Vital economic signs

Vital economic signs

It is too premature to link the highly positive vote of the
financial market immediately after the June 7 elections --
reflected in the rise of the Jakarta Stock Exchange index and the
rupiah exchange rate to new highs in the past eight days -- to
the likelihood of which party will take over the government later
this year. The market bulls were set free mostly by the
discounting of one component of the country's political risk
premium, the great concern that the balloting would descend into
widespread violence, which thankfully did not occur.

As the preliminary vote count puts the Indonesian Democratic
Party of Struggle (PDI Perjuangan) as the front-runner which
could later become the leader of a coalition government, the main
question is how the new government will deal with the country's
economic woes. Unfortunately, a cohesive economic platform was
not high on the campaign agenda of PDI Perjuangan, nor of the
other 47 parties contesting the elections.

Nonetheless, since PDI Perjuangan's main economic thinkers,
noted economist Kwik Kian Gie and former bank director Laksamana
Sukardi, happen to be among the most popular analysts in the mass
media with opinion articles and interviews, one can accurately
gauge the main principles that will guide the party's policy
direction. A clearer outline of PDI Perjuangan's dominant
economic thinking also emerged in a series of inter-party
economic debates organized by private television stations in
recent weeks.

Apart from Kwik's controversial remark about the need to
restore a fixed-rate currency system, which he later
characterized as mere musing aloud, the basic policy outlines
espoused by both party leaders appear to be market-friendly, the
most important guideline sorely required by businesspeople. PDI
Perjuangan does not believe in special treatment of small and
medium enterprises, as trumpeted in the "people's economy"
concept currently promoted by the Habibie administration. The
party instead focuses on a free market with fair and open
competition under the rules of the Antimonopoly Law.

The most soothing point of view is PDI Perjuangan's full
realization that the International Monetary Fund will remain a
pivotal member of the economic policy-making team. This means
that a PDI Perjuangan-led government would firmly stick to the
reform programs already agreed on with the multilateral
institution although, as Kwik often asserts, fine tuning will be
made as circumstances require.

This is a rational and pragmatic stance for now. Continued
cooperation with the IMF is imperative because the fund,
irrespective of its shortcomings, remains the most influential
catalyst and opinion leader for foreign creditors and investors
who will play a crucial role in helping lead the country out of
its economic quagmire.

Indeed, given the economic woes the country now faces,
whichever party heads the new government will have no other
choice but to initially focus on crisis management within one
year or two. Top priority will have to be placed on economic
stabilization and consolidation through the reform agenda, as
agreed upon with the IMF: the social safety net, fiscal and
monetary reforms, bank restructuring and its attendant loan
collection and asset recovery measures, as well as legal,
regulatory and institutional reform.

The fact that the currency and stock markets reacted
positively every time a political risk was removed clearly
indicates that businesspeople are comfortable with the current
economic programs. Were it not for the remaining political risks
related to the announcement of the final election results next
week and the presidential election in November, economic
stability would be much stronger now.

Still, good policy measures are one thing, but effectively
implementing them is something else. Here lies the biggest
challenge for the new government. The basic requirement for
effective policy execution is good governance -- a clean and
competent government with a clear division of power between the
executive, legislative and judicial branches.

With severely limited budget resources and huge servicing
burdens imposed by about US$75 billion in foreign debts and the
$45 billion in domestic debts (treasury bonds), the new
government will face major hurdles to meaningful civil service
reform, the cornerstone for building good governance.

Another uphill challenge is the democratization process
itself. Crisis management often needs fast decision-making, rapid
judgment to deal with a particular problem promptly and
efficiently. The new government, deprived of majority support in
the House of Representatives, will have to tread carefully
between efficiency and democratic orientation. Deliberation in
the House will likely be slow moving, bogged down by discordant
voices, disparate interests and conflicting points of view. It
will be the government's daunting responsibility to ensure that
the advance of democracy is not sidetracked by the clamoring to
have one's voice heard.