Long-term reform a must for RI

Long-term reform a must for RI

By Omar Halim

JAKARTA (JP): Amid the nosedive of the rupiah value against
the dollar by more than 50 percent between July and October,
President Soeharto decided last week to ask the International
Monetary Fund (IMF), World Bank and other international financial
institutions to assist in shoring up Indonesia's currency.

He also asked Dr. Wijojo Nitisastro, the New Order economic
guru, to take the necessary action and coordinate with the
relevant governmental institutions to deal with the problem.

These steps have no doubt increased confidence in the
government's intentions and seriousness in facing the present
monetary crisis. The rupiah exchange rate had, as of yesterday,
rebounded to Rp 3,400 to the dollar.

In the past several weeks, the monetary measures announced
were meant to drastically reduce the money in circulation through
compulsory deposits of public corporations deposited into Bank
Indonesia, the central bank, accompanied by the payment of
exorbitant interest rates for these deposits.

These prompted an intense time-deposit rate war among banks to
attract deposits from the public. Gradually, these rates have
been reduced. The government had subsequently complemented these
measures with a series of fiscal measures which were meant to
redress the excessive balance of current account deficit in the
longer term.

The continuing liquidity squeeze has affected the financial
viability of firms which could, sooner or later, result in
bankruptcies and unemployment. A decrease in the rate of economic
growth has been widely forecast for 1997 and 1998.

The involvement of the IMF and World Bank, and the return of
credibility and confidence, might stabilize the exchange rate of
the rupiah for now, but the government should take this
opportunity to undertake fundamental reforms aimed at laying the
basis of long-term confidence in the Indonesian economy.

This should include revitalization of the capacity and
performance of the economy at the micro level, the level which
will basically determine the viability of the Indonesian economy
in the face of the process of globalization.

In accordance with the ASEAN Free Trade Area timetable,
Indonesia will be exposed to almost full competition from other
ASEAN countries by 2003. Members of the Asia Pacific Economic
Cooperation, including Indonesia, have agreed to have free trade
among themselves by 2020. Indonesia should be, if it does not
want to be the backyard of other countries, at that time, fully
competitive in world trade.

For this purpose, the government should have a long-term
perspective of the comparative advantage of the Indonesian
economy vis-a-vis its major trading partners in ASEAN and the
Asia Pacific region.

It should orient the education and training system to enable
Indonesia to be fully able to face the challenges of the future.
This is a long-term project, which should have been started.

The government could also use this opportunity when the
international community (IMF, World Bank, ADB and major bilateral
donors) is prepared to support its efforts to put the Indonesian
economy back on the high-growth track.

This means undertaking fundamental reforms in the banking
sector, as has been suggested by numerous commentators, to weed
out inefficient and incompetent financial institutions in order
to make the banking sector fully capable in efficiently
channeling financial resources into the appropriate sectors.

At the same time, the banks should also be protected from
having to fork out funds for projects that have not been
thoroughly evaluated and approved. The government should also use
this opportunity, in general, to eliminate demands for resources
that are not consistent with national economic priorities, or
nonviable megaprojects which would only increase the overall cost
structure of the economy.

Monopolies, oligopolies and other activities that distort
prices, and the efficient allocation of economic resources,
should also be phased out within a short period of time. These
entities, if they are serious in contributing to the Indonesian
economy, would benefit from the required rationalization process
that would make them competitive with foreign competition.

It is difficult to take firm decisions on these, and other,
reform measures because there are numerous influential interest
groups. Some of those measures would also take some years to bear
fruit.

But it is imperative that the fundamental reform of the
Indonesian economy must be undertaken now. It will immeasurably
increase confidence in the Indonesian economy and the government
much more than the confidence which is being shown now to restore
the value of the rupiah.

The IMF/World Bank mission in its stay here this week should
take a long-term perspective in its recommendations to the
Indonesian government.

Better still, as Dr. Mohammad Sadli said in a recent Business
News editorial, if the "government, on its own initiative,
(would) adopt most urgent measures without consulting vested
interests, and before any demand is made by the IMF".

Failure to undertake the necessary reform now would make the
Indonesian economy continue to be vulnerable. And if such crisis
should recur in the future, international goodwill will be much
more difficult to come by, since it will be clear to foreign and
national capital that Indonesia is not where their capital would
receive the maximum return.

The writer is a research fellow at the Center for Strategic
and International Studies who worked for the United Nations for
almost 30 years.