Nurturing optimism about the future

Nurturing optimism about the future

By Mohammad Sadli

The following is an excerpt of a paper presented at a recent
seminar in Jakarta jointly organized by the Centre for Strategic
and International Studies and the Indonesia Project, the
Australian National University.

JAKARTA: It is impossible for most intellectuals in Jakarta
today to talk about the country optimistically. The country seems
to be breaking apart, or bursting at the seams. The government is
weak. At times there seems to be no government at all.

The unity of the republic is being challenged. The two
outlying provinces of Aceh and Irian Jaya are defiant and are
demanding merdeka (freedom). The fires of social conflict in the
Maluku islands, going on for more than a year and claiming
thousands of lives, are still smoldering.

This is not to say that the whole country is in flames and
beyond salvage. In most places and most of the time, daily life
goes on as usual, and citizens do not fear for their lives. But
the degree of insecurity is increasing. Businesses complain about
a lack of physical and legal security.

Plantations, logging companies, shrimp farms, mining
operations have faced, and some still face, hazards coming from
local communities that demand greater compensation for land ceded
a long time ago.

The newfound democracy has allowed new labor unions to form
and some of them to resort to confrontational tactics to get
attention and following.

Of course the striking unions have their own complaints, that
is, that an employer can resort to unethical tactics, like hiring
thugs to frighten union activists. There are reports that large
foreign companies, although not leaving Indonesia, are favoring
other Asian countries for expansion and subcontracting.

We have to stress, however, that all these predicaments have
not made it impossible for the Indonesian economy to recover and
grow. Last year it achieved an almost 5 percent growth, after an
almost 14 percent contraction during the depth of the crisis,
that is, in 1998, and a very dull performance in 1999.

Consumption was the main driving force, followed by exports,
while investments showed incipient growth. Non-oil exports
performed splendidly, with products from the large scale and the
vibrant small and medium scale sectors leading the pack.

The very much undervalued local currency contributed to this
performance but it also proved that infrastructure, like
transportation, communications and harbor facilities, is still
functioning. The recovery and peak performance of such exports
are not supported as yet by a normal functioning banking system,
which shows that the economy, and the new actors in the
productive sectors, have been quite dynamic to find alternative
ways of financing and expediting.

Many large conglomerates and banks are still flat and
languishing in the wards of Indonesian Banking Restructuring
Agency (IBRA), but a host of new players and actors, many from
the small and medium enterprises (SMEs) and informal sectors, are
occupying central stage. The crisis has stimulated the birth of
new players and structures and this societal dynamism may carry
the day in the longer run.

But at the end of the year 2000, the stark realities in the
political arena may have taken their toll. Dana Reksa Research
Center as well as Bank Indonesia reported declining indexes of
consumer and business confidence. There have been reports of
lower growth in exports since the end of the year. The latter may
be more because of the weakening of the external markets, but the
loss of export orders to safer Asian countries may also account
for it.

The continued weakening of the rupiah is both a reflection of
further erosion of confidence as well as a trigger for further
deterioration of macroeconomic conditions. The monthly inflation
rate will be affected, as imported goods are priced higher.

The state budget is in greater peril as higher interest rates
result in greater interest expenses to service the government
bonds for bank recapitalization. The political situation makes it
much more difficult for the government to go ahead with price
increases for domestic fuels to reduce the huge subsidies. If the
train of events cannot be stopped from going in the wrong
direction, the crisis will escalate, and sooner or later the
system will collapse, calling for a change in government.

But even crises can proceed very slowly in Indonesia before
the situation boils over. The political elite in Jakarta has
become very cautious and wants to avoid creating a bad
precedence. In engineering a political resolution it wants to
stick to the Constitution.

There is broad consensus about prudent economic, and
especially macroeconomic, policies but the problem of the
government is in teamwork, coordination and communication with
other parts of society. The executive branch is embroiled in a
fierce contest of power with the legislative branch, and the
bureaucrats, technocrats and professional economists are at the
time caught in the cross fire.

In times of economic adversity a large country like Indonesia
suffers from nationalistic and populist compulsions. Economists
generally believe that market-friendly and open-economy solutions
are the best.

But economic nationalists and populist pundits distrust the
free market because the strong-willed overwhelm the weak. Hence
they cry for protection. But protection will favor only certain
parts of the nation, that is the middle class, the Java based
consumers, the land owning farmers and others, not the poor, not
the majority among the consumers, not the regions outside Java.

