(8 Mei, 2000)Introduction
A few months into the financial crisis in East Asia, Ross Garnaut made the following statement:
For the whole of Southeast Asia, the future of political cohesion and economic development in Indonesia will strongly influence the lessons that are drawn from the 1997 crisis. And that big story is still unfolding (Garnaut, 1998:10; emphasis added).
Two years hence that story is still unfolding. A book by Richard Mann (1998) on the Indonesian economic crisis carries the sub-title 'The Full Story'. This claim is certainly premature. However, he was not incorrect in his observation that: "The crisis sowed doubts in the minds of Indonesians about their readiness for globalisation and sparked a feverish search for scapegoats to blame for all that had apparently gone wrong." Yet he himself subsequently argued that: "How things would turn out only time will tell." (Mann, 1998:11).
Time flies. The crisis in Indonesia has taken on a dynamic of its own. What began as a currency crisis in the third quarter of 1997 rapidly turned into a deep financial crisis with wide-ranging economic and social impacts, and finally became a serious political crisis that exploded in May 1998, forcing President Soeharto to resign. Soeharto's departure, however, did not resolve the crisis. He left behind an economy in shambles, a serious political vacuum, and a highly polarized society. The road to recovery will not be a short and easy one.
The policy framework to deal with, and the policy conclusions that will be drawn from, the crisis will be influenced by this dynamic development. Three kinds of assessment will be influential (Soesastro, 1998a). The first involves the 'lessons learned'. There is now already a rich source of literature about the causes of the crisis in various East Asian countries (e.g. McLeod and Garnaut, 1998; Jackson, 1999; Arndt and Hill, 1999) and in Indonesia specifically (e.g. Tambunan, 1998; Hill, 1999; Nasution, 1999). The second assessment relates to the 'actual experience' in overcoming the crisis. The series of 'Survey of Recent Developments' in the Bulletin of Indonesian Economic Studies (BIES) are an invaluable source, perhaps the best of its kind. Supplementary analysis focusing on political developments can be found in the annual country surveys in the Asian Survey (e.g. by Bird, 1998 and Bird, 1999) as well as in Southeast Asian Affairs (e.g. Sukma, 1998; Lowry, 1998, and Suryadinata, 1999). The third kind of assessment has to do with the state of affairs and the state of mind when the crisis is finally over. How, for instance, will affected countries assess the state of their post-crisis economy, either with reference to their stated or implicit national aspirations and goals or relative to the state of the rest of the world? The contours of this assessment can already be seen emerging in the body politic in Indonesia and perhaps elsewhere. The issues are wide-ranging, including the loss of Indonesia's position in the international system (Lentner, 1998), the domination of the industry by foreign capital and the imposition by the International Monetary Fund (IMF) of a certain model of economic development.
These three kinds of assessment are not mutually exclusive. The BIES survey that covers the first few months into the crisis shows the inability of the government to deal with the contagion although it had taken a series of monetary and fiscal measures rather early (Soesastro and Basri, 1998). The government appeared to be rapidly losing confidence in itself. This led the government to seek assistance from the IMF despite President Soeharto's great reluctance. Subsequently, the public and the market began to lose confidence in the government as they sensed that it was not serious in implementing the structural reform program under the agreement with the IMF. The stabilization policy was seen as making matters worse, and the closure of banks as part of the "IMF conditionally" caused a panic leading to bank runs. The currency slid down rapidly. A second, more detailed, agreement was signed but this was followed by a standoff with the IMF, among other things because Soeharto wanted to adopt a currency board system as an alternative to the IMF recipe. His search for an alternative was to avoid having to undertake various structural adjustment measures that directly affected the businesses of his family and cronies. This resulted in a postponement of the disbursement by the IMF that would last for many months and worsened the crisis.
In March 1998 Soeharto was re-elected for a seventh term. Subsequently, a third agreement was signed with the IMF by his new government. It was a continuation of the previous agreements but a program to tackle the huge private sector debt was added, ending the reluctance on the part of both the government and the IMF to deal with this problem. A debt restructuring agency (INDRA) and a banking restructuring agency (IBRA) were established. The economy continued to fall sharply. The weak currency, the large monetary expansion to support banks, and a severe drought have sharply increased inflation (Johnson, 1998). The economy virtually collapsed following the riots in May 1998. Soeharto was forced to resign but the succeeding transition government under Habibie did not help to improve the situation (Evans, 1998). A new agreement was signed with the IMF leading to a resumption of international assistance in July 1998. The IMF adopted a more flexible approach and even allowed the budget to run a deficit of 8.5 percent of GDP to finance increased social programs. In the efforts to restructure the banking system, the largest private banks were nationalized by default. In the restructuring process IBRA also acquired assets from closed banks as well as corporate assets owned by the owners of banks that have been closed or taken over. The government ended up owning an estimate of up to 70 percent of private sector assets.
