Coping with crisis

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.