Mon, 24 Jan 2000

Unstable Indonesia liability to region

The following article is 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). This is the first of two articles.

JAKARTA: With a new government, a more stable macro-economy and rising growth and confidence across Asia, Indonesia is now opening a new chapter of its history. As the government begins to address the many challenges that lie ahead, I am glad to have the opportunity to see the new environment for myself -- and think about the prospects for the future.

One message that President Clinton expressed to President Abdurrahman Wahid last November I am glad to repeat to you here: the United States and the entire Asia-Pacific region has a major stake in your success and we stand ready to support the government as it works to build a new Indonesia.

We have been reminded once again last week that Indonesia's greatest challenges in the months ahead are fundamentally political. But inseparable from the challenge of political integration and the deepening of democracy is the economic challenge of creating a stable environment for a fully integrated and vibrant national economy. With that in mind, I want to focus today on the major economic, financial and institutional priorities facing Indonesia as we enter this new century.

Let me touch on three topics:

* First, the core lessons to date of the financial crisis in Asian and other emerging market economies.

* Second, the implications for the Indonesia government and the new Indonesia that it hopes to create.

* Third, the approach that the United States and the international community will take going forward in supporting the kind of stable and successful Indonesia we all want to see.

The financial crises that began in Thailand in the summer of 1997 brought out very clearly that in a new global economy, national weaknesses in policies and institutions will be punished more quickly and severely by international markets than was true in the past. At the same time, they have perhaps also shown that governments that are able to respond effectively to these problems will be rewarded that much more rapidly.

We see this around the region today, where economic and financial prospects look much brighter today than they did even a year ago when I last visited the region -- not to mention two years ago when crises were all around us. If anyone had predicted then that every Asian emerging market economy would achieve positive growth in 1999 -- that prediction would surely have been greeted with some skepticism.

While there are important caveats and risks, we can now say that crisis economies in Asia and further afield whose governments were able to respond decisively to their financial problems and with international official support have benefited enormously from that response.

* In Korea, the economy grew by more than 9 percent in 1999 -- and private sector forecasters expect healthy growth to continue in 2000. Short-term interest rates and inflation are both in the low single digits, unemployment has almost halved since the start of 1999 and capital inflows are returning.

* Thailand, the first country to enter crisis, is growing by around 5 percent. Short-term interest rates are around 4 percent, and output and consumption are returning to pre-crisis levels.

* And in Brazil, inflation has been contained in the wake of last year's devaluation of the real; the recession in the economy has been shorter and shallower than many expected; and private forecasters are predicting solid growth for the year ahead.

What explains these strong results? The elements were many and varied but some stand out as especially crucial. These are:

* The development and implementation of a sound framework for fiscal and monetary policy that helped stabilize the financial markets and support an early return to growth.

* Rapid implementation of a credible plan for financial and corporate sector restructuring -- so that the overhang of debt could be lifted and private sector lending and growth could resume.

* Early commitment to strengthening national institutions and creating the right legal and regulatory infrastructure for private investment and growth: especially the rule of law.

* And, crucial to all of these, credible political leadership that can inspire the confidence of citizens and markets and get things done. This has perhaps been most striking in Korea, where President Kim Dae-jung's arrival in office, in retrospect, marked a turning point.

These elements, in turn, shed light on recent economic developments in Indonesia. Here the authorities' commitment to sound macro-economic policies has restored broad economic stability. But a failure to move forward with restructuring and institutional reform has prevented a full recovery. Inflation is now low and growth was positive last year. But at less than 1 percent, Indonesia's growth rate was by some margin the slowest of all the Asian crisis economies last year, and output is still not yet back to pre-crisis levels.

With a new government and the first democratically President and vice-president in Indonesia's history, there must be a real prospect that this period of uncertainty and logjammed reform can draw to a close. The array of challenges facing President Wahid and his administration is formidable indeed. But we know from the experience of Korea and others that failures that are inherited from the past can also be problems that are easier to confront.

Every nation in the Asia Pacific -- and the international community as a whole -- has a great stake in Indonesia seizing this special moment of opportunity as we consider the contours of a new regional global economy. One can perhaps imagine a situation in which other economies in the region perform better than Indonesia for some period of time. But it is inconceivable that the region as a whole could prosper in the years ahead without an open, stable, and vibrant Indonesia.

I will discuss briefly the approach that the United States will take to supporting this objective. But we know well that what will matter most of all will be the steps that are taken here at home. It is to these core priorities that I now turn.

One way to express the challenges that Indonesia faces today is that Indonesia has now won government by the people -- what it has yet to create is government for the people. What does that mean? It means building the foundations for a system that is not simply more just and even-handed, but seen to be so by Indonesians and the world at large.

Listening to Indonesians and others talk about this country today I have been struck by the degree to which this desire for a more just system of doing things permeates every aspect of national discussion. It is truly the hallmark of a new Indonesia. And its greatest triumph has been the successful conduct of last June's parliamentary elections -- which brought a new government to power through a process that was widely considered free and fair.

The question facing all Indonesians today -- and all Indonesia's friends in the wider world -- is how to bring this national aspiration to concrete fruition.

* This is a question of national identity and stability, because improved governance will be fundamental to political and social stability -- perhaps even national territorial integrity -- over the long-term and the basis for deepening democracy going forward.

* It is also a crucial national economic question, because an Indonesia that cannot earn the confidence of its citizens that due process will be followed and the laws enforced will equally fail to earn the confidence of businesses and investors that a growing and integrated new Indonesia will depend on.