IMF gave wrong remedy for RI

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.