Unstable Indonesia liability to region

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.