement to ensure the safeguarding of common concerns such as democracy, the environment and labor rights. (swe)