Safeguarding reform

Safeguarding reform

The latest package of economic stabilization and reform
measures agreed on by Indonesia and the International Monetary
Fund last week should be welcomed, especially ahead of the June 7
general election and after the ruling Golkar Party's nomination
of the incumbent B.J. Habibie as its sole candidate for the
November presidential election.

The reform package, with clearly set schedules for the
implementation of its various programs under the watchful eye of
the IMF, can serve as a safeguard against any populist measures
the incumbent government might take to woo voters at the expense
of the long-term stability and viability of the economy.

Significant improvements in the country's key economic
indicators over the past few months -- deflation over the last
two months, a steady decline in interest rates, a steady
appreciation of the rupiah and a slight recovery in the gross
domestic product -- surely augur well for strengthening public
confidence in the IMF-designed reform programs. These economic
improvements should also convince any newly elected government
of the merits of the reforms, thereby helping to secure their
sustainability.

As in many other countries facing an election year, there is
no doubt a great temptation or even inclination on the part of
the ruling administration to backtrack on or delay painful reform
measures in order to avoid short-term political costs, even at
the expense of the long-term good of the economy. This is
particularly true in Indonesia, where political institutions are
not able to properly exercise effective checks and balances on
the government.

However, the clearly defined reform programs and their
implementation schedules should function as a built-in
supervision mechanism to guard against short-sighted actions
aimed solely at luring politically uninitiated voters. To put it
bluntly, the IMF-designed package makes it extremely difficult
for Habibie, as a presidential candidate, to manipulate the
levers of power to advance his ambitions. In fact, this could
occur only if Habibie and his ruling Golkar Party were so hungry
for power as to make them totally unconcerned about the future of
the nation.

Any tampering with or backtracking on the restructuring
measures would destroy the buds of confidence which have started
to grow among domestic and foreign investors, along with the
encouraging signs of economic improvement during the first
quarter of this year. Further delay in the restoration of
business confidence would worsen the economic crisis and severely
threaten the political stability expected after the June
elections.

Given the uncertainty over the transition from an
authoritarian to a democratic system -- understandable given that
the upcoming polls will be the nation's first multiparty
elections in more than 40 years -- the strong macroeconomic
policy and reform programs provide a sense of certainty about the
future direction of the economy, irrespective of which party or
parties win the elections.

The latest reform package rightly focuses on rebuilding the
battered financial system and developing good governance in the
public and corporate sectors through five interrelated measures:
bank and corporate restructuring and loan recovery, currently the
main obstacles blocking economic recovery, as well as the
promulgation of new commercial laws.

Barring any major disruptions of the elections in June, the
implementation of the restructuring program within the next few
months would further strengthen the process of economic
stabilization so that by the time a newly elected government
assumes office in December, the process of economic recovery
could begin immediately.

Recapitalized banks would be able to resume lending to pump
fresh blood into the real sector. Production plants would reopen
or increase capacity utilization, new jobs would be created,
giving consumers new purchasing power. An improved economy would
help eliminate the huge corporate bad debt overhang. All this
would in turn further strengthen business confidence, especially
because the framework of laws and rules ensuring a level playing
field in the market is already in place. Better and stronger
laws, such as those regarding good governance, monopolies and
competition, bankruptcy proceedings and the independence of the
central bank, would help make the country an even better place to
invest.