Suffering in Indonesia

[Robert Weissman <rob@essential.org>]

Paris, Saturday, October 3, 1998
Wrenching Changes Force Jakarta to Backtrack on Reform
------------------------------------------------------------------------
By Michael Richardson International Herald Tribune
------------------------------------------------------------------------

While a few of the monopolies and cartels that received privileged
treatment
under the Suharto regime have been broken up, many of the most powerful
remain.



Paris, Saturday, October 3, 1998
Wrenching Changes Force Jakarta to Backtrack on Reform
------------------------------------------------------------------------
By Michael Richardson International Herald Tribune
------------------------------------------------------------------------
SINGAPORE - In the 14 months since Indonesia turned to the International
Monetary Fund for assistance, its economy has plunged so deeply into
recession
that the Fund has been forced to ease the austerity and reform program it
sought to impose in exchange for loans worth more than $40 billion
Partly as a result of IMF pressure to end the corrupt and nepotistic ties
between government and big business in Indonesia, the world's fourth most
populous nation has undergone wrenching political change and social
distress
at a time when its economy is least able to bear the consequences, analysts
say.
It may be that Indonesia represents the hardest challenges for a post-Cold
War
IMF all at once.
With a complex economic situation exaggerating the tears in the nation's
social fabric - and in the face of little fiscal improvement - both the IMF
and Indonesia have struggled to find new ways of doing business. In recent
weeks - as unemployment and poverty continue to spread, and prices for food
and other essentials spiral upward - Indonesia has been rocked by
increasing
riots, looting and attacks by anti-government protesters. There was even an
armed clash between rival military units in one province.
''The political situation remains highly unstable, with a weak government
moving only reluctantly in the direction of economic and political
reform,''
the Political and Economic Risk Consultancy Ltd. said in its latest report
on
Indonesia.
President B.J. Habibie warned this week that the rising tide of unrest
threatened to degenerate into anarchy and could derail attempts at economic
recovery.
Indonesian students and other protesters used the IMF's clean-up demands to
help rally a nationwide street protest movement that forced former
President
Suharto to resign in May, after 32 years in power. But the riots and
looting
that accompanied the political protests intensified the economic crisis.
That, in turn, has prompted growing criticism of the IMF in Indonesia, to
the
point where some officials and business leaders are calling for imposition
of
currency controls in defiance of the Fund. They say the aim is to revalue
and
stabilize the Indonesian currency, the rupiah, so that ruinously high
interest
rates can be lowered and companies that borrowed heavily abroad can start
repaying their loans.
''The IMF recipe will keep us afloat but will not help the recovery because
interest rates are prohibitively high for the private sector,'' said Sofyan
Wanandi, chairman of the privately held Gemala Group of companies, which
has
interests in pharmaceuticals, financial services and real estate.
''We are now obediently implementing our reform agreement with the IMF, and
its officials say that Indonesia is on the right track,'' said Kwik Kian
Gie,
an Indonesian economist. ''But there is no sign that confidence has been
restored and the economy is getting even worse.''
Despite the political uncertainty and social unrest in recent weeks, the
U.S.
dollar has fallen to about 10,750 rupiah, down from a high of 16,650 in
June.
Late last month, creditors of the Indonesian government agreed to
reschedule
$4.2 billion in sovereign debt to free money for state spending to help
cushion the impact of recession.
Indonesia was the second onetime tiger economy in East Asia, after
Thailand,
to turn to the IMF for help.
What has happened, according to analysts, is that the IMF's program for
Indonesia - which was originally designed to restructure the country's now
largely insolvent banking system as well as its business practices and
commercial regulations - has had to shift its focus to help finance a
widening
budget deficit, price subsidies and other measures that are seen as
essential
if workable government is to survive in Indonesia.
The IMF, which expects the Indonesian economy to contract by about 15
percent
in 1998 and annual inflation to rise to over 80 percent, has also had to
accept a slower pace of implementation in the reform program.
''It is now more of an aid than a reform package,'' said a Western diplomat
based in Jakarta.
Singapore's deputy prime minister, Lee Hsien Loong, noted at a recent
business
conference in Tokyo that while Thailand and South Korea - the third East
Asian
economy under IMF care - were following the Fund's prescriptions most
closely,
Indonesia faced a more complex and urgent situation.
''The IMF and World Bank now play only a supporting role,'' he said.
''Indonesia's priorities are to feed the population, restore law and order,
follow through the political transition to establish a strong and effective
government and stabilize their economy.''
Analysts said that the IMF, faced with a real risk of lawlessness in
Indonesia, had little choice but to tolerate some foot-dragging on
structural
reform.
A plan to raise $2.5 billion through the sale of stakes in 12
state-controlled
companies - another key element of the IMF's reform program - was scaled
back
in August because of poor market conditions and pressure from local
interests
not to allow control of national industries to fall into foreign hands.
While a few of the monopolies and cartels that received privileged
treatment
under the Suharto regime have been broken up, many of the most powerful
remain.