Indonesia's economic developments confusing

The deterioration of the economy has reached a point where it is difficult to see a solution. Economist Kwik Kian Gie discusses dilemmas faced by the government.

JAKARTA (JP): Deep economic depression has caused the Indonesian elite to oscillate between optimism and pessimism so that they can no longer make appropriate judgments that are based on the realities.

When the rupiah's value strengthened to about Rp 7,000 per U.S. dollar at the end of 1998, for example, many of the elite optimistically took the view that the economy had bottomed out and that economic recovery was likely to start in 1999.

But government officials and many economists later became pessimistic when the International Monetary Fund (IMF) acknowledged that it had made mistakes in treating the economic crisis in Asian countries, while, at the same time, the rupiah weakened to some Rp 9,000 against the dollar.

Bank Indonesia, therefore, made a statement that it would defend the rupiah through market intervention.

The economy is likely to remain in its dire condition for a long time because recovery requires stimulation from improved consumption, increased investment or the introduction of a deficit state budget, while it is very difficult to boost consumption at a time when the gross domestic product (GDP) is decreasing and unemployment and poverty are increasing. Stimulating the private sector to increase investment is also difficult due to the high levels of bad loans at banks and the weakening of consumer purchasing power, while introducing a deficit state budget will not help much because the government's total budget is decreasing.

Based on such conditions, there are two possibilities for the future development of the Indonesian economy. The international community may provide the adequate financial assistance needed to reinvigorate economic life or, otherwise, the economy will continue to deteriorate. Indonesians have experienced serious poverty and yet they have not become extinct as a nation. Serious poverty is even expected to train them to become a strong, united nation.

In this era of globalization, serious poverty in Indonesia might affect neighboring countries but Indonesia cannot prevent the contagious effects of such economic deterioration on the region, nor floods of refugees.

If the international community does not want to be affected but is not willing to help provide long-term concessional aid, it could take any measures to totally isolate Indonesia and the nation would have to prepare itself to face the possibility of extraordinary poverty. From the lowest point of economic conditions, Indonesians would rebound, while trying to avoid the repeat of past mistakes.

What was the most fundamental mistake that has led the economy into such a serious crisis? A wide gap between foreign debts and the country's capability to save capital.

The foreign debts of the private sector alone have reached almost twice the country's GDP as many Indonesian conglomerates have had a debt to equity ratio of far above 100 percent. Added to the government's foreign debts, the country's total offshore borrowing is equal to four times its GDP.

To make things worse, domestic banks are now affected by bad loans of up to Rp 700 trillion.

A foreign economist, who happened to be a supervisor of the implementation of the Indonesia-IMF bailout agreement on economic reform, said he was not that pessimistic. Before the economy falls to as low as the 1940s' level, investments will flow into Indonesia again and the economy will rebound.

He said that as soon as Indonesia's big businessmen make investment again, foreign investors will follow suit. Foreign investors believe that Indonesia's big businessmen know better about the investment climate in the country because they have complete networks of information.

However, the facts show that the government is facing a big dilemma. About 50 to 100 of Indonesia's conglomerate owners, who make large contributions to the GDP, have played big roles in corrupt, collusive and nepotistic (KKN) practices which have ruined the economy, particularly the banking industry.

The government, therefore, is now involved in disputes with them. If these disputes cannot be settled, they, consequently, will no longer make new investments. The value of their total assets is actually smaller than their total debts with the banks. Many of them have been banned from traveling abroad because their business practices have allegedly involved criminal acts.

But some of them do not feel guilty, considering that their failure to repay debts has been caused by a force majeur factor, the economic crisis. Some others say that all their assets can be confiscated as long as they are freed from debt obligations and any other demands.

Should the banks also take over the risks by, for instance, writing off part of their debts? The problem is that the conglomerate owners' failure to repay the debts was not merely caused by the economic crisis. Many of them have marked up costs and assets and deposited part of their borrowing in foreign banks for their own personal interest. The government and society, therefore, will not accept any plan to write off their debts, a measure that will burden the government.