IMF supplementary reform may repeat old mistakes

IMF supplementary reform may repeat old mistakes

The government and the International Monetary Fund (IMF) have
reached an agreement on supplementary reforms needed to
restimulate the Indonesian economy. Economist Kwik Kian Gie
discusses its impact.

Question: Do you believe the supplementary reforms will help
the Indonesian economy recover?

Kwik: Not in the short run, considering that the economic
crisis has been caused by the widening of the savings investment
gap. Instead of being supported by an adequate volume of domestic
savings, economic development has thus far been bolstered by
foreign debts, while the country suffers a current account
deficit every year. The crisis was triggered last year when the
U.S. dollar's value skyrocketed due to increasing demand for the
greenback from the private sector to repay its overseas debts.

The crisis was worsened by the poor state of the banking
industry, which meant Indonesian companies found it difficult to
open letters of credits for their trading activities.

Above all, the crisis has also been spurred by corruption,
collusion, nepotism and cronyism. The IMF clearly wants
Indonesians, particularly the elite, to end corruption,
collusion, nepotism and cronyism by supervising the
implementation of the reform.

In the medium and longer terms, the reforms may do some help
if all its programs are implemented consistently.

Q: The supplementary programs are demanding Indonesia tightens
its monetary policies to help the rupiah strengthen and to curb
inflation. What impact will this have on Indonesian companies and
the people?

K: The country will have to pay for such reform with an economic
recession, marked by the bankruptcy of many industrial companies,
the dismissal of workers and economic growth of minus four
percent.

Q: Do you expect foreign investment and loans to return to the
country in the near future?

K: No. Foreigners will wait until the economic decline reaches
its bottoming-out point and economic activities start to recover
again. The IMF projects that the economy will recover in three
years.

Q: The IMF appears to be allowing the government to maintain its
budget deficit policy that will be offset by foreign aid. What
impact do you see from such a policy?

K: It is contradictory to the policy of high interest rates and
the control of the money supply under the net domestic assets
criteria. The positive side of the budgetary policy is that the
deficit is offset by dollar-denominated foreign aid, which will
help increase the supply of dollars on the domestic money market.

Q: Is there any guarantee that a similar crisis will never recur
if we implement the reform perfectly?

K: No. On the contrary, I guarantee that a similar crisis will
recur in accordance with the business cycle theory.

The reform programs are aimed at restoring the confidence of
foreign investors and creditors, so they will again put their
money in Indonesia.

This means that we will again reimplement our old pattern of
economic development, which will widen the savings investment
gap, increase the country's current account deficit and encourage
overinvestment again. Dependence on huge foreign debts has been
the source of the current disaster.

Q: The reform program is demanding the dismantling of monopolies.
Do you think that vested-interest groups will end their
monopolistic and cartel practices?

K: Of course not. The government, therefore, must be serious in
eradicating monopolistic practices and establishing a system for
fair business competition to avoid the development of new cartels
and monopolies.

Q: The government will soon allow foreign investors to trade in
the domestic market. Are Indonesian firms ready to compete
against them?

K: There will surely be some domestic companies which are capable
of competing against their foreign rivals. Some foreign
distribution firms will be successful but certainly they will
never monopolize the market.

Q: Do you think the government will, this time, seriously comply
with all the reform programs?

K: I do not dare to say anything about that because I cannot read
the mind of President Soeharto.

But IMF First Deputy Managing Director Stanley Fisher told CNN
that the implementation of the reforms would be monitored on a
day-by-day basis by foreign personnel recruited by the fund. Bank
Indonesia, the central bank, the Indonesian Bank Restructuring
Agency and the National Economic and Monetary Resilience Council
will be supervised by high-quality foreign experts.

Q: Do you think that the government's social safety net program
is adequate to help the poor cope with their difficulties?

K: That question is difficult to answer because there is no
accurate data on the number of laid-off workers or the poor and
how much money the government will spend on such a program. (riz)