Indonesia, Australia and overcoming the Asian crisis (2)

This is the second of three articles based on former Australian prime minister Paul J. Keating's lecture at the University of New South Wales in March on the impact of the Asian economic crisis on the region in his capacity as visiting professor of public policy.

SYDNEY: Australia has to base its policy through the critical period, in which Indonesia is trying hard to recover from its current economic crisis, on one fundamental -- We stand with Indonesia.

It is the same message that the Labor government sent to the young republic during the revolution. We are with Indonesia whatever happens now.

Australia cannot insulate itself from the future of the 202 million people who are our nearest Asian neighbors. And we should not try to do so.

I know that the statement "We stand with Indonesia" begs some important questions. Is standing with Indonesia the same thing as standing with the Indonesian government? How exactly do we stand with Indonesia? What are the practical things we can do? What is the crossover point between helpful neighborliness and counterproductive intrusiveness?

But these are exactly the questions we should be debating.

My point is that if you approach policy formulation from that starting principle, you reach different conclusions from those which follow if you begin from other points, like how can Australia firewall itself from the impact of what is happening? or how can Australia best bring about political and social change in the region?

Well before I became prime minister I was concerned that despite the long, hard efforts of committed people in both countries to build friendship, the relationship between Australia and Indonesia seemed little more than a thin foreign policy veneer. I believed Australia faced serious dangers if it entered the 21st century without trying to build a relationship of trust and substance with our nearest Asian neighbor.

Significant misunderstandings persisted in the public mind on both sides. Research we commissioned in 1994 showed that fewer than one in five of the Indonesians surveyed saw Australia as a modern or advanced society, only 2 percent were aware of Australian manufactures and mining products, and a depressingly large two-thirds believed the White Australia Policy was still in operation.

On Australia's side, suspicion of Indonesia as a long-term threat to the country persisted. It was fueled by an equal level of ignorance about modern Indonesian society. Some in Australia believed that geography made Indonesia a permanent threat to their country.

What both President Soeharto and I tried to do was to construct a framework for a relationship which would endure after we had passed from the scene. I certainly valued my friendship with him, but I was also conscious that our friendship would not be enough to change the nature of the relationship. What we had to do was to increase substantially the number of stake holders in it.

So on my first visit to Jakarta as prime minister in 1992, we established a new ministerial forum to meet every two years and to bring together ministers from a whole range of economic and social portfolios. We wanted the different areas of government to discover new opportunities for cooperation.

On the defense side, we developed the Agreement on Maintaining Security as a historic declaration of trust between us, a recognition that Australia and Indonesia had common, not conflicting, security interests in the region, and in appropriate circumstances could respond through common measures.

We improved the foundations for trade and economic ties. A major trade promotion in Jakarta in 1994 was attended by the largest number of Australian businesspeople ever to attend a trade fair abroad.

But we also know this had to be more than a government-to- government relationship.

We worked to build up the number of people outside government with a stake in the relationship, supporting Indonesian language teaching and setting up the Australia-Indonesia Merdeka Fellowship scheme to bring outstanding Indonesians to Australia and send outstanding Australians to Indonesia in mid-career.

To underpin all this, I made six visits to Indonesia between 1992 and 1995. This was more than the total of all previous visits by Australian prime ministers in the preceding 20 years.

But the depth of our accomplishments, and the work of so many other Australians in and out of government over the past 50 years, will be tested in coming months.

In the policy now being developed, our aim has to be what will cause the least pain to the Indonesian people and what will get growth going again.

Australia's role is not to stand in judgment over Indonesia, marking boxes with ticks and crosses and awarding points for adherence to International Monetary Fund (IMF) packages before deciding whether or not we should respond to the country's needs.

In this crisis, Australia needs to be a miner and distributor of ideas.

This is not a job for the government but for business and universities as well -- for anyone who can understand and interpret what is going on. Over a period of nearly 50 years, Australian academics and universities, beginning with people like Sir John Crawford and Heinz Arndt, have maintained a level of scholarship on Indonesia which is among the highest in the world. Now is the time for contemporary Indonesian scholars to contribute to the debate.

