IMF's role in post-election Indonesia

By M. Sauri Hasibuan

JAKARTA (JP): The multifaceted crisis in Indonesia is the result of an improper macroeconomic framework established by the government. This framework has a dominant mode of thinking which asserts that the proper operational objective in public policy is to promote the highest possible rate of economic growth. Such policy-makers contend that the best way to promote such growth is through the infusion of new input in the form of new investments. With a deregulated banking system and a liberal money market, enterprises have over-borrowed domestically as well as offshore.

This article will briefly analyze the role of the International Monetary Fund (IMF) in the Indonesian economy and will raise several concerns. Where have all the billions gone? Who lent what and to whom? What did the money do there?

In Indonesia the collapse of the exchange rate set off a chain of events, beginning with the monetary crisis and the rapid depreciation of the rupiah. In turn, there was an economic crisis with enterprises, including banks, faced with an inability to pay their debts and to continue operations. This fueled a social crisis with massive underemployment and poverty and then there was the continued political instability.

It is a cruel irony, because prior to mid-1997, on average Indonesia enjoyed 7 percent growth each year, a factor that led Indonesia, together with other economies in Southeast Asia, to be dubbed "economic miracles". Such was the positive outlook that the "country doctors" (to borrow Paul Krugman's term) at the IMF and the World Bank, by nature of their position, considered Indonesia the next Asian model.

A very important footnote, however, needs to be put to this very rosy picture, namely that wealth distribution has been widely uneven in the country. Large sections of the private sector, notably farmers and other small-scale producers have largely missed out on sharing the fruits of the "miracle" development. Farmers and other small-scale producers constitute about two-thirds of the private informal sector of the economy. Within the remaining one-third of the private formal sector there has also been substantial maldistribution of economic resources.

Furthermore, maldistribution of investment was coupled with disproportionate benefits of growth for the urban sector compared to rural areas. Such a factor was unavoidable because a priority in investments is toward projects and activities that can produce growth in output and services.

It is the urban industrial sector and relatively large enterprises that have the capacity to produce the needed growth. Such logic may be correct in the short-term, but is not correct in the long run. Nor can such growth become sustainable, because by definition the basis is narrow. Growth for a time may be uplifted through injections of substantial investment funds (including World Bank and IMF money) through the banking system. But as the crisis has so clearly demonstrated, such "bubble" growth can be sustained only for a relatively short period of time. In difficult times like these, nobody wants to be held responsible for the money they borrowed from domestic sources or abroad, as many of these companies belong to the former president's sons' or the ubiquitous minister's nephew.

The real critique of the IMF, and one we should worry about, is the accusation that it has failed to understand the root elements of the Indonesian crisis, ones described in the preceding paragraph. Having assisted Indonesia for quite a long time, the IMF and the World Bank should have realized that fund utilization in the past was channeled into various governmental agencies, and had minimum supervision.

Big projects and investments had to receive approval from the elite and politically connected businessmen. Many of these businessmen only acted as sleeping partners, extracting fees and remaining in the background without making significant decisions. Small-scale producers, street vendors and most notably farmers hardly enjoyed the benefits of the funds. What happened here is that the private sector knowingly or unknowingly, willingly or unwillingly, accepted a fallacious framework for its activities. The government, the IMF and the World Bank bureaucratic elites have together been responsible for this fallacious framework.

The crises in Indonesia exemplify the operational philosophy of complete separation of the government and the private sector in the pursuit of society's economic objectives. The reason why domestic enterprises have been able to borrow from abroad without tighter control from monetary authorities is that the government does not, and thinks it should not, monitor how much money has been borrowed from abroad. It was not the business of a government to monitor such debts or credit movements by the private sector. Such monetary movement was left to the market. As a consequence, Indonesia has one of the most liberal monetary regimes in the world.

The operational philosophy of separation provided a legitimate basis for non-transparency in transactions involving public funds. Transactions involving government funds were strictly government business; outside parties did not need to be informed of such matters. An attitude of non-transparency opens the doors for inefficient practices, including the practice of corruption, collusion and nepotism (locally known as KKN), which was found to have occurred in the past during disbursement of IMF and World Bank funds.

In the case of IMF money, a large proportion of the funds must be distributed to the most vulnerable elements of society. Social safety net programs cannot be implemented effectively unless all governments operate in a transparent and accountable manner at all levels. To the greatest extent possible, the public must have access to such information. The government should ensure public accounts are open to public scrutiny. The role of civil society is most crucial at the national and local levels, where participation should be fostered by providing access to decision- makers and public hearings on matters of importance. Indonesia must slowly free itself from dependence on IMF and World Bank funds.

Apart from the IMF program, the next government will have some important decisions to make about the nature of Indonesian capitalism. The bank restructuring agency is now sitting on US$33.8 billion of assets acquired from the owners of a handful of failed banks. These must be sold off. To these might be added assets of the New Order's regime and families. The next government will also need to develop and implement a competition policy, something Indonesia has never had.

The condition of the Indonesian economy suggests that cronyism and corruption, whether organized or disorganized, can levy devastating costs on the economy. It also reduces investment with its potential for arbitrary actions by state officials. Moreover, it reduces competition by granting permits to the highest bidder rather than to the most efficient user.

In the meantime, there will be demands from indigenous Indonesians for a bigger share of government contracts and credit schemes. There is also the question of who really owns Indonesia's vast natural resources, now that they no longer belong to the New Order's cronies and children. To a large extent, therefore, the next government will need to do much more than just steer the IMF's chosen course. It must decide what kind of economy Indonesia is going to have.

The writer is the business development manager of PT Airindo Bersih Jaya.