'Conditionalities' choke Indonesia's recovery

By Sidhesh Kaul

This is the second of two articles on the relationship between international institutions and Indonesian government.

JAKARTA (JP): "Structural reforms" touch the nerve centers of governance. Trade liberalization, bank reforms, privatization of state owned enterprises (or SOEs), poverty alleviation, tax reforms, privatization of agricultural lands and "good governance" drives to name a few.

The trade liberalization drive is ostensibly a war against import quotas and the reduction and unification of tariffs. With the abolition of protective barriers the state's revenues (through customs and other levies) is negatively impacted and contributes in some measure to the fiscal imbalance as well as deprives the state of necessary instruments for foreign exchange rationing.

The IFIs have traditionally sought legitimacy for their trade liberalization policies under the cloak that these measures effectively make the domestic industry more competitive.

In reality the impact is disastrous -- trade liberalization invariably leads to the collapse of the sector that produces goods for the domestic market.

The IMF's hypocritical trade liberalization stance is even more galling with reference to Indonesia where the collapse in credit (both on-shore as well as off-shore) has a singular implication for the unprotected domestic producers -- without capital they can never hope to compete with their counterparts overseas.

The lowering of tariffs encourages imports. The interesting coincidence here is that the country's biggest importers are also the biggest investors (FDIs).

The structural adjustment programs pushes the government into a divestment frenzy as far as SOEs is concerned -- in reality a disguised conversion of debt to equity since most of the capital raised is channeled to repaying the obligations to the London and Paris Clubs.

In a market like Indonesia, where domestic sources of capital have virtually dried up, this implies that the assets would fall into foreign hands and most probably at a bargain price.

With the collapse of the banking sector in Indonesia, the IMF and its likes have been advocating a program for bank recapitalization that hopefully would be fueled by asset disposals in the real sector.

This is being done despite the full knowledge that there is a large mismatch between the obligations and the value of the underlying assets. Whilst these measures might temporarily resuscitate the banking sector such a recovery would be short- lived since the banking sector would not be able to function if the real sector were not rehabilitated.

The methods deployed by the Indonesian Bank Restructuring Agency largely mirror the "one-medicine-cures-all" kind of approach that the IMF is famous for.

In the absence of any real foreign interest, save for the odd Guthrie deal, it is but a matter of time before the mismatch between assets and liabilities would have to be absorbed by the government and who, in turn, would have no choice but to pass this problem on, in one form or the other, to the ordinary Indonesian.

Unless of course "new investment" takes over the equity in the troubled domestic banks and relieves the pressure on IBRA to fund the recapitalization program -- the proceeds from the "new investment" being channelized straight towards servicing the IFIs.

Divestment of local equity in both private and state banks implies that the government would lose its leverage and control over credit (and hence the ability to manage growth) in the domestic sectors.

Meanwhile the real sector limps along and banks that have been recently declared "fit and healthy" have not mustered enough courage to extend fresh credits in the market -- this is sowing the seeds for another round of problems in the banking sector.

Other interesting instruments deployed by the IFIs are the "poverty alleviation" (a "conditionality with most World Bank agreements) and the "social safety net" programs.

These programs focus on slashing governmental public expenditure and instead focus on targeted "poor" groups. The slash in social-sector budgets is utilized towards servicing the state's obligations to the IFIs.

Under the guise of "managing poverty" the IFI's not only limit the government's social-sector expenditure but also engineer the replacement of the state functionaries with non-governmental organizations (NGOs) from social programs.

The "social safety net" program advocated by the IFIs is a euphemism for some form of compensation to those public sector workers (either by way of severance payments or minimum employment schemes) who have lost their livelihood as a result of the programs.

For the Indonesian government this poses a real dilemma. A selective social-sector program runs the risk of polarizing an already divided populace and the "all-round-general" type of cut in public expenditure runs the risk of bringing the frustrations to the streets.

To add to this confusion is the "conditionality" of democracy and good governance -- a difficult condition indeed for the embattled Indonesian government.

President Abdurrahman Wahid must constantly juggle between being a torchbearer for democracy while at the same time embracing the largely unpopular "conditionalities" that the IFIs have set.

It is time the Indonesian government woke up to the fact that they would have to put aside petty politics and re-light the fire for a endogenous economic development recovery process.

The short term benefits of going with a begging bowl to the IFIs every now and then for relief is dangerously addictive and is pushing the country into a quagmire of debt and socio-economic instability. Every incremental borrowing will bring with it stricter "conditionalities".

Instead, the government would do well to initiate a concerted campaign to seek forgiveness on a sizable portion of the obligations to international creditors or at least declare a moratorium till such time stability returns to Indonesia.

It is time for Indonesians to break out of this spiral of despair.

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