Australia cannot compete with the large economies in offering multibillion dollar loans to Indonesia. But we should be a principal coordinator of support and a major deliverer of services and advice in areas like information, education, applied systems and public administration.

We should be substantially increasing our support to enable Indonesian students to continue studying in Australia during this period.

Food will be critical in the coming months. I think the government has its priorities right in looking to the humanitarian task ahead. But Kim Beazley's proposal to broaden this into a mini-Marshal Plan involving not only the World Bank but the Food and Agricultural Organization and the World Food Program, together with an international coalition of aid donors, deserves the government's support.

Under an earlier coalition government, Australia was involved in the mid-1960s in putting together the Inter-Governmental Group on Indonesia (IGGI) to coordinate aid. Although the World Bank now performs that task, there may be scope for an informal grouping of governments to offer Indonesia support and advice in the way IGGI originally did.

This is a regional, not just a national, crisis. Indonesia is the epicenter of Southeast Asia and we need to work as closely as possible with our other neighbors in trying to address the causes and consequences of Indonesia's problems.

I cannot tell what will happen in Indonesia over the coming months. But I am much more confident than many. We have been treated to a good deal of coverage -- some of it shrill -- about what lies ahead, including prophecies of the breakup of the archipelago, or a renewal of the massacres of 1965, or flotillas of refugees fleeing Java.

I can confidently offer advice about what we will not see. Historical analogy is generally a lousy way of predicting the future, and it is especially so in this case.

This is a very different Indonesia from the country of 1965 and 1966.

In the weeks and months ahead, my earnest advice to you is to discard immediately any newspaper articles or television reports you come across which include phrases about years of living dangerously.

In some ways, the political stability over the years of the New Order government has disguised to the outside world the speed of change in Indonesia since 1966. The country has been transformed from a rural to an industrial economy, from a village to an urban society, from a largely illiterate society to one where education is spread widely. Agriculture made up half the economy in 1966. Now it is about 20 percent. A large middle class of about 15 million has emerged.

And because of these achievements, Indonesia is no longer the country it was. With its integration into the world economy have come changing expectations about the kind of society it should be.

Formally or informally, issues like the piece of pribumi (indigenous) business in the economy, the long-term role of the Armed Forces (ABRI) and whether it retains its dual function in the security and political areas, ways of addressing differences in the rates of development between the central and outer islands, and means of getting greater public participation in politics are all being debated in Indonesia.

So change is not going to stop now. It will continue just as it has continued in other Asian societies and in our own. But it is change which must come from within.

One great danger is that as the political and social consequences of the economic downturn become clearer, Indonesia and other countries of the region will turn inward as they conclude that engagement with the world was the cause of their problems, rather than the source of their growth. (And it is worth recalling that despite the experience of the past 12 months, Asia in recent years has been the largest and fastest surge of growth in human history).

Prime Minister Goh Chok Tong of Singapore has spoken of the danger of a broadening of this sentiment to include a reassessment of the region's relations with the West.

Voices in Asia are now being raised in favor of greater autonomy. This is fine. Asian countries can be as autonomous as they like. But they have to accept that a trade-off exists between autonomy and growth. In a world revolutionized by information technology, autonomy will not deliver enough jobs to absorb the growing number of young job seekers.

And the domestic savings on which these economies have depended will no longer be sufficient. They will continue to need access to international financial markets and to the technology and expertise which foreign direct investment can provide.

Asia does not have to play according to the Authorized Economic Version or the Wall Street Model. There are obvious cultural dimensions to the way Asian economies work, just as there are to the American or German or Australian economies.

But Asia does have to play by the rules which facilitate growth.

You cannot attract investment without an economic rate of return and you cannot get the best sort of investment without providing the opportunity to litigate your interests. The challenge for these countries is to find ways of preserving their cultural autonomy and the different social, and inevitably financial, obligations which accompany it while improving transparency.

If this danger of an inward looking Asia is to be avoided, the best antidote to it will come through the policy prescriptions and examples of the regional great powers -- Japan, China and the United States.

