IMF gave wrong remedy for RI

By Patrick Schwarz

SEMARANG (JP): News about high finance normally goes unnoticed by ordinary citizens, as it is, at best, negligible information concerning a privileged elite from the greedy world of capitalism.

But a recent Dow Jones Newswires release, printed in the Asian Wall Street Journal of Feb. 12, 1999, quoting a statement of the International Monetary Fund's Hubert Neiss after a recent visit to Jakarta that "Indonesia must keep interest rates high until the rupiah stabilizes", deserves full attention.

However, the arrogance with which the IMF enforces its misguided advice on economies in trouble, and the billions of dollars wasted in the process, is hard to swallow for ordinary people like me. And especially so for the millions of out of work Indonesians going through enormously trying times.

The rupiah has reached a condition that can be likened to a patriarch on a respirator. Most of his bodily organs, as well as parts of the brain, have ceased to function. Being an archetypal Indonesian, he has a large extended family who love him dearly and cannot believe they are about to lose their provider. They are also poor.

The doctor, the IMF, wants to keep him hooked up and alive at any cost. Respirators are used to keep very sick people alive in the developed world. They are also very expensive. And the doctor expects the family, already heavily in debt, to run up even higher debts. So high, in fact, that two, maybe three generations to come will live in total dependence to the doctor.

This remedy of high interest rates will not work. It will only cause generations of Indonesians immeasurable hardship, as if their present lot was not hard enough. Why? The following is an explanation based examples from where I come from: the grassroots small business arena.

A close acquaintance of mine owns a small factory. Like many young entrepreneurs everywhere, he is not really a savvy manager, with negligible technical and marketing skills. His performance leaves a bit to be desired. With the onset of the crisis, the local market has all but vanished for him, and the few overseas clients he retains deal with him more out of compassion and curiosity than a desire for a real business relationship.

Yet financially he is still doing rather well. Under a controversial assistance scheme of the Ministry of Cooperatives and Small Enterprises (The Jakarta Post described this scheme in detail in its Feb. 12 editorial), he obtained a subsidized loan with 18 percent preferential interest. He does not really need the money.

So he deposited most of it at the going market rate, which is well over 40 percent. This keeps him quite comfortable, and there is no reason why he should go to the trouble of improving his factory's efficiency and production quality to become internationally competitive. The IMF's funding of this scheme, by the way, adds a whopping US$2.1 billion onto the country's debt.

Several other acquaintances have closed shop altogether and sent their workers back to the villages. They moved roughly half of the fortunes they made during the speculative "boom" years overseas into safe, hard currencies, and keep the other half in high-interest rupiah deposits.

It is quite logical: 45 percent on not even a very large sum beefs up ones monthly income rather nicely. Between golfing holidays on Australia's Gold Coast, they casually play the currency markets via their handphones. They are understandably quite happy with their lot and have no longing for this situation to change. That the banks are bleeding to death and the economy has come to a grinding halt and the country is falling ever deeper into debt is of little concern to them.

Shortly before former president Soeharto's downfall, there was a hot debate over the introduction of a currency board. Unfortunately, Soeharto was not able to pound it through any more. The argument went that it would only serve as a bailout chute for the presidential cronies' fortunes, and that Indonesia could not afford such a currency board. While the former argument was probably all too true, as to the latter: What can Indonesia afford today?

It seems that most economists, along with the authorities, refuse to see just how serious the predicament of the Indonesian economy has become, and the good doctor IMF is taking full advantage of the situation to sell his resuscitation equipment. Had the currency board been introduced back then, there would have been a chance to revive the patient.

Small businesses like mine that contribute small, but real, hard currency, income to the country's coffers and keep a fair amount of Indonesians employed, would have had a solid base to work from. They would not have to change price lists on an almost daily basis according to the ups and mostly downs of the rupiah and, at least for a while, until the inflation caught up with us, we would have been internationally competitive.

But this would have been enough to at least restart the real sector of the economy. Today we wonder why exports are further down -- despite a cheap currency and the cheapest labor anywhere.

A rumor making the rounds in the German expatriate community has it that Mercedes Benz is going to assemble their top of the line S-series in Indonesia, and that the vehicles will be sold at a cool Rp 1 billion a piece. Yes, in the middle of this crisis. This is dismissed as "bottom-of-the-beer-mug talk". But another, more sober, rumor has it that the production capacity for the entire first year has already been sold, and that Porsche sports cars intend to follow suit.

In stark contrast, a friend of mine from Switzerland has just been touring slums in and around Jakarta in preparation for a new movie he is producing about war and poverty. To get the right feel, he came to Indonesia to be able to look eye to eye with virtual misery.

As absurd as such contrasts are, they tell us that there is still a lot of money idling in Indonesia. But under the IMF's own selfish remedy, such money cannot be mobilized. The policy of high interest rates will encourage those entrepreneurs that do have the funds available to keep them offshore or use them speculatively, meaning unproductively for the real economy.

What the Indonesian economy and the Indonesian people need is to start producing again. Not soon, now. Extreme care must be taken when tapping onto capital market funding. Rogue speculators must be strictly kept at bay. Trying to patch up the economy with funds and deals in the capital markets is just not going to do the trick. Indonesia does not have enough clout to play with the sharks of the global capital markets. Trying to do so will only open its flank to further abuse.

A true remedy can only come from the grassroots level. People like you and me doing business together again, meaning exchanging goods and services for money. In my case this means being able to buy from Indonesia again and getting quality, internationally competitive prices and timely deliveries, and in return compensate Indonesia with badly needed hard currency.

To be able to do that, we need an even playing field, and moneys have to be lured out of speculative cycles. Entrepreneurs with funds need an environment that makes it attractive to invest in production again, and the knowledge that the initial pain of bringing production up to international standards will be highly lucrative.

But there is just no way we can achieve this with the IMF's ill conceived high-interest policy. Interest rates must come down immediately. Even at the risk that the rupiah will drop through the floor. This will only be temporary. Just like the family with the old man on a respirator, there is a time when we all must learn when to let go. Let the rupiah go. It may be steep and painful at the beginning, and cause equally steep inflation. But eventually the bereaved new generation will recover and be glad that the debt accrued on the respirator was negligible.

Likewise, the rupiah will eventually find itself again in tune with the real market forces and will gain strength as real productivity increases. Indonesia will have succeeded in bringing about a new beginning. In line with the political changes and structural reforms taking place, and the emergence of a democracy, Indonesians will be able to develop their true potential sooner than most people think.

The writer is a businessman based in Semarang.