Lease out Batam to save economy

By Steven Susanto and Hario Suprobo

JAKARTA (JP): Past success in developing the country was made possible by a large inflow of foreign capital. The capital allowed us to exploit domestic resources for the benefit of a few members of privileged families through the widespread abuse of power and facilities in the form of corruption, collusion and nepotism. Personal gains were the single focused pursuit of most key decision-makers in the public and corporate governance.

Business institutions functioned as the most effective vehicle for generating personal gains at the expense of their liquidity and profitability, as indicated by sluggish productivity improvement and depreciating exchange rates.

The deteriorating solvency of public and private enterprises was disguised by the continued inflows of overseas capital and domestic liquidity expansion from the banking industry. The insolvent domestic institutions were accidentally exposed by the large-scale outflow of capital in the second half of 1997 which was triggered by the spillover of the currency crisis in Thailand and weakening economic fundamentals. The extreme depreciation of the rupiah introduced the crisis.

The crisis resulted in an enormous compression of domestic demand leading to high unemployment and low rates of capacity utilization. The huge rupiah depreciation has ignited rapid inflation and swelled the rupiah value of external debts. A severe liquidity squeeze due to a domestic scarcity of external financing ruined the balance sheets and the profit and loss statements of domestic financial institutions and nonfinancial corporations with considerable foreign currency exposure.

Massive withdrawals of funds from the banking industry have dried up cash reserves of an increasing number of banks, leading to a worsening solvency in financial markets on top of the major stagnation in the real sector.

A shameful episode was then colored by dreadful social turmoil in mid-May. Substantial losses on the economic front tragically added up within a very short time. The social unrest crippled distribution networks and expedited shortages of essential goods, in addition to dramatic deterioration in the investment climate. Most domestic and foreign investors headed for the exits following the crash. They continue to stay away from the country's battered economy and its dire markets. Indonesia has lost the confidence of both domestic and international investors and producers.

Production is expected to stagnate further and aggregate output is forecast to fall by 10 percent. We fear that the economy is sliding into deeper stagflation due to the large-scale flight of domestic and foreign capital out of the country, which adopted an open capital account regime. Moderate modification of the regime is worth considering in a bid to escape the potent possibility of another radical and preposterous slide in the rupiah.

A renewed slide in the rupiah is already apparent and has dealt a serious blow to the domestic and foreign currency markets as well as stock and bond markets. Fears of a looming depression has hit market sentiment and caused both domestic and foreign investors to remain sidelined. Bearishness seems to last long and has weighed down the markets. The shattered markets resulted in the decline in asset prices that magnified the drying up of private financing and instability in financial markets across the board. Consequently, the country is presently lurching toward default.

The existing stocks of basic products may not be sufficient to meet domestic needs for the next five months. Domestic production and distribution are expected to fall sharply since an increasing number of companies have closed down their operations after laying off their employees.

We are doubtful that banks can remain sound in view of their illiquid and unprofitable performance which has led them to a state of insolvency. Our GDP continues to shrink at an accelerating pace to exacerbate stagflation. Excessive unemployment and spiraling inflation have become alarming, and if prompt measure are not initiated the rate will become intolerable in a few months.

Without a quick resolution of the crisis, widespread hunger will cause further large-scale social turmoil and the country will be subject to further devastation, loss of property and business, and threaten people's lives.

We believe that Indonesia must be reformed and recapitalized, and that both programs should be implemented simultaneously. However, the latter is more important than the former in terms of priority. Recapitalization constitutes the necessary condition, but it is not sufficient and therefore should be complemented by reform. Recapitalization is more urgent since it would keep the Indonesian economy from collapsing in the immediate future.

Reform should nevertheless be carried out to address fundamental weaknesses in the public, corporate and financial governance as highlighted by the crisis. Economic fundamentals must be good to justify any investment. The ingredients of the IMF-supported programs that aim at reforming the economy are laudable and beneficial except for the contractionary measures on which the IMF insisted. The IMF, through its multibillion dollar bailout in exchange for the contractionary measures the government has to adopt, only offered a dangerous pill that may in fact kill off the patient.

The economy is in worse shape because of the policy slippages advised by the IMF. As a result, the government has tripled interest rates to a mind-boggling level that brought semi- collapse to the financial and real markets. The growth-impairing measures only serve to deepen the crisis as Indonesia swallows its bitter and damaging pill from the IMF. The contractionary measures have caused job losses and an economic impasse.

The government should expand the shrinking economy by applying expansionary measures. The ongoing contraction has to be offset by expansionary policies to bring the country out of its predicament. The country is presently gripped by deepening stagflation that has resulted in escalating poverty.

The contractionary fiscal and monetary policies threaten the saliently susceptible supply of essentials. We suggest that the government cease exercising contractionary strokes which cause further contractions of the economy, and instead commence applying expansionary fiscal and monetary measures to expand the economy. It is an odd hoax from the IMF office to declare that the Indonesian economy is overheated in the present era of rising unemployment and idle and dormant production capacity.

The inevitable need for expanding the shrinking economy leads us to the second program of recapitalization, which is more urgent than the first program of reform in terms of time, attention and resources. The country needs considerable funds to expand its beleaguered economy and finance its recovery.

The years of easy money disappeared when confidence in Indonesia ebbed and one key to regaining confidence is a robust expansion of the economy. The unnecessary tightening of monetary conditions has to end to avoid nationwide calamity since the system will run out of the energy needed to feed its people in less than five months.

Although we disagree with the idea of printing more money, we nevertheless believe that only through a large-scale fund injection can Indonesia escape from its most daunting peril.

Last month's large capital outflow, which resulted in the dramatic compression of domestic demand, has to be compensated for by a large capital inflow to fuel the sluggish economy and activate inactive resources. It is quite risky to rely solely on the US$43 billion fund that the IMF brokered to bail out Indonesia's ailing economy because of its insistence on contracting our economy through contractionary policy slippages.

In addition to the inadequate amount of the bailout fund and its emphatically slow and tough disbursement, we view that it would be wiser to always rely on our internal resources as the main base and treat external aid as additional revenue to allow the Indonesia government to determinate the fate of this country and its people.

To reverse the ongoing contractionary spiral before the system disintegrates, we conclude that the magnitude of capital inflow should be at least $50 billion. The amount of required capital inflow would compensate for the abrupt and enormous withdrawal of capital out of the country through capital outflows.

The amount of financial energy that disappeared is projected to surpass $100 billion since our gross estimate on the total amount of foreign direct investment in Indonesia since 1967 is about $90 billion and the size of private sector external debts above $75 billion.

To meet the resolution, we explored the following question: What available but marketable resources do we have?

After reviewing and exhausting all viable alternatives from all internal resources that can generate fresh funds in the neighborhood of $50 billion to $100 billion in less that five months from now, we eventually arrived at the most viable solution.

We should lease out Batam island to any prospective tenants. In addition to Batam island, we could also prepare Bintan island to ensure that the amount is sufficient to reactivate the lethargic and inactive wheels of development.

Our lack of national credibility rules out a lot of realistic possibilities of raising some $50 billion in five months to salvage the country from its internal blowout. However, because of limited time and budget constraints, we view Batam island as the only leasable asset that meets our urgent need for reversing the increasing contraction of the economy.

Needless to say that this major breakthrough ought to go hand in hand with the privatization of state-owned enterprises which the government is endorsing.

The writers are members of FEUI 1978 group who based this article on a discussion within the group. Members of the group enrolled in the University of Indonesia's School of Economics in 1978.