Rescuing the economy

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.