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