IMF's role in post-election Indonesia

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.