Coping with crisis

President Soeharto finally demonstrated a full recognition of the economic crisis in which the nation is currently mired by committing himself to a strengthened reform program which will hit hard, among other things, at the business interests of his family members and close relatives. The reinforced reform measures agreed with the International Monetary Fund yesterday include the sacrificing of sacred cows such as abolishing the clove monopoly, tax and duty relief for the Timor car company and the plywood cartel as well as the curtailment of the aircraft development project.

However, the most severe pains will be wreaked on the common people as food, fuel and electricity prices will be raised within the next few weeks. This will consequently increase the prices of almost all economic goods precisely at a time when the income of the majority of the people will decline and the number of unemployed will rise sharply due to massive layoffs by bankrupt companies and the zero, even probably negative, economic growth throughout this year.

The immediate questions, though, are: Will all these pains and bitter medicines be effective in leading the nation out of the economic crisis without causing widespread social riots and threatening political stability? The answer depends entirely on how the government manages the implementation of the painful measures and rallies public support at a time when an increasing number of the people and foreign investors have begun to lose confidence in its competence and credibility or, to put it briefly, in its leadership.

Theoretically, the new dose of more painful measures is the standard prescription of medicine to address the economic crisis. The state budget will be made more accountable and transparent, the central bank, so far highly vulnerable to the lobbyings by politically well-connected businesspeople to advance their own business interests, will be vested with full autonomy in monetary management. Monopolies, oligopolies, cartels and most other market distortions and unfair business practices will be rooted out. In short, the IMF-imposed reform measures are designed not only to improve overall economic efficiency and productivity but also to gradually develop good governance.

The uphill challenge, though, is that what was originally praised in November as a preemptive bailout package from the IMF has now turned into a severe crisis because of the government backsliding out of its reform commitment over the past few weeks. Past experiences teach us that measures taken under duress do not carry the same conviction with the market as the same policy actions undertaken before a crisis is full-blown.

The situation is further being complicated by the political uncertainty in the run-up to the general session of the People's Consultative Assembly which will elect a president and vice president in March, to be followed by the installment of a new cabinet later that month.

Hopefully, though, the stronger dose of reforms, if fully enforced, will greatly improve the medium-term outlook of the economy and this prospect will put the leaders of the United States, Japan, Singapore, South Korea and Europe in a better position to prod the banks in their respective countries to rollover the private sector debts. For sure, a massive debt rollover is one of the prerequisites to reestablishing a degree of currency stability because without it, it would be impossible for businesses to operate and foreign investors would not return. Given the magnitude of the debt problem, we may have to live with a highly volatile rupiah rate at least until after the election of a new president and vice president and formation of a new cabinet later in March. It needs much more than a letter of intent and well-written programs to regain the confidence of the people and international community. The determination should be demonstrated by firm, consistent and transparent action and not by rhetorics.

Many may worry that a government under the same leader might easily return to its old bad habits as soon as some improvements are in the air and then return to business as usual. The risk of a recurrence of corruption, collusion and market distortions is indeed quite big with the children and close relatives of so many top officials, provincial leaders, high military officers and retired generals quite active in business.

But the grave crisis we are in now should have rudely awakened the government to the likely horrendous cost of another mistake or capricious attitude. The writing is already on the wall: reform now or collapse.