Part 1 of 2: Why we've failed to recover from economic crisis

Sri Pamoedjo Rahardjo, Executive Director Center for the Study of Administration and Management Indonesia, Jakarta

The debate on Indonesia exiting the International Monetary Fund (IMF) assistance program offers opposing views within the government. In spite of better than expected growth and respectable foreign reserves, the economic condition is still far from good; talk about the "good old days" abounds.

Only by looking at how our Southeast Asian neighbors dealt with the crisis can we fully comprehend why Indonesia missed the opportunity for fast recovery.

Before the crisis, developed nations praised the rapidly growing economies of the five original founders of the Association of Southeast Asian Nations (ASEAN). These countries were able to maintain political stability as a crucial condition for economic growth. They maintained local currencies at about the same rate over a long period of time.

Their impressive growth, with the exception of Singapore, manifested in features of the Mexican Peso syndrome, i.e., rapid increase in the balance of trade deficits and accumulation of foreign debts. These factors affected confidence in holding large amounts of the local currency or assets denominated in the local currency.

Soon after Thailand fell, the crisis rapidly spread to other Southeast Asian countries. Yet Indonesian and World Bank economists believed that we would not be seriously affected because of strong economic fundamentals supported by abundant resources. This may explain why the Soeharto government became complacent.

As the economy began to collapse, economic players ran to safety. Worse, no one in the administration was equipped to respond to the crisis or the ensuing social hysteria.

It was much too late when president Soeharto called in the original designers of the New Order economy. He then had no other choice than to entrust economic recovery plans to the 50-point scheme submitted by the IMF.

What made countries like Thailand, Malaysia and the Philippines able to recover sooner? The answer is solid support from their citizens; their people understood that the government wasn't solely responsible for the crisis. Their governments made use of their country's comparative and competitive advantages as triggers to escape from the crisis. These governments used simple assumptions to meet the challenges.

Thailand was the most fortunate country in the region with one rallying factor, the King. Citizens pitched in their gold assets. The King's leadership combined with strong Thai social ethics contributed to solid political stability. The country used IMF's rescue package to improve its monetary and fiscal conditions; but its comparative advantage, tourism and a productive agricultural- based industry, was also harnessed to stimulate the economy.

To maintain policy and program consistencies, Thailand established two national committees working with multilateral agencies.

Malaysia established a highly centralized committee under the very strong office of the Prime Minister -- the National Economic Recovery Council. Its crucial decision was to introduce a fixed rate of the local currency against the US dollar only, and to forbid the ringgit to have any value outside Malaysia -- a bid to stop capital flight.

Also important was to save jobs for the middle and working classes, by continuing on-going projects -- particularly those with a significant social impact. This maintained citizens' purchasing capacity. To reduce labor market competition, the government ended contracts with migrant workers with retrenchments. This approach built people's confidence in the government to handle the matter.

The Philippines intervened in a more conservative way. It maintained programs within its sectoral ministries. The government separated agencies dealing with economic recovery from agencies dealing with crisis-affected programs.

Yet, compared to some other countries, the Philippines was not seriously affected by the crisis because of the sheer number of Filipino workers overseas and immigrants, who continued to remit a strong US dollar back to their country.

The considerable amount of hard currency sent back to the country by income earners abroad became the Philippines' social safety net. With four out of five Filipinos having relatives working or residing outside the country, the economy remained "healthy". Hence, the real poor -- who needed assistance -- could be identified in a straightforward manner.