Part 2 of 2 Why we have failed to recover from the crisis

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

In contrast to other neighboring countries, Indonesia did not set up a special agency to deal with the crisis. The old guards of the New Order economy became ineffective because the development continuity was disrupted by the contemporary designs of "Habibienomics".

Reforms were delegated to an already overburdened National Development Planning Agency (Bappenas). Yet, implementation of projects remained in the same troubled sectoral structures. Hence loan compliance could not be properly attended to. And without effective public support, the government hesitated in implementing hard and unpopular decisions.

The condition worsened, as the IMF began coaching the administration on what to do and what not to do. The start of the political debacle was marked by the closure of 16 commercial banks as a show of impartiality in bank reform.

The invisible hand of the IMF was unnecessarily extended to cancel the proposed currency regulation under the currency board system. While the concept was debatable, the cancellation deepened social distrust.

Contrary to Malaysia, Indonesia unilaterally scaled down or in some cases closed down on-going projects, and even canceled signed contracts creating uncertainties in business practices.

These actions resulted in a negative chain effect of contractions within the economy. Hence, major industries adopted a wait and see attitude by downsizing production activities, increasing unemployment. Thus nonperforming loans from national banks had significantly increased which in effect resulted in overall bank liquidity problems.

The worsening condition here should be blamed on both the government and the donors. In the early stage of the crisis, both Indonesian and the World Bank economists were quite aware that it was essentially an urban and Java-based crisis.

Had the strategies been directed to prevent the urban Java economy from crumbling, a different picture may have been drawn about Indonesia today. Instead, the government adopted broad reforms and introduced a social safety net to the detriment of its middle class -- resulting in conflicting jargon.

Worst, the concept of the safety net was extended to bail out financial institutions faced with liquidity problems. The idea could have worked if the local economy was not left to contract. The condition worsened because the central bank did not apply any monetary control.

The money market was left opened and the currency rate was left afloat. Indonesian money flowed out seeking safe havens and parked outside the country. Singapore was believed to have housed Indonesians' money reaching over US$100 billion!

Without concrete intervention in program continuity, the impact on the economy was mediocre at best. Despite evidence of success in pro-poor program activities, without recovery and revival of production in major industry, these pro-poor projects have began to wilt.

Rather than investing in the poorest of the poor, targeting the significant number of educated middle income groups with better entrepreneurial skills can jump-start the economy with direct trickle-down benefits to the poor.

Many of the pro-poor projects today have not achieved institutional continuity. The recent commotion in the agribusiness company PT QSAR suggests the fragility of the grassroots economy, when it is far too detached from macro policy interventions, especially when affecting the middle income groups.

President Megawati Soekarnoputri has inherited brittle political, social, and economic fundamentals. Unless all political parties stop squabbling and start rebuilding the country, no leader will ever be able to implement decent macro and micro policies for reconstruction.

As a nation, Indonesians should renew their commitment to reconstruct the economy over and above partisan interests. Even the current government's commitment in a economic stimulus package may not yield significant results, if the strategies used continue to overlook the importance of the growing middle income groups not only as consumers of goods, but also as employers in the informal sector.