Indonesia after the IMF: Business as usual

Indonesia after the IMF: Business as usual

Satish Mishra

The 13th annual meeting of the Consultative Group on Indonesia
on Dec. 11, was a decidedly upbeat affair. As usual in Indonesia,
yet unusual for a large developing country, virtually the whole
Cabinet was in attendance.

Across the table were representatives of countries and
institutions poised to help Indonesia finance its budget deficit
in the coming election. They would do so either by lending to it
or by making gifts to it. In past years this involved haggling
and arm twisting behind the scene. This year was different. It
was a time for mutual congratulation. The IMF was officially
leaving. It was time to say goodbye to an old, if at times
controversial friend. It was time to give the devil his due.

As expected, the Indonesian government and its ministers of
finance and economy were soundly cheered for a job well done!
Indonesia has achieved macroeconomic stability! If you find
yourself scratching your head let me explain.

Achieving macroeconomic stability is not like climbing Mount
Everest but it can give a country's leaders a considerable buzz.
This is especially the case when praise comes from a world agency
charged with promoting it. From that you might gather that it is
a hard thing to do.

The kind of thing in which the guardians of the nation's
finances, which includes not only your tax rupiah but also the
donor's tax dollars, might justifiably be proud. Leaders like to
be perceived as strong men and women of independent views. It is
important to be seen as doing something which exemplifies
strength, and independent judgement. Macroeconomic stabilisation
provides just the opportunity.

If you think this is overdoing it, take a look at what
achieving macroeconomic stability in Indonesia has involved.
First, and most important, it has meant bringing down inflation
from a dangerous 58 percent per annum in 1998 to just 5.3
percent, year on year, by November 2003.

Second and closely connected to it, the exchange rate of the
rupiah to the dollar has had to be stabilised. As the World Bank
Report prepared for the CGI points out, the exchange rate during
2003 was unaffected by the Bali bombing, the SARS epidemic, the
war in Iraq and the attack on the Marriott.

Third, despite the administrative nightmare involved in
implementing decentralisation across more than 400 districts, the
overall budget deficit remains under control. The government
further intends to bring the budget deficit down to 1.2 percent
by end 2004. As donor representatives are particularly fond of
pointing out, Indonesia is bolder than many of their own
countries when it comes to setting conservative fiscal targets.

Fourth, public debt, not long ago, over 100 percent of GDP,
continues to fall. It now stands at around 60 percent of GDP and
is set to decrease as interest rates accompany lower inflation
rates. This takes the wind out the sails of those who have seen
debt as the single most important factor impeding economic
recovery.

All this is a cause for serious self-congratulation. In a
recent conference in Bali, Eisuke Sakikabara, known widely as Mr
Yen, declared the Indonesian economic crisis as formally over. He
advised Indonesia to concentrate on coming to grips with new
reality in the Asian economic scene: the rise of China and India
as two giant economic motors of the future. Similar sentiments
were echoed at the CGI as several delegates confirmed the end of
the economic crisis in Indonesia. They spoke with confidence
about how macroeconomic stability would serve as a foundation
from which to attract new investment, exports and employment.

This is a good story. It keeps everyone happy. It makes every
one optimistic. It is a much needed corrective to the bout of
depression that seems to grip the more agitated members of our
civil society. And if nothing else it might convince some
investors, just a few big ones will do, that it is time to
revisit Indonesia. There are just two problems. The story is not
very interesting. It might, moreover, do more harm than good.
It is important to keep the broader picture in mind.

First, let us look at the macroeconomics. True, inflation is
falling, interest rates are going down, the budget deficit is
under control, exchange rate is stable: all good IMF territory.
This would be impressive indeed in countries with a history of
fiscal profligacy. There are many countries in Africa or even
Europe with such a history of inflation bias. Bringing the budget
deficit under control might be an even more of an achievement in
those countries of Latin America where organised labour entered
locked horns with organised employers association for a fairer
distribution of the national wealth.

It would be just as commendable if the budget deficit were
brought under control in countries emerging from wars or
prolonged conflict, such as a Somalia or an Iraq. After all, in
these countries fiscal consolidation would require re-
establishing the basic machinery of budgeting on the hand and
controlling public expenditure volumes on the other.

Indonesia is easy ground for macroeconomists. There is no
history of sustained high inflation, no organised and radical
labour movement, no competing political parties with distinct
constituencies which require fiscal attention and favour. Large
segments of state apparatus, civil servants, university teachers,
policemen and soldiers and the inevitable array of judges and
court-officials, are used to raising much of their incomes
through extra budgetary channels. For such groups, putting
pressure on public expenditure is the least effective option in
raising their incomes.

This is not all. Macroeconomic policy in Indonesia is
determined by technocrats in the government and the civil service
who pride themselves for not being politicians. This is a short
hand for saying that they are unconcerned with the political
implications of macroeconomic policy. Besides being normal
operating procedure under the New Order, it also makes the job of
achieving macroeconomic stability easier. Privatisation of state
owned assets is a good example. Here, meeting financing gaps in
the budget deficit rather than productivity or employment has
been the most important touchstone of policy.

It would seem therefore that achievement of macroeconomic
stability in Indonesia is not as difficult as it might be hyped
up to be. Of course, policy makers point to powerful vested
interests which continually lobby the parliament. But this kind
of argument is a slippery slope. It implies that the vested
interests under the New Order were less powerful and less
destructive of the nations finances than today.

The best we can say about macroeconomic stability is that it
is a good beginning. This is not a very rousing message in the
seventh year of the transition. In fact it is a rather worrying
thought.

It would seem that Indonesia has covered the easy part of the
transition journey. The most difficult challenges still lie
ahead. These include consolidating a new political system,
reducing social stress and ethnic division, generating new jobs
for Indonesias young and ensuring a fairer share of the national
income and wealth for the average citizen backed by a system of
transparent, open and affordable justice.

This is not to deny that there have been many reforms in these
areas also. Yet as everyone knows, there is no clear game plan,
no convincing time frame and no overarching strategy. Without a
significant movement on these fronts, economic recovery cannot be
sustained. Neither can Indonesia weather future shocks to its
political and economic system without serious social division and
turmoil.

Overselling macroeconomic stability under such circumstances
will only serve to create false expectations. That is not a good
move in an election year where more than just economic recovery
is at stake. Like many technocrats, we may have little sympathy
for democratic politics. Some of us might even see the possible
advent of a new Indonesian autocracy as an irrelevant detail in
its development journey. A new autocracy might well have its
uses. It may keep social activists and religious radicals at bay.
It might also, according to some, serve an emerging geopolitics
of the day.

In Indonesia it would spell the end of the reform spirit and
back to business as usual.

Satish Mishra is head/chief adviser United Nations Support
Facility for Indonesian Recovery (Unsfir).