The answer is out there

By Rob Goodfellow

WOLLONGONG, Australia (JP): Steve Sondakh, who wrote, "When can we resume business?" recently in this newspaper, is a member of the National Economic Restoration Committee and director of PT Hero Supermarkets. He understands business and his frustration can be understood. With Indonesia now in the fourth year of economic crisis, he, like many Indonesian businesspeople feel that the situation will never improve.

He raised a number of issues. These include uncertainty in law enforcement, failure to progress economic and legal restructuring initiatives, a lack of clear policy on regional autonomy and last, but not least, the continuing problem of Indonesian bank liquidity and the debate about how the proceeds of asset sales can be more efficiently used.

With considerable justification he reminds us, "we may feel genuinely concerned about the condition of the world, though such concern should drive us into action and not into depression". Unfortunately it is the latter not the former that is winning the day.

A mood of near despair has descended over the Indonesian business community with the rupiah again threatening to fall beyond Rp 10,000 to the $US. However, contrary to prevailing sentiment, there actually is a great deal for Indonesian business to be optimistic about.

First, it has to be remembered that there have been two revolutions in Indonesia since the dark days of early 1998. Indonesia has successfully weathered the painful transition from authoritarianism to participatory government. This has occurred in less than three years. For most of the nations of Europe, this same process took almost a millennium.

Similarly, it cannot be forgotten that Indonesia came perilously close to civil war in 1998, as students directly challenged the authority of Soeharto's 33-year New Order Regime. Now Indonesia has a democratic and robust legislature, which frequently dares to challenge executive policy and power.

As a result, the government is becoming distinctly civilian in character with a clear public rejection of the socio-political and economic role of the Indonesian Military.

Second, Indonesia has enjoyed a partial but steady recovery from the worst economic collapse in history. Examining the three stages of the monetary crisis gives us a good indication of how much progress has been made.

In 1998 Indonesia was washed over by a financial tidal wave. The currency collapsed, interest rates rose to unprecedented levels, prices -- especially for rice and cooking oil -- increased wildly.

Capital flight led to tens of billions of dollars leaving Indonesia practically overnight. All it took was the push of an "enter" key on a computer keyboard and hard currency hemorrhaged away, mostly in the direction of Wall Street. This first stage was quickly followed by a contraction of financial infrastructure.

As capital dried up, many businesses disappeared. It was estimated that in 1998-99, 95 percent of all private businesses in Indonesia were technically bankrupt.

Since 1998 domestic prices have stabilized; there has been movement in the price of the rupiah, but these fluctuations have been trends rather than collapses; and Indonesian exports have increased dramatically as a result of the rupiah's competitiveness.

Furthermore, the Indonesian government has pursued a strategy of reforming the banking sector, has redrafted foreign investment policy and brought commercial law into line with international practices.

While the process clearly has a long race to run, the forces that are driving this change tell us something about the future course of events for the Indonesian economy and why.

The Indonesian economic collapse confirmed once and for all the instantaneously transferable nature of international capital. As financial markets continue to converge, money simply goes to where investors can find the greatest returns for the least manageable risk.

The point is that if money can leave Indonesia so quickly, it can likewise quickly return -- under the right circumstances. There are a number of reasons why this is expected to happen, not in the long term, but quicker than most people can imagine.

Indonesia is at the epicenter of the new manufacturing locomotive of the entire world. The East Asian Hemisphere is home to, with the exception of the United States, what will be the most powerful manufacturing economies of this millennia -- China, Japan, India and, yes -- Indonesia.

Interestingly, in the 1800s the countries of Europe and the Americas only produced about 20 percent of the world's manufactured goods. During the 20th Century this rose to 80 percent.

However, by 2020 it is estimated that these processes will again reverse as the aspirational countries of the underdeveloped world take their place not as struggling recipients of IMF crisis aid, but as manufacturing giants.

Concerned Indonesians like Steve Sondakh may find it difficult to believe, especially at this time of awkward social and economic transition, but Indonesia has the potential for genuine greatness.

It has an energetic, youthful, basically well-educated, aspirational work force. It has an emerging affluent middle class with a global focus. It is located in the center of the East Asian Region.

It is gloriously endowed with natural resources and it straddles the busiest shipping lanes in the world. Finally, even with the deeply entrenched, institutionalized corruption that plagues Indonesia, there are few places that can complete with it on cost and skill.

Some sources estimate that corruption adds around 30 percent to the bottom line of most goods and services in Indonesia. In the West companies have to turn themselves inside out to achieve a meager 2 percent efficiency. The augment is that if Indonesians are already competitive, a 30 percent increase in overall operational efficiencies will make them unbeatable.

With the pace of change in Indonesia already 10 to 100 times faster than for countries of the Organization for Economic Cooperation and Development, Indonesia has become accustomed to a change process. This gives Indonesia yet another advantage.

While the developed countries of the Old World, including Indonesia's proto-Western southern neighbor -- Australia, struggle with their new role as a basis for support research, tertiary education and service provision, change is becoming an integral feature of the Indonesian social and cultural landscape. It is "normal".

Change clearly does not mean a return to the past. Indonesia can and will occupy a new position in the world economic order, not if but when a number of fundamental issues are comprehensively addressed.

International capital is a borderless behemoth hungry for the opportunities Indonesia presents. However, this will only start to flow back when there is the rule of law, bureaucratic transparency and policy predictability.

The world is awash with capital wanting a good home. This process, however, will not be all one way. Investment, particularly in high tech manufacturing, will initially lead to a "soaking up" of the unorganized Indonesian cheap labor sector and a greater demand for technically skilled workers.

Increased productively will put upward pressure on wages and lead to an increase in overall national wealth. This in turn will drive the emerging emphasis on lower tertiary and technical education further raising the overall positive prospects for Indonesia.

Right now this scenario may seem a little far-fetched. The truth is however out there. It is in all Indonesians best interests to advance the reform process as quickly as possible, and ensure that collectively "such concern drives them into action" -- in both economic and democratic reform.

The writer is a cross-cultural consultant to international business specializing in Indonesia and is based at The University of Wollongong, Australia (sujoko@ozemail.com.au).