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

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.