Monetary stability was achieved in late 1998, but there was no progress in banking and corporate debt restructuring. The private sector adopted a wait and see attitude because of continued uncertain political developments. Populist economic policies were introduced by the Habibie government. Information and data from field surveys and improved methodologies suggested that the social impact of the crisis was less severe than earlier estimated (Cameron, 1999). However, the policy has to further increase the disbursements of funds for various social safety net programs. This was opposed by many civil society organizations that saw a lot of misallocation and corruption and the use of the funds for vote buying in the run towards the general elections. Having become independent, Bank Indonesia, the central bank, was able to maintain a tight monetary policy. Monetary stability was maintained during the heated period of political campaigning and the general elections in June 1999. Interest rates have come down significantly. However, with no progress in banking restructuring, credit growth continued to be negative. The real sector remained stagnant and recovery continued to be retarded (Pardede, 1999). The period following the elections saw a paralyzed government. Confidence that was still low was further affected negatively by the post-ballot turmoil in East Timor and the Bank Bali scandal involving party and government officials close to Habibie. In September the IMF suspended its assistance. Political intervention in bank and corporate restructuring hampered the process, further raising the already very high cost of bank recapitalization (50 percent of GDP) that in turn will increase the fiscal burden over many years to come. Questions arose about fiscal sustainability (Booth, 1999).
In November 1999, a little over two years after the start of the crisis situation, Indonesia finally got a democratically elected President. A new program with the IMF covering the next three years was signed in January 2000. The program is a continuation of the earlier one but emphasis is now given to governance issues (Fane, forthcoming). This new government is faced with an enormous task. In the first 100 days the President's priority was in the political field. Problems in civil-military relations and relations between the center and the regions are at the core of the political agenda. The economic agenda is yet to be implemented but the economic team in the cabinet is widely considered to be weak. As a consequence, confidence has not been restored. Another major problem that could affect public and market confidence relates to the policy of disposing the huge assets under IBRA. The rational policy should be one of maximizing the value of the assets. Yet various constraints are being imposed upon IBRA, to protect certain vested interests and often presented under the disguise of some notion of 'industrial policy'.
This brief summary of developments over the past two years, based on the BIES surveys, highlight some of the pertinent policy issues in relation to the crisis. They are predominantly, if not exclusively, focused on internal issues and domestic policies. Indeed it is interesting to note that regional or international aspects and implications of the crisis have not became an issue in the public debate and policy discourse in Indonesia. This does not mean that the Indonesian crisis does not have regional implications.
Regional Implications: The Issues
In geopolitical terms it is believed that Indonesia occupies an important position in Southeast Asia, perhaps even in the wider Asia Pacific region. Indonesia's neighbors have been greatly concerned about the effects upon them of a deep and prolonged crisis in Indonesia.
Regional spillovers and contagion. One way to look at the possible regional implications of the crisis is to trace through the ramifications of the losses in material capacity (Emmerson, 1999). Economic impoverishment could trigger domestic instability that could spill across borders. The concern in Malaysia and Singapore has been with an increased influx of illegal workers from Indonesia. Malaysia increased patrol along its coasts to seal off the country from this inflow, and with Malaysia itself experiencing economic downturn there were a lot of talk about the need for a massive forced return of Indonesian workers. However this did not happen on a large scale perhaps because of the appeal from the Indonesian side or because Malaysians after all did not want to do the kind of jobs performed by the Indonesian workers.
There was also the concern about the effects of the way the crisis was being handled. As briefly described above President Soeharto showed great reluctance to implement the agreement with the IMF, increasing the uncertainty in the markets about Indonesia's ability to overcome the crisis. Concerned about the possibility of some kind of 'contagion', namely that Indonesia's poor handling of the crisis would hamper the process of recovery in other countries in the region, Singapore's senior minister, Lee Kuan Yew, and other regional leaders appealed directly to President Soeharto to fully implement the program. John Howard of Australia approached the IMF to seek greater flexibility in the program, also with the aim to encourage the Indonesian leadership to implement the program. Malaysia's Mahathir openly complained that his efforts to bring the Malaysian economy out of the crisis were frustrated by the continued uncertain developments in Indonesia. He partly used this argument to justify the policy of fixing the exchange rate and instituting capital controls.
