Thu, 25 Dec 2003

Post IMF Indonesia: Business as Usual

Satish Mishra UNSFIR Jakarta

The 13th annual meeting of the Consultative Group on Indonesia on Dec. 11, was a decidedly upbeat affair. As usual in Indonesia, yet unusual for a large developing country, virtually the whole Cabinet was in attendance.

Across the table were representatives of countries and institutions poised to help Indonesia finance its budget deficit in the coming election. They would do so either by lending to it or by making gifts to it. In past years this involved haggling and arm twisting behind the scene. This year was different. It was a time for mutual congratulation. The IMF was officially leaving. It was time to say goodbye to an old, if at times controversial friend. It was time to give the devil his due.

As expected, the Indonesian government and its ministers of finance and economy were soundly cheered for a job well done! Indonesia has achieved macroeconomic stability! If you find yourself scratching your head let me explain.

Achieving macroeconomic stability is not like climbing Mount Everest but it can give a country's leaders a considerable buzz. This is especially the case when praise comes from a world agency charged with promoting it. From that you might gather that it is a hard thing to do.

The kind of thing in which the guardians of the nation's finances, which includes not only your tax rupiah but also the donor's tax dollars, might justifiably be proud. Leaders like to be perceived as strong men and women of independent views. It is important to be seen as doing something which exemplifies strength, and independent judgement. Macroeconomic stabilisation provides just the opportunity.

If you think this is overdoing it, take a look at what achieving macroeconomic stability in Indonesia has involved. First, and most important, it has meant bringing down inflation from a dangerous 58 percent per annum in 1998 to just 5.3 percent, year on year, by November 2003.

Second and closely connected to it, the exchange rate of the rupiah to the dollar has had to be stabilised. As the World Bank Report prepared for the CGI points out, the exchange rate during 2003 was unaffected by the Bali bombing, the SARS epidemic, the war in Iraq and the attack on the Marriott.

Third, despite the administrative nightmare involved in implementing decentralisation across more than 400 districts, the overall budget deficit remains under control. The government further intends to bring the budget deficit down to 1.2 percent by end 2004. As donor representatives are particularly fond of pointing out, Indonesia is bolder than many of their own countries when it comes to setting conservative fiscal targets.

Fourth, public debt, not long ago, over 100 percent of GDP, continues to fall. It now stands at around 60 percent of GDP and is set to decrease as interest rates accompany lower inflation rates. This takes the wind out the sails of those who have seen debt as the single most important factor impeding economic recovery.

All this is a cause for serious self-congratulation. In a recent conference in Bali, Eisuke Sakikabara, known widely as Mr Yen, declared the Indonesian economic crisis as formally over. He advised Indonesia to concentrate on coming to grips with new reality in the Asian economic scene: the rise of China and India as two giant economic motors of the future. Similar sentiments were echoed at the CGI as several delegates confirmed the end of the economic crisis in Indonesia. They spoke with confidence about how macroeconomic stability would serve as a foundation from which to attract new investment, exports and employment.

This is a good story. It keeps everyone happy. It makes every one optimistic. It is a much needed corrective to the bout of depression that seems to grip the more agitated members of our civil society. And if nothing else it might convince some investors, just a few big ones will do, that it is time to revisit Indonesia. There are just two problems. The story is not very interesting. It might, moreover, do more harm than good. It is important to keep the broader picture in mind.

First, let us look at the macroeconomics. True, inflation is falling, interest rates are going down, the budget deficit is under control, exchange rate is stable: all good IMF territory. This would be impressive indeed in countries with a history of fiscal profligacy. There are many countries in Africa or even Europe with such a history of inflation bias. Bringing the budget deficit under control might be an even more of an achievement in those countries of Latin America where organised labour entered locked horns with organised employers association for a fairer distribution of the national wealth.

It would be just as commendable if the budget deficit were brought under control in countries emerging from wars or prolonged conflict, such as a Somalia or an Iraq. After all, in these countries fiscal consolidation would require re- establishing the basic machinery of budgeting on the hand and controlling public expenditure volumes on the other.

Indonesia is easy ground for macroeconomists. There is no history of sustained high inflation, no organised and radical labour movement, no competing political parties with distinct constituencies which require fiscal attention and favour. Large segments of state apparatus, civil servants, university teachers, policemen and soldiers and the inevitable array of judges and court-officials, are used to raising much of their incomes through extra budgetary channels. For such groups, putting pressure on public expenditure is the least effective option in raising their incomes.

This is not all. Macroeconomic policy in Indonesia is determined by technocrats in the government and the civil service who pride themselves for not being politicians. This is a short hand for saying that they are unconcerned with the political implications of macroeconomic policy. Besides being normal operating procedure under the New Order, it also makes the job of achieving macroeconomic stability easier. Privatisation of state owned assets is a good example. Here, meeting financing gaps in the budget deficit rather than productivity or employment has been the most important touchstone of policy.

It would seem therefore that achievement of macroeconomic stability in Indonesia is not as difficult as it might be hyped up to be. Of course, policy makers point to powerful vested interests which continually lobby the parliament. But this kind of argument is a slippery slope. It implies that the vested interests under the New Order were less powerful and less destructive of the nations finances than today.

The best we can say about macroeconomic stability is that it is a good beginning. This is not a very rousing message in the seventh year of the transition. In fact it is a rather worrying thought.

It would seem that Indonesia has covered the easy part of the transition journey. The most difficult challenges still lie ahead. These include consolidating a new political system, reducing social stress and ethnic division, generating new jobs for Indonesias young and ensuring a fairer share of the national income and wealth for the average citizen backed by a system of transparent, open and affordable justice.

This is not to deny that there have been many reforms in these areas also. Yet as everyone knows, there is no clear game plan, no convincing time frame and no overarching strategy. Without a significant movement on these fronts, economic recovery cannot be sustained. Neither can Indonesia weather future shocks to its political and economic system without serious social division and turmoil.

Overselling macroeconomic stability under such circumstances will only serve to create false expectations. That is not a good move in an election year where more than just economic recovery is at stake. Like many technocrats, we may have little sympathy for democratic politics. Some of us might even see the possible advent of a new Indonesian autocracy as an irrelevant detail in its development journey. A new autocracy might well have its uses. It may keep social activists and religious radicals at bay. It might also, according to some, serve an emerging geopolitics of the day.

In Indonesia it would spell the end of the reform spirit and back to business as usual.

Satish Mishra is head/chief adviser United Nations Support Facility for Indonesian Recovery (Unsfir).