Circumventing reform

Circumventing reform

The government has repeatedly claimed, in defense of its plan
to introduce a currency board system, that the IMF-brokered
rescue package signed by President Soeharto on Jan. 15, has
failed to stabilize the rupiah-U.S. dollar exchange rate.

But has the government executed the reforms to which it is now
committed in a firm and consistent manner? The answer, after
scrutinizing the 50 points of reform contained in the IMF
agreement, is a resounding no.

It must be acknowledged that the government has swallowed the
bitter medicine of reform, as prescribed, on a number of
occasions. However, at other times, reforms have been half-
heartedly executed. Market distortions have been abolished, only
to reappear under a different guise, undermining attempts to
reinvigorate public confidence in the government and the economy.

Inevitably, dismantling decades of financial excess, market
distortions, lucrative trading monopolies and rent-seeking
practices will encounter strong resistance from politically
powerful vested interests. But banishing these demons is
necessary if our high-cost economy is to be transformed into an
efficient and competitive entity, strong enough to withstand
exogenous shocks.

The plywood export cartel and sugar, wheatflour and clove
monopolies had to be disbanded by February, in line with
commitments made to the IMF. Non-tariff barriers to the export of
agricultural products such as crude palm oil and its derivatives
must be removed by April.

The Indonesian Wood Panel Association (Apkindo) abolished an
export quota system and relinquished the cartel-like stranglehold
which it held on the plywood industry, leaving producers free to
deal directly with overseas buyers. However, these reforms were
surreptitiously followed by a new ruling which obliges exporters
to pay a bond of Rp 50,000 to Apkindo for every cubic meter of
plywood exported. A second directive on the shipment of plywood,
has also been issued. Both amount to cartel-like practices.

The export bond, Apkindo stated, is to ensure that plywood
producers submit detailed export reports to the association.
Apkindo is a private organization and is not legally entitled to
impose this compulsory reporting, yet no industry or trade
officials have dared to challenge the new system. The terrifying
message which this sends out is that despite Indonesia's
commitment to reform, well connected businesspeople will continue
to get their way. Reforms may come but crony capitalism is here
to stay.

The National Logistics Agency will soon relinquish the
monopolies which it holds on the distribution of sugar and
wheatflour. However, its chairman, Beddu Amang, recently
confirmed that the agency will have a continued involvement in
the distribution of these staple goods.

A foundation of the agency's employees, backed by investors,
are developing a new private trading company, a move which has
caused consternation among businesspeople planning to enter the
sugar and wheatflour markets. They now fear that vested interests
will continue to be favored in this sector.

Palm oil producers have also been cast into uncertainty. The
industry and trade ministry has hinted that an export ban on palm
oil may persist beyond April. Trade officials must realize that
in order to begin exporting in April, producers must immediately
begin to negotiate deals with overseas buyers and arrange
shipping contracts. But this cannot take place amid the
uncertainty caused by these official hints. The industry, in
which Indonesia holds a distinct comparative advantage over
competitors, is being undermined as a consequence.

A reprieve granted to the clove trading monopoly (BPPC) on
Monday has left clove producers facing similar doubts to the
plywood and palm oil producers. Minister of Cooperatives and
Small Enterprises Subiyakto Tjakrawerdaya stated, after meeting
President Soeharto, that the BPPC would continue trading through
a new 'partnership' with producer cooperatives and the clove
cigarette industry. Despite the minister's hasty assurance that
farmers, cooperatives and cigarette manufacturers will be free to
buy and sell cloves unilaterally, nobody missed the message which
came out of his meeting with the President. It is unlikely that
any of the government-dominated clove producing cooperatives or
cigarette makers will dare to shun the planned partnership, given
the powerful political connections of the BPPC controlling
shareholders.

The IMF review team which arrived yesterday should closely
scrutinize these breaches of the agreement, along with other
inconsistencies in the implementation of reforms. The IMF should
act firmly to bring an end to them because it is not only the
future of the Indonesian economy which is at stake. The
reputation and resources of the IMF are also on the line.