Tue, 25 Jan 2000

Unstable Indonesia a liability to region

This is the second of two articles based on a presentation by United States Treasury Secretary Lawrence H. Summers in a luncheon at the Regent Hotel, Jakarta on Jan. 20. The event was jointly organized by AmCham Indonesia and Association of University Graduates of Economics Faculty (ISEI).

JAKARTA: Businesses used to cite the stability of the Soeharto government as an important weight in their investment calculations. The perception that you could count on commitments if he had endorsed them counterbalanced the widespread conviction that the courts did not supply reliable investor protection.

In the new Asia, that kind of stability is no longer sufficient. Indonesian and foreign investors alike now seek another kind of stability: one that comes with the rule of law; the certainty that market mechanisms will be allowed, even made, to operate; and the trust that public institutions are there to serve everyone not just the favored few.

That will involve reforms across a wide range of fronts in addition to the maintenance of continued macro-economic policies going forward. Let me highlight two that will be especially crucial to restoring domestic and international confidence and faster, more inclusive growth.

First, rapid and transparent financial and corporate sector restructuring.

Nothing in recent years has better symbolized, to Indonesians and the outside world, the authorities' failure to move forward with reform than the failure to make inroads on the huge burden of corporate and financial sector debt. The institutions to do this are now in place. What is needed is the determination and political will to let those institutions do their work -- despite the deep sensitivities that may be involved and despite the entrenched pressures for delay.

The new three-year IMF program attests to the international community's desire to move forward from the Bank Bali scandal and commits the government to a new start in the financial and corporate restructuring process. But as the IMF has made clear -- and we ourselves have stressed in our discussions with the authorities -- the critical signal to those who are asking themselves where this new government will take Indonesia will not be strong words but strong action.

In this context, early concrete examples have the potential to be defining. Notably:

* An early demonstration that the Indonesian Bank Restructuring Agency (IBRA) and those involved in its work are able to pursue the full sweep of their mandate independent of outside pressure -- from whatever quarter.

* The transfer of a government-owned bank into private sector hands, as part of a comprehensive and transparent plan to restructure, privatize, and recapitalize Indonesia's banks or, where necessary, foreclose on insolvent institutions.

* Evidence of clear progress on disposal of bad assets by IBRA, even where this means accepting the previously unacceptable. Debts whose market value is not going to be realized need to be written down. And asset disposal must proceed so as to save precious public resources that are urgently needed elsewhere. The fear of fire sales is understandable, but all the relevant experience in this area, in Asia and elsewhere, suggests that if you hold firm against low prices today, you will face even lower prices tomorrow.

* Demonstration of a new willingness to see foreign investors as a crucial part of the solution to Indonesia's corporate and financial sector debt problems -- and not part of the problem. As is has been true elsewhere in Asia, foreign banks could be an important support for financial sector reform in Indonesia, not only as sources of much needed capital but as a source of greater financial resilience in the future.

* Decisive and even-handed use of IBRA's extrajudicial powers to bring debtors to the table. After a long time in which these powers have largely been inoperative, it must be seen to go after uncooperative debtors, regardless of their political connections. In the cases where IBRA is not the major creditor, the Jakarta Initiative Task Force also needs to be seen to have the resources and mandate to bring reluctant debtors to the table.

* And, not least, investigation and prosecution of judges who have engaged in corrupt practices. The word must go out that in a new Indonesia, no one is above the law and the laws will be fairly enforced.

Second, a more effective infrastructure for investing in people.

As I have noted, effective management of financial and corporate restructuring takes on added urgency today because every rupiah wasted propping up the institutions of the old Indonesia is a rupiah that could have been spent building the institutions that Indonesians need to face the future.

Of these none will be more important than institutions and policies for investing in people. In a new global economy in which capital moves more freely and labor does not, a country's most distinctive resource will increasingly be its people. A new Indonesia will be one that puts broad-based human development top on the agenda as a moral imperative and also an economic impera- tive, because Indonesians will not support a new kind of economy unless they believe that it works for them.

The rapid growth that Indonesia achieved from the early 1970s until the mid-1990s was fairly successful in helping to lift all boats in the economy and keep poverty on a downward path. This provides the best reason for now putting the macro- and micro- ingredients for a long-term recovery in place. But in an increasingly constrained budgetary environment, it will be equally vital to ensure that social investments are better targeted to the people who need them most.

