Lease out Batam to save economy

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.