Rescuing the economy

Some may see it as too early and therefore unfair to judge the performance of President B.J. Habibie's 80-day old government, which came to power by political default and inherited an economy already on the brink of collapse. Yet the stern warning to uphold basic economic principles given to Habibie's administration by 15 noted economists last week was urgently warranted.

The deterioration in the economy since May has been so rapid that developments now require monthly, rather than annual review and, if necessary, quick corrective measures. It is not simply a coincidence that the International Monetary Fund (IMF) has also decided to review the Indonesian economy on a monthly basis rather than through quarterly reviews as it does for other countries receiving its financial assistance.

The economists, including several from what is perceived to be Habibie's political camp, blasted the new President's populist policies and cast great doubt on his willingness and capacity to undertake appropriate measures to right the economy, particularly the more painful ones. Although not explicitly mentioned in their declaration, there seemed to be suspicion among the group of economists that Habibie, fully aware of his lack of political legitimacy, had resorted to populist measures at the expense of sound economic principles to gain a popular mandate.

But central to their bone of contention remains the problem which was inherent in the Habibie administration right from the outset -- the absence of domestic and international market confidence. That is the main reason behind the persistent volatility in the rupiah exchange rate and that is why it is now trading at a level even lower than was seen in the few weeks before Soeharto and his 32-year rule came to an abrupt end amid political, social and economic upheaval.

Habibie apparently has not realized that official foreign aid, even loans as large as the additional US$14 billion pledged to the government last month, is political in nature and not driven by the market. The rupiah exchange rate, now hovering at between 12,000 and 13,000, is the hard evidence. The official loans may succeed in preventing massive social unrest within the next eight months, but the economy will continue to deteriorate without new flows of private capital to resuscitate business and create new income-generating assets.

Market confidence should be achieved through introducing correct policies in an efficient manner and ensuring they are implemented fairly and honestly. But Habibie has yet to shed the political baggage he inherited from the previous administration. He has yet to prove that he has broken from the old Soeharto regime and willing to rapidly push through political and economic reforms, clean up the banking mess and fully restore law and order.

While populist handouts and price support and subsidy schemes are necessary to help the poorest strata of society, the government should not forget that private investment is the only locomotive capable of lifting the economy out of the crisis.

The markets perceive that they have been ignored by a government preoccupied with populist programs and unaware of the urgent need to restore investor confidence.

The government's overriding concern with income inequality is fully justified because this was partly responsible for the recent riots. But its attempts to reduce income inequality by hastily pouring trillions of rupiah into cooperatives and small enterprises, irrespective of their viability and the competence and entrepreneurial skills of their proprietors, is giving the wrong signal to medium and large-scale investors.

It is therefore imperative for the government to go all out to restore security, law and order through the use of concrete measures. Only stability and confidence will revive business.