'Conditionalities' choke Indonesia's recovery

'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.