The economic crisis revisited

The economic crisis revisited

By Lance Castles

YOGYAKARTA (JP): Reviews of the economic situation in
Indonesia typically speak in terms of gloom, pessimism and crisis
even though they should not necessarily do so.

It seems the typical Jeremiah approach ignores at least three
points.

* Everyone seems to agree that if the economic crisis had not
occurred, former president Soeharto would not have "stepped
down". So at worst, it is in some sense a blessing in disguise.

* Monetary crisis is indeed a more accurate term than slump or
economic contraction because it was mainly the money economy, not
the real economy, which suffered a crisis. Prices indeed rocketed
or collapsed, many went bankrupt and the stock exchange and
foreign exchange markets experienced turmoil.

The past tense is used here because stability has long
returned to the money economy. One year ago, the rupiah was at
16,000 against the United States dollar and now it is Rp 9,000 to
the dollar. This morning at the supermarket, we paid 15 percent
less for rice then we paid the previous four months. This is
hardly monetary chaos. But earlier too, real production, or goods
and services, behind the monetary veil, suffered a much smaller
change.

* The cliche that those who were hit hardest were the poor is not
borne out by the data. This seems to be a difficult point for
most people to grasp.

Obviously, when people are close to the breadline they will
suffer more from any reduction of real income (subjectively
experience it more bitterly) than will the rich.

But objectively, the greatest proportional losses were
suffered by the rich. Anyone who owned shares on the stock
exchange (including many foreign funds and speculators), found
that their value in dollar terms dropped around 95 percent.
Those who owned houses or other valuables also found their value
diminished and the conglomerates whose income was in rupiah but
whose debts were largely in dollars found they were bankrupt. Not
to mention the many cronies whose "capital" consisted merely of a
contract with the government, which has now been canceled. Their
expected future income from that source is now, of course, zero.

To further pursue the relative distribution of the (real)
downturn, government figures show the urban sector has been
harder hit than the rural sector, Jakarta harder hit than
elsewhere in the country and Java harder hit than the other
islands. In fact, in some provinces outside Java, notably Bali,
real income has continued to increase.

It may be added that the informal sector has survived better
than the formal, and the unpropertied sector better than the
propertied.

According to Minister of Cooperatives and Small Enterprises
Adi Sasono, only 1 percent of the loans he has made are in
arrears, compared with about 30 percent of nonperforming loans in
the commercial sector. Some might remark that Adi gives loans at
subsidized interest rates, but many conglomerates also were stuck
with dollar loans.

To see the economic downturn in its correct proportions, it is
necessary to understand that for over 30 years Indonesia has been
experiencing rapid economic growth; around 5 percent annually in
terms of real per capita.

Not surprisingly, the proportion of Indonesians living below a
standard poverty line dropped from about 60 percent to about 15
percent. This had already been achieved by the mid-1980s.

We are now informed that Indonesia's real income in the year
1997/1998 declined by l4 percent, followed by perhaps a further 3
percent decline in 1998/1999. This is indeed the most severe
contraction among Asian countries hit by the crisis. But it means
the country goes back to the position it was in about three years
ago.

Is this a disaster? It is still two-and-a-half times the level
of the mid-1960s. The International Labor Organization's claim
that another 40 percent of Indonesians have now sunk back into
poverty is an obvious falsehood because it assumes an impossibly
discontinuous income curve.

Suppose the "poverty line" is US$300 per head per year. Now a
contraction of 17 percent takes place in incomes. Those formerly
in the income range of $300 to $349 per year will now drop into
formally defined poverty. But clearly it is absurd to believe
that 15 percent of the population are in the income range of zero
to $300 per year and then 40 percent in the income range of $300
to $349 per year.

A more realistic picture might be that the proportion living
below the poverty line has temporarily risen from 15 percent to
about 25 percent.

The impression that Indonesia suffers from food shortages
perhaps arose from reports about a year ago from regions like the
interior of Irian Jaya, Southeast Maluku and parts of Nusa
Tenggara, which, like Papua New Guinea, were suffering the acute
effects of El Nio.

But this is now a memory. The overall rice situation,
according to government figures, is that the average Indonesian
consumes about 50 percent more than he did in the mid-1960s.
Obviously the rich were already full, so it must be the poor who
are getting more.

Another example of a silver lining which most commentators are
determined to ignore is the reported 50 percent decline in log
production -- in forest despoliation. What a blessing for the
environment, all thanks to the crisis. But strangely,
conservationists never seem to derive any satisfaction from such
events.

