Unstable Indonesia a liability to region

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.