Reform must go on

Reform must go on

There is great comfort in knowing that none of the core
elements of the reform package set in Indonesia's July 31 letter
of intent (LoI) to the International Monetary Fund have been
changed. The focus of the new LoI signed by the new chief
economics minister, Rizal Ramli, and Bank Indonesia's acting
governor Anwar Nasution on Thursday remains the same: debt and
corporate restructuring, bank reform, asset recovery, judicial
reform and good governance in the public and private sectors.
Even the slightest change in or backtrack on any of the
interrelated basic components of the reform would have spooked
the market and could have eventually sabotaged the budding
economic recovery.

The consistency could be the main reason the IMF did not make
things any more difficult for the Rizal-led economic team to get
approval for the new LoI. If allowing the previous LoI to be
rewritten into a very slightly revised version proves effective
in gaining the full cooperation of the new Cabinet, it is a small
price for the IMF to pay for its trouble of having to deal with
three different governments -- the Soeharto, the Habibie and the
Abdurrahman administrations -- in less than three years.

If this exercise worked well to provide a psychological boon
to the members of new economic team and increased their sense of
ownership of the difficult and painful reform programs and
heightened their sense of responsibility to deliver the goods,
the whole process was not, after all, a waste of time. There is
no harm in letting Rizal have his ego massaged by claiming that
he is the first chief economics minister capable of solely
initiating a reform package since Indonesia fell into the IMF-led
bailout program in November 1997.

It would nonetheless be entirely unfair not give credit where
credit is due. The new document does contain some technical
changes, such as extending the LoI period from four months to six
months and in the interval between IMF reviews of the reform
implementation from two months to three. This change is warranted
because the present economic condition is no longer as volatile
or vulnerable as it was in 1999 when a review was done on a
bimonthly basis, nor as bad as in 1998 when an assessment was
done on a monthly basis. The longer interval will give more
breathing space for the economic team to work and prepare for the
next review.

The new LoI also gives the multilateral executors of the
bailout program -- IMF, the World bank and the Asian Development
Bank -- a better division of jobs according to their core
competence.

The most substantial among the slight changes and the only
contribution of the new economic team is the induction in the new
LoI of what the team claims to be its own initiative -- a 10-
point economic recovery acceleration program. Although the 10
measures were randomly mentioned in the old document, their
insertion on top of the LoI could still serve as a clearer
signpost for policy direction. Three points of the program
regarding the development of subsistence agriculture, rural
infrastructure and small and medium-scale enterprises (SMEs) will
most likely prove to be not only politically popular but also, if
properly implemented, will contribute greatly to strengthening
the long-term foundation of the economy. Their outstanding
display in the document could also be effective in gaining
stronger political support, especially from the House of
Representatives.

Our biggest reservation though is that we don't see any
convincing signal as to how or why the populist programs, which
had been aired by economics ministers under former president
Soeharto for more than 30 years, now have a better chance of
being executed properly.

The problem is that even though the programs have been
declared high-priority tasks of the government since the early
1970s, the government has so far failed to develop adequate
institutional capacity to execute them in an efficient and
corruption-free manner.

The Habibie administration decided in early 1999 to accelerate
farm and small enterprise development by pouring in Rp 8.2
trillion (US$1 billion) in concessional loans to the rural areas.
But the credit program turned out to be the distribution of
political goodies to canvass support for the June 1999 elections.
Only 30 percent of the loans has been repaid and the program is
now the subject of an investigative audit at the request of IMF.

The credibility of the new economic team will depend on its
ability to deliver on the LoI according to the specified time
schedules and the technical details the economics ministers work
out concerning how they will go about executing the 10-point
economic recovery acceleration program. Despite our reservations,
we should give the team the benefit of the doubt.