Social safety net

World Bank president James Wolfensohn was not exaggerating when he told analysts and leaders of non-governmental organizations here on Wednesday that the economic crisis now facing Indonesia has reached the point of life or death.

But he also put his money where his mouth is by announcing a World Bank funded crash program, worth US$100 million, to create 75 million work-days of low wage jobs this year, through labor intensive projects. The bank is also reallocating $1.2 billion in commitments to Indonesia, as yet unspent, for the procurement of basic food staples, medicines and job-creation projects.

Wolfensohn rightly saw the urgency of placing a social safety net below the most vulnerable elements of society. The blunt fact is that current reforms aimed at setting the economy on a path to recovery, cannot run smoothly without adequate, short-term programs aimed at easing poverty induced by the crisis.

Sharply rising prices have eroded purchasing power at precisely the same time as millions of newly redundant workers are joining ranks of the unemployed. The 6.88 percent inflation in January alone, when most basic food commodities, fuel oils and public utilities were still subsidized, portends more devastating inflationary pressures over coming weeks.

The government, as part of the reform measures, must slash subsidies on all food staples (excluding rice), fuel oils and electricity by April. This in turn will trigger a chain of price rises across the economy, at great risk of social and political unrest. Sporadic rioting in several towns in Java and Sulawesi, in protest at rising prices, may be a foretaste of what is to come.

The Indonesian government is aware of the potential for a social backlash in protest at painful reform measures, and has acted to head this off by creating temporary labor intensive works programs in Jakarta. This, however, falls far short of a remedy for the unemployment problem.

Wolfensohn's visit was timely, and brought with it considerable World Bank experience of poverty alleviation in the developing world. His announcement that World Bank funding for labor intensive employment projects will be accelerated should help to create more than 75 million work-days of low wage jobs. A shrewd move, this step will help bolster public support for the IMF-assisted reform package, which is expected to cause further hardship over the next two years.

Reallocation of over $1 billion in funds committed to, but not yet disbursed, in Indonesia, for the procurement of food, medicines, farm inputs and job-creation works will further curb the social impact of the adjustments that have to be made.

However, the temporary nature of the job-creation and social- security schemes must not be overlooked. These programs, though necessary, are not a sustainable way to alleviate poverty. That can only be achieved with the restoration of sound economic growth. Thoughts of this cannot be entertained until the confidence of domestic and foreign investors is restored.

Restoring confidence in the economy requires structural reforms, a strengthening of the financial sector and good governance in the private and public sectors. This can be achieved through just enforcement of the law, and greater accountability and transparency. Programs focused on these problems are designed to place the economy on a sound footing, and will absorb the bulk of the $4.5 billion pledged by the World Bank and $10.5 billion pledged by the IMF, under the $43 billion rescue package arranged to assist our economy over the next three years.