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.