Economic reform without misery?
Economic reform without misery?
By Omar Halim
This is the first of two articles examining the prospects for
Indonesia's economy in light of the signing of a reinforced
economic program mid this month by President Soeharto and the
International Monetary Fund (IMF) managing director Michel
Camdessus.
JAKARTA (JP): President Soeharto signed on Jan. 15 an
agreement revising and strengthening an earlier economic program
with the IMF.
The basic aims of this program are to:
* Restore confidence in the Indonesian rupiah as quickly as
possible.
* Include all extra-budgetary resources in the budget and bring
transparency into the budgetary process.
* Rationalize public expenditure, limiting it to "those items
that are of vital importance to the country".
* Take the initial steps toward undertaking reforms to strengthen
the long-term competitiveness of the Indonesian economy.
Before commenting on this program, it is imperative to comment
on the need for Indonesia to seek the assistance of the
international community.
In seeking assistance to resolve a major problem, which it
could not fix on its own, a country should be prepared to cede
part of its sovereignty, since in return for obtaining outside
resources and support it has to undertake certain corrective
measures that it could not, or did not want to, take on its own.
But it should not have to undergo the humiliation of having
the managing director of the IMF glaring down, with folded arms,
on the head of state signing the agreement to obtain that
assistance.
Unlike other ASEAN countries, such as Thailand -- and as
Sumitro Djojohadikusumo and Mohammad Sadli have concluded -- the
tremendous lack of confidence is no longer a reflection of the
economic problem alone -- it is rooted in the political
foundations and other problems faced by the country.
The IMF package alone is therefore no longer sufficient to
restore confidence.
As the performance of the rupiah -- after the President had
indicated his willingness to run for another term and implied the
type of person he would like to have as vice president --
recently showed, it is where the country and the economy are
heading in the next five years that will determine whether
confidence will return.
It is therefore imperative that a regime which could elicit
full trust, be elected to lead the country in the next crucial
five years.
This regime should comprise leaders who are widely accepted
and respected, by the different groups and layers of Indonesian
society, and supported by technically competent people. They
should be able to undertake essentially three types of reform:
* Economic and financial reform (to be undertaken immediately).
* Political reform
* Reform of the judiciary.
With the prospect of such reforms in the next five years, the
country would be turned into one that would be governed more
transparently, rationally and with fairness. There seems to be no
doubt that confidence, especially among Indonesians, would
return.
Capital flight would stop and new capital, local and foreign,
would flow into the country. The rupiah would strengthen
considerably in expectation.
Economists and financial traders have been attributing the
collapsing rupiah to the US$65 billion corporate debt overhang.
It has no doubt been putting a lot of pressure on the rupiah,
but, it is argued here, that it is a supplementary influence in
the free fall of the Indonesian currency.
The lack of confidence has substantially decreased the supply
of U.S. dollars to be exchanged for rupiah, and the need for U.S.
dollars to service corporate debts and, presumably, small-scale
capital flight, has resulted in the increasing volatility of the
thin U.S. dollar market.
The magnitude of capital flight is hard to determine, but a
political change would no doubt assuage capital owners.
With regard to corporate debt, a moratorium and other
arrangements have been proposed.
Despite the understandable reluctance of the government to
assume these debts, it is imperative that it acts immediately to
calm the situation.
For example, the government could bring together the
Indonesian debtors to assess the extent of their indebtedness and
to strengthen their collective bargaining position.
In this way, they could be brought together with the creditors
in order to arrange for possible rollover, moratorium, discount
or other mutually acceptable solutions.
This should alleviate considerably the need to purchase
foreign currencies. Then the rupiah might strengthen further to
levels closer to Rp 4,000 or Rp 5,000, and remain stable.
The high interest rate policy would not, under this condition,
be required to stabilize the exchange rate. Reasonable interest
rate levels could be used, at an appropriate time in the future,
to stimulate investment, and consumption, which would in turn be
sources of economic growth.
This stability would enable the economic agents to plan their
activities, particularly the manufacturers who produce goods for
export.
At present, it is conceivable that exports have decreased
because of the uncertainties caused by the huge swings in the
exchange rate.
With a significantly depreciated rupiah -- as long as the
import content of their products is relatively low -- they should
have a considerably strengthened competitiveness in international
markets.
But exports would not increase sharply overnight, especially
those whose markets were other ASEAN countries. Exports should,
in the long-run, be a crucial demand component for Indonesian
manufacturers as an engine of growth.
Consumer demand, in light of the sharp deceleration of the
economy anticipated for this year, will no doubt decrease
substantially.
Investment demand, in light of decreased consumer demand,
should also plummet, and there could even be a disinvestment.
The decrease in consumer demand and investment will
particularly be exacerbated by the banking sector being in
a shambles.
The writer is a research fellow at the Center for Strategic
and International Studies. He retired from the United Nations two
years ago.