Among the young professional economists there may be more
rivalry at the top, that is, between the chief minister and his
many critics. There is more cooperation at the working level.

These groups are trying hard to make sense of economic
policies. There is a history of close interaction of the central
bank and economic ministries with major universities. Legislative
commissions dealing with economic affairs are becoming the latest
targets for networking and public economic education.

The political weakness of the government, and the new
independence of the central bank, often work against the
implementation of wrong policies. That's the blessing in
disguise. If the protective tariff for the importation of rice is
set too high, then it becomes an open invitation for smuggling
and the measure becomes counterproductive.

But the struggle to educate the public to understand and
support prudent economic policies is never easy or finished, and
there will be setbacks, especially in trying times like today.

There is, among the public and even among noneconomic
intellectuals, the tendency to "have your cake and eat it too".
For instance, to abandon the International Monetary Fund, to go
it alone, and find other sources of financing while demanding
debt cancellations because of its "odiousness". Populist
economists advocate complete abandonment of the large or
conglomerate sector and to rely on SMEs and the informal sector
as the new paradigm of growth.

The leaders of the Indonesian Chamber of Commerce and Industry
often prefer protection and admonish the government not to be
afraid of deficit spending if such a measure can pump up the
economy. We, conventional economists, should not come down too
hard on alternative economic thinking, because John Maynard
Keynes was also regarded a starry-eyed populist in the inter-war
years for advocating the government to spend money it did not
have.

On this occasion I would like to recall the initiative of the
Australian government to invite a group of young and upcoming
economists to Canberra (September 1998) to interact with their
colleagues in the excellent center for Indonesian studies at the
Australian National University, and talk about economic policies
that could help Indonesia get out of its crisis and resume
growth.

These road shows on macroeconomics were followed up by efforts
of public education on the problems of implementing the law on
regional autonomy. A multiple-year program has been mounted to
research, train regional cadres and disseminate studies on
regional autonomy and development.

Finally I wanted to illustrate our longer-term predicament.
The younger generation is worried about how they will have to pay
for the crisis as it resulted in government indebtedness equal to
almost 100 percent of gross domestic product. They dislike the
prospect and there is no domestic purchasing power to absorb it.
But the other choice is that the country will be stuck as a
complete socialist state where most of the modern and large-scale
sector remains in government hands. The young generation also
abhors the scenario that to achieve greater maintenance of law
and order the next government will have to accommodate the
military, restoring the latter's political role.

The young and old generations alike are facing the ugly
prospect of a breakup of the unitary republic. The law on
regional autonomy is not even a disguised form of federalism
because power will be handed down to 400, at times unruly,
regencies, rather than 30 large provinces.

The chilling prospect of living in a prolonged "messy state"
is starting to haunt us. What is the way out?

Economically speaking, the way out is through high growth with
strong exports to make debt repayments more bearable in the long
run. Such growth, however, should be under a different paradigm,
for better distribution and social cohesion. All that requires a
strong government, and how to acquire one in a messy state of
social and political transformation?

The answer is slow and patient institution building and
rebuilding, on the principles of prudence, transparency and good
governance. There should be political consensus and
reconciliation between the major parties, and between
personalities of the New Order of the Soeharto era and the
present Orde Reformasi.

The younger generation and the student movement are demanding
a price for political reconciliation at the top, that is, the
prosecution of big-time corruptors of the past, starting with the
former first family. For the large political parties and for
whoever will be in the government in the near future, this is not
an easy proposition, as the present situation shows. But
international pressure is also working in the direction of
establishing a clean government. Such international pressure is
strong because of the financial dependency of the government.
Some of us, Indonesians, can only applaud since domestic forces
may not be adequate to clean up the mess.

But because no single party has the overwhelming might, the
resolution of all those tugs-of-war will exact its time. The only
hope is that in the long run "we are not all dead", like Lord
Keynes said, when he castigated economists who claimed that
"everything would work out in the long run".

But what is there for us Indonesians to hang on to, other than
to believe that Indonesia, somehow and in the long run, will be
able to manage itself? We have invested enough in the last 30
years to educate our people and to build infrastructure that will
serve as the foundations for a new Indonesia.

Prof. Mohammad Sadli is a former Cabinet minister and senior
lecturer at University of Indonesia.