Political moves key to economic cure

Political moves key to economic cure

By Sofyan Wanandi

The following article is based on a paper presented at the
"Indonesia Update 1998" Conference in Melbourne from Sept. 25 to
Sept. 26, 1998. This is the first of two articles.

MELBOURNE: To many Indonesians, and the so-called reformists
in particular, the country has not yet entered the post-Soeharto
era. The transition government under President Habibie is seen as
just a continuation of the Soeharto regime without Soeharto. This
is perhaps correct if judged on the basis of the practices of
governance. Here, nothing seems to have changed. It is perhaps
too early to expect that the practices of governance can change
overnight. What is expected is not the results as such, but clear
signs that changes are being made. Indeed, such signs are nowhere
to be seen.

However, from the perspective of the Indonesian business
community there are already changes, not in terms of practices of
governance but in the political agenda of the government that
have a direct bearing on the business community. Although the
economic policies of the Habibie government lack coherence, the
general thrust of its policy towards business is quite clear. The
emphasis now is on small enterprises and cooperatives. This is
not unjustified in view of the fact that small enterprises and
cooperatives are very weak and play only a marginal role in the
economy.

There has always been a strong belief that the Indonesian
economy should rest on three pillars: the state, private
enterprise, and cooperatives. This is not the cause of uneasiness
on the part of the business community. What worries them is the
fact that the government is not interested in a revival of
existing big businesses that are currently in deep trouble. The
big uncertainty on their part comes from the feeling that the
government is basically hostile to them. Will small enterprises
and cooperatives be promoted at the expense of the larger
businesses? Does the policy essentially have racial overtones?
Are all of these concerns at all justified?

Unless these issues are clarified, confidence in the business
community will remain low. This holds true not only for
Indonesian-Chinese businesses but also for the much wider local
business community, and perhaps for the foreign business
community as well.

Soeharto had been a strong proponent of an economic framework
that rests on the three pillars referred to above. He introduced
various policies over the years to strengthen the weakest link in
that framework, namely cooperatives and small enterprises. The
Ministry of Cooperatives was established quite early during his
reign and huge amounts of resources were directed to the
cooperatives especially during the time when the Minister of
Cooperatives was also the head of the State Logistics Agency
(BULOG). The Ministry of Industry also introduced various schemes
(e.g. LIK or lingkungan industri kecil) to assist small scale
industries.

Various schemes of "partnership" (kemitraan) were also
introduced on the basis that not only the state should be
involved in the strengthening of the cooperatives and small
enterprises but that the large private enterprises are equally
responsible. The results were not encouraging on a national
scale, although there are individual success stories. In later
years, Soeharto, who became very impatient, took things into his
own hands and established the Jimbaran Group. This was an even
bigger disappointment as nothing concrete came out of the
initiative.

Much can be said about the above policies and initiatives. An
objective assessment of their meager results points to their two
main causes, namely poor governance and the politicization of the
program. It should be a matter of concern to all that the current
policies will have the same fate because, as proposed earlier,
the practices of governance have not changed, and the project is
a highly political one. And it is not improbable that the
government would find scapegoats for its failure. The previous
head of BULOG has become the first victim, ironically not because
of the agency's corrupt practices.

What about the other pillar, namely the state or more
precisely state-owned enterprises? Many of the large state
enterprises are in financial difficulties. Garuda Airways is in
deep trouble and Robby Djohan, an experienced banker recruited
from the private sector, has been given the task to rescue the
enterprise. Perusahaan Listrik Negara (PLN), the state
electricity company, is technically bankrupt.

While the new minister in charge of privatizing state
enterprises has removed the head of the company, who was held
responsible for deals with private power producers that were
forced on him, it remains unclear how the enterprise will be
rescued. The plan to privatize Semen Gresik, which was to become
the first privatization exercise, ran into trouble with the
parliament and public opinion because the negotiations were
regarded as non transparent. Pertamina, the largest state owned
enterprise, is also in deep financial trouble.

It has begun to rid itself of the rent-seeking activities of
the Soeharto clan that had cost Pertamina dearly in foregone
revenues and higher charges. Having done so, in order to survive
Pertamina still needs to do much more. It must formulate its new
mission and adopt a new business orientation. This is a challenge
faced by all state enterprises. Having Tanri Abeng, Indonesia's
first "one billion rupiah professional manager", in charge of
state enterprises (with the exception of Pertamina) is not a
guarantee that the challenge will be successfully responded to.
Tanri must go beyond raising funds for the government coffers by
privatizing state enterprises.

The third pillar, the "modern" private sector is in total
disarray. Only a few of the large conglomerates will survive.
Some were structurally weak long before the crisis. Others easily
fell victim to the crisis because they had over-invested, become
over-leveraged and over-stretched.

But there are also healthy enterprises that are having a hard
time coping with the crisis situation that has already lasted for
more than one year. Some continue to make their debt service
payments but there is a strong incentive for these companies to
join in the debt moratorium of their foreign and domestic
borrowings.

The banking sector, which in itself did not have large foreign
exposure, unlike the case of Thailand and Korea, has become the
victim of the debt moratorium or rescheduling. Some banks,
including the banks that have been liquidated and frozen, were
also in trouble before the onset of the crisis. They had large
problem loans and had severely violated the prudential
requirements. Of course the bad ones must be penalized.

Yet, separating the good ones from the bad ones does not seem
to be an easy task. Partly, this is due to weak corporate
governance resulting in poor transparency and accounting
practices. Partly, it is because the mechanisms and the
regulations are not in place. In other words, there is a lack of
an exit policy, as put forward by the 15 economists that signed
the Declaration on the Recovery of the Economy in early August.

IBRA, the banking restructuring agency, has to start from
scratch and is confronted with real problems of financing the
restructuring. INDRA, which is trying to assist in resolving the
external debt of the private sector, has produced a framework
which still lacks a mechanism for implementation. The more
worrying part is that the attempts to separate the good from the
bad has become highly politicized.

In a recent television talkshow, Soegeng Sarjadi from the
Kodel Group, expressed his concern that the government and public
opinion cannot discriminate between the good and the bad because
the problems have become so politicized: all the big ones must be
bad; all conglomerates must be bad; all Chinese-Indonesian
businesses must be bad; all the businesses of Soeharto's children
must be bad; all businesses of his cronies must be bad. What then
is left?

The overall environment for business is far from conducive. To
some, most likely Soeharto's children and cronies, there is a
witch hunt taking place. If improper procedures are used, this
could have a negative effect on the business environment. To
others, perhaps the big Chinese-Indonesian conglomerates, there
is the danger of hostile takeovers by groups sponsored by the
government.

Recent noises from within the government about a policy of
asset redistribution have increased such concerns. Asset
redistribution may mean redistribution to the government's new
cronies. Still, some other groups feel that the government will
force them out of their businesses, to be replaced by
cooperatives or other business units that are government
sponsored.

Such signals have been made by the government towards
participants in the food distribution system. Whatever the case,
in general the Chinese-Indonesian community feels most uneasy
with the uncertain situation about their place and acceptability
in the society, not only in business.

They feel that if their participation in business is no longer
welcome, they are essentially unwelcome in the society. No
assurances have been made at all by the Habibie government. More
reason for concern was the statement by Abdurrahman Wahid (Gus
Dur) that four ministers in the present cabinet are anti-Chinese.

Sofyan Wanandi is Chairman and CEO of the widely diversified
Gemala Group.