* That means building on past successes in community-based provision of basic social services, with greater decentralization and transparency and wider participation to command credibility and popular trust.

* It means maintaining and extending the impressive efforts that have been made to keep children in school through the crisis -- an investment that will pay off many times over in faster growth and greater social cohesion in the years to come.

* It means a new focus on greater and more effective provision of critical health services, which have perhaps been hit hardest by the crisis -- particularly basic preventive and curative services and a revived emphasis on family planning.

In their financial support and technical advice the IMF and, especially, the World Bank have been working to promote these investments in Indonesia in recent years. I am glad to note that with the election behind us this support is going to be increased, notably with the disbursement of the World Bank's US$600 million social safety net adjustment loan for both safeguarding key parts of the Indonesian social safety net and improving their design.

Those who have studied economies over the years have come to an ever-broader understanding of the ingredients of economic growth:

* The ability to mobilize physical capital is important, which is why the creation of a strong financial system is so crucial.

* The ability to mobilize human capital is important, which is why the right institutions for investment in people are so crucial.

* And increasingly, we are coming to understand that the ability to mobilize social capital and the presence of the right kind of institutions to protect and mediate social capital can also be vitally important to a nation's economic success.

That is why the recent flourishing of NGOs in Indonesia is so welcome in the current context. And it is why establishing a strong legal system and support for reform of the justice system will be so important to Indonesia in the months ahead -- as a basic underpinning not just of commerce but of the rights of individual Indonesians and their confidence that these rights will be protected.

I have stressed that Indonesia's most crucial challenges are those of institution-building and political leadership. However much we may desire these things in Indonesia -- or any other country -- the international community can do nothing to promote them if the commitment at the national level is lacking. But in the context of united and determined new leadership, we can and do stand willing to help provide the greatest prospect for success.

Indonesia's supporters are scheduled to meet here in Jakarta at the start of next month for an historic session of the Consultative Group on Indonesia. I hope and anticipate that the broad themes of institutional reform and a just system of government for Indonesia will feature heavily in the Indonesian government's presentations to the donor community at that time. And I am confident that the U.S. and all of the CGI's members will be eager to support the new government's initiatives in this broad and crucial area.

In the context of continued reforms, the United States will continue to work bilaterally on a wide range of fronts to support lasting change in Indonesia. Indeed, we hope that we will be able to increase our bilateral financial support significantly over the next two years. As you may know, a U.S. mission, including representatives from Treasury, is also in Indonesia right now assessing how best we can provide technical assistance at this crucial time.

At a multilateral level, we will also work to ensure that the right kind of official support for a reforming new Indonesia:

* Lending by the international financial institutions (IFIs) To date the IFIs have disbursed $16 billion to Indonesia in support of the restoration of confidence and growth. With the new IMF program announced this morning, the World Bank and ADB support already in train -- and continued and forceful implementation of the conditions of all these programs -- the international community has now pledged upwards of $10 billion over the next three years to reform and renewal in Indonesia.

* Rescheduling of Paris Club Obligations. I am pleased to say that in the context of the new government's commitment to far- reaching economic and institutional reform, the United States is ready to work with other Paris Club creditors to achieve a generous rescheduling of Indonesia's obligations. This would provide a further two years of relief to strengthen the government's capacity to carry through on an agenda that we all share.

These steps underline our support for a new Indonesia, and our belief that in the right circumstances, external support can make an important difference. But once again, the international community cannot want reform and stability in a country any more than a country's own government and its people do. And it cannot lead such an effort from the outside.

Leadership from the very top has seldom been more important to a country's future than it will be in Indonesia today. That is why I was so pleased that in my discussions with President Wahid recently that he recognized the importance of speed, openness, transparency and commitment as the government works to implement its reform agenda in the months ahead.

The crisis highlighted the fundamental elements of the Indonesian model that needed to change. But it has equally presented the country with a rare opportunity to strengthen policies, rebuild institutions, reinvest in people -- and emerge a more resilient and inclusive society than it has ever been. The United States, the rest of Asia, and the global community as a whole have a major stake in Indonesia's new leadership seizing that opportunity with both hands.