In particular, the speed with which Asia emerges from recession and the longer-term strategic impact of the crisis will depend on:

* Whether Japan can stimulate its economy and use it to drive growth elsewhere,

* Whether China can cope with its huge domestic challenges and withstand the strong pressures it will face to devalue its own currency,

* Whether the U.S. economy continues to grow and to remain open to Asian exports.

Japan's response to this crisis so far has been deeply disappointing. The original victim of the Asian economic crisis, it is still mired in a long structural recession.

It is likely to see negative growth this year. At the same time, its trade surplus rose 88 percent in February over the same months a year ago. And its imports were down from every Asian country.

One of the most effective ways through Asia's current problems would be for Japan to resume its role as the regional engine of growth and expand its capacity to absorb some of its neighbors' exports.

Japan has generously contributed to the IMF packages and Prime Minister Hashimoto has been personally involved in the problems of Indonesia. But what has been absent is much of a sense of Japan taking a leadership role in the region, generating ideas, marshaling support and making decisions about its own economy in full cognizance of their impact on its neighbors.

The Japanese government is expected to announce another fiscal stimulus package tomorrow, but if it is to have any long-term impact the more important issue will be what it does in they way of basic structural reform.

When we look back at this crisis in coming years, I believe the thing for which it will be remembered is not that Asian economic growth suddenly stumbled. That was always going to happen in one form or another. The historically significant thing about it will be the way China handled the first region-wide crisis since it reasserted its role as a great power.

China's neighbors have been looking carefully at the way it responds to these current difficulties as a measure of the way it will behave in future, as a test of the sort of power it will be.

By any measure, the results so far have been encouraging.

Although the massive devaluations of other Asian currencies will impose new pressures on China's exports, cutting its growth rate back to under 8 percent, the government has promised to avoid any competitive devaluation of the yuan. It has justified this decision precisely in terms of the harmful impact such action would have on its neighbors.

China has instead adopted a policy of expanding domestic consumption. It has begun a public works program equal to 1 percent of economic output.

It has also shown practical support for the other countries of the region by participating in the IMF rescue packages.

But just as important has been the example China has provided. It has demonstrated that the best way out of the crisis is by continuing bold reform rather than retreating into introspection and caution.

It has taken on the huge challenges of reforming the state- owned enterprises and the banking system. It has begun the largest restructuring of the machinery of government since 1949. It has signaled new measures to encourage foreign investment in China's infrastructure. On the political front, it has announced that it will sign the International Covenant on Civil and Political Rights.

No one, least of all President Jiang or Premier Zhu, would underestimate the huge difficulties of keeping reform and growth going in an economy of 1.2 billion people but China's handling of its response to this crisis suggests that it is conscious of the responsibilities of leadership and capable of acting beyond narrowly defined national interests.

The United States has now had a period of prolonged economic growth, part of a long upcycle beginning in 1993. This has been fed by a stock market which can shift capital effectively and efficiently out of unproductive sectors into productive sectors. With luck, the Asian crisis will help the United States continue to grow by feeding in deflationary effects.

However, virtually all the Asian economies will be basing their strategies for economic recovery on even more competitive exports. And the U.S. market is the one they will be looking to.

But the U.S. foreign trade deficit for the last three months of 1997 was already the highest ever recorded and seems set to grow. A further surge of Asian imports will fuel protectionist sentiments in Congress. This will be happening at a difficult point in the electoral cycle.

Although the administration has been heavily involved in seeking solutions to the current economic crisis, it is hard in the post-Cold War United States to find congressional or public acknowledgement of the link between American prosperity and the rest of the world, or indeed much interest in the outside world. The forces standing in favor of confident U.S. multilateralism seem to be losing ground.

A growing problem for the rest of us is that the cost to the United States administration of securing U.S. public and congressional support for international issues like United Nations funding or the current IMF replenishment is increased demands that these organizations demonstrate that they serve specific American goals and ideals. This situation is untenable over the long term for both the United States and the international community.

Window: What both President Soeharto and I tried to do was to construct a framework for a relationship which would endure after we had passed from the scene. I certainly valued my friendship with him, but I was also conscious that our friendship would not be enough to change the nature of the relationship.