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)