Investors waiting for legitimate government

The economic crisis and political upheavals over the past year and a half have driven investors out of Indonesia. Economist Kwik Kian Gie questions whether investors will return to the country after the general election scheduled for June 7.

JAKARTA (JP): Indonesia is expected soon to have a new government which surely will introduce policy changes. But whether the changes will lead to the restoration of the economy or to its deterioration remains unclear.

Whoever governs the country after the upcoming general election is expected to get more serious than the current government in its attempts to restore the economy.

The belief in several quarters is that political stability will encourage an inflow of investment, which will in turn reinvigorate the country's economic activities. But will the upcoming general election lead the country to political stability?

Political stability can be expected if losing political parties and their constituents accept their defeat and support the winning parties. This will occur only if the general election is held freely and fairly, with no money politics, and a new government is established from a coalition of parties well-known for their past freedom from corruption, collusion and nepotism. A free and fair election will not guarantee political stability if the winning parties reappoint current figures who are widely known by the public for their alleged corruption.

If political stability is established, will domestic and foreign investors reinvest in the country?

Many Indonesian investors have sent their money abroad even though they have not repaid their debts to banks. The banks in turn are now facing financial difficulties due to the mounting bad loans and are being forced to generate large amounts of liquidity by borrowing from the government. Because the government is now scrutinizing the management of the banks and confiscating their assets, including those put up by their borrowers as collateral, Indonesian investors with outstanding debts will not reinvest their money in the country for fear of possible investigation.

The government has a number of alternatives to settle the problems related to corporate debts but it has so far failed to act. A government established after the next general election will, therefore, have to deal with these old problems.

Alternatives to settling the problem of corporate debt include writing off the debts, confiscating the debtors' assets and investigating the debts to find out whether the debtors are involved in criminal acts. Borrowers who fail to prove that they are not involved in criminal acts should be imprisoned and their assets confiscated.

Any solution to the debt problem will be dilemmatic because law enforcement will also mean the removal of entrepreneurs. But as long as the government does not take any action, it is difficult to expect domestic investors to bring their money back into the country.

Expecting foreign investors to reinvest in the country is also difficult, even after political conditions stabilize, because they are still owed some US$75 billion by domestic companies. Foreign creditors can be expected to write off part of the bad loans -- like the writing off of 80 percent of cigarette producer Bentoel's debts -- or to convert their loans into equity. But such solutions will take time.

Therefore, companies which make new investments in the country will not take out loans from banks, and these new investments will come only when the supply of essential goods or some luxury products becomes thin and demand increases.

However, companies will make new investments only if there is political stability and political stability can be established only if the new government can win the public's trust.

A new government will be able to win the public's trust by making its policies more transparent and accountable to the people. It will have to disclose to the people all matters relating to the debt problem and the economic crisis.

The new government will also have to hold routine consultations with the House of Representatives on how to settle the problems of bad debts, the corruption of public funds and criminal acts.

If the people are well informed about the real problems, they can be expected to be more content in facing economic difficulties.