In fact, the best way to envisage Indonesia's current economic
position is to imagine we personally get the unwelcome news our
salary for the coming two to three years is cut by 17 percent,
but, not to worry, regular annual raises of 5 percent per annum
will then return.

The International Monetary Fund and most economists seem to
believe good growth will resume in Indonesia, though maybe at a
slower rate than in the bubble years before the crisis.

We can adjust in three ways. We can reduce our savings -- for
instance, if we were putting aside 20 percent for old age, we
could cut that to 3 percent and maintain the same level of
consumption.

Or we could cut expenditures. For instance, this year we will
not go home for the Muslim Idul Fitri holiday, but just telephone
our relatives. Or our son will have to go to a state school, not
the private overseas school we were planning to send him to. Or
we can dissave -- sell our car and go by bus, sell our gold or
land, run down our savings.

It is these adjustments which people are making throughout the
country. For some they are unhappy adjustments. But not
catastrophes. Certainly not a national catastrophe.

That 40 percent less people are going on the pilgrimage to
Mecca this year might be taken as a sign of how badly the crisis
is biting. But then the pilgrimage is an ideal example of a
discretionary expenditure. It is not obligatory if we cannot
afford it, and it can be postponed until better times.

So why does the language of catastrophe dominate the media,
and even private discussion?

First, it is in the interest of the media, which are watching
the ratings and circulations, to shout gloom and doom.

Secondly, it is obviously in the interest of opposition
politicians to make things look as bad as possible. They can
blame the government, which tries to maintain that things are not
so bad after all -- and anyway the problems are caused by
foreigners.

A new government will have a honeymoon period during which it
can still blame all problems on the situation it inherited. After
that it will have to fall back on the line that things are not so
bad.

Meanwhile, each minister -- of education, cooperatives,
agriculture, social welfare -- tries to depict the picture in his
field in as gloomy terms as possible so as to get more funds.
Economics ministers in general were taken aback when a recent
World Bank report -- after a year of Jeremiads -- suggested the
crisis was being exaggerated. Would this not make it harder for
Indonesia to get funds?

There still seems to be a problem. Why do even disinterested
academics think things are so terrible? Perhaps this is because
of guilt. In their comfortable houses they think guiltily of the
peasants or pedicab drivers who must be having it so much worse.
But are they?

In view of the strong bias of the losses to the propertied,
formal and urban sectors, people who are feeling the pinch should
better remember that it will not last forever, and at any rate
things were much worse on average in their fathers' time. If they
do not feel worse off, or are even better off, as many are, they
should not feel guilty about it. And in either event, they could
take the media, pundits and politicians with a grain of salt.

A colleague has maintained that another motivation for
exaggerating the severity of the crisis is to record a vote for a
reform of the world economic system, which supposedly caused, or
did not prevent, the crisis. Improvements in international trade,
investment and payment arrangements may be possible, but whatever
one great economist or world bloc blames, others assert the
opposite. Some want a borderless world, others want more control.

Is Malaysian Prime Minister Mahathir Mohamad on a disastrous
tack, or was Malaysia's former deputy prime minister Anwar
Ibrahim? Is U.S. investment manager George Soros the hedge fund
operator the villain, or is George Soros the peddler of nostrums
an even greater danger? Or, none of the above.

Ultimately the motivation here seems to come back to the
factors already mentioned. Some Westerners -- academics and do-
gooders, not governments -- deplore the economic devastation "we"
have brought to Asia -- the aforementioned guilt factor.

For governments and intellectuals in the region, this is a
stick to beat the West with and avert blame from themselves.
About 80 percent of the population of Asia live in countries
where economic growth has not ceased during the so-called Asian
crisis. These include China (expected growth in 1999 according to
The Economist's poll of forecasters: 7 percent), Taiwan (4
percent), India (4 percent), Pakistan, Sri Lanka and Vietnam.
Apart from Indonesia, countries expecting a downturn this year
are Hong Kong (1.5 percent), Japan (0.7 percent), Malaysia (0.2
percent), Thailand (0.4 percent) and Singapore (0.1 percent).

So where is the occasion for guilt and gloom? Please, a little
less despair on the financial pages.

The writer, an Australian political scientist, is a visiting
lecturer in political science at Gadjah Mada University in
Yogyakarta.

Window A: There still seems to be a problem. Why do even
disinterested academics think things are so terrible? Perhaps
this is because of guilt. In their comfortable houses they think
guiltily of the peasants or pedicab drivers who must be having it
so much worse. But are they?

Window B: To see the economic downturn in its correct proportions,
it is necessary to understand that for over 30 years Indonesia has
been experiencing rapid economic growth; around 5 percent annually
in terms of real per capita.