Disintegration and democratization. The greater regional concern is with a possible disintegration of Indonesia. Lentner (1999) is of the view that the disintegration of Indonesia coupled with continued economic stagnation are the main factors that could cause significant shifts in the security structure in Southeast Asia. In Leifer's words, the consequences of a fragmentation of Indonesia is incalculable, with the obvious exception of the adverse effect on business confidence extending beyond the region (Leifer, 2000). The separation of East Timor has aroused similar sentiments in other parts of Indonesia for independence. The 'rich' regions of Aceh (natural gas), Riau (oil), and Irian Jaya (copper and other minerals) have been very unhappy with what they perceive as an unfair sharing of the revenues from the exploitation of natural resources between the center and the regions. The case of Aceh is complicated by the fact that for a long time there have been strong demands for the adoption of Islamic law, as well as the existence of an armed independence movement that had been responded to by the government with massive military operations. Other regions are also demanding for greater autonomy. In response to this two laws have been passed, but they will not be implemented before April 2001 although the government has begun the process of fiscal decentralization in the budget for 2000. Serious efforts by the government to implement the decentralization laws will help resolve this problem. Calls for independence have weakened following the widespread support in the region and elsewhere for the continued territorial integrity of Indonesia that President Wahid received during his foreign visits.
The overwhelming support the new government is receiving from the international community is essentially a support for the democratization process under the first democratically elected president. Decentralization and the devolution of power from the centre to the regions are indeed seen as part and parcel of the democratization process. Given the size of the country and its geopolitical position, this democratization process that is widely regarded as having a major positive impact on developments in Southeast Asia and beyond. During his visit to Jakarta, US Secretary of the Treasury, Lawrence Summers, made an explicit statement to this effect.
Direct economic impact. Although geopolitically speaking Indonesia may be of some great importance, this does not seem to be the case in the economic realm. The direct economic effects of Indonesia's economic crisis appear to be rather insignificant. Initially there were concerns that Indonesia's stagnant economy may cause a drag on other regional economies. However, this proved not to be the case. Although there was almost no growth in Indonesia in 1999 other countries in the region, including the crisis countries, have been able to pull themselves out of the malaise. In fact Korea managed to grow by a little over 10 percent in 1999 and Thailand achieved nearly 8 percent growth in the third quarter of 1999.
Regional disengagement. A possibly greater impact is whether Indonesia will continue with or reverse its internationally oriented economic policy, and whether it will disengage from regional economic cooperation activities (ASEAN, APEC). Having so many problems on its plate, Indonesia has not given much attention to regional cooperation. As the country in the region most seriously hit by the crisis it is perhaps expected that Indonesia will make use of regional cooperation structures to help resolve the crisis. It has not taken any initiative to that effect. The Indonesian government may have recognized the limitations of ASEAN as well as APEC in resolving the crisis. Instead, it has relied on international, multilateral institutions such as the IF. In addition, President Soeharto had made a number of bilateral approaches. This pattern has been continued by President Whaled.
Although less than spectacular, ASEAN did try to do something, including making a collective appeal to advanced industrial countries to keep their markets open and to maintain trade financing to the ASEAN countries, to encourage their banks to honor letters of credit issued by Indonesian banks and to be more accommodating in the negotiation of debt. A more significant initiative by ASEAN is to establish an economic surveillance mechanism, called the ASEAN Surveillance Process. This, however, does not address the problems of overcoming the current crisis but is aimed more at preventing future crises (Soesastro, 1999b). This process may also help strengthen efforts in individual ASEAN countries to improve economic governance (Soesastro, 1999c). However, in all this Indonesia has largely been dragged along rather than taking the lead. It has joined in the pledge of the group to continue with a consistent application of sound, market-oriented and outward looking policies in overcoming the crisis. ASEAN governments have agreed to accelerate by one year the implementation of AFTA (ASEAN Free Trade Area).
Trade liberalization commitments. In May 1995 the government announced a schedule of significant tariff reductions in line with its Uruguay Round and AFTA commitments. Unilateral (MFN) tariff reductions lag behind the AFTA preferential tariff reductions but in most cases the two tariffs will be equal at various target dates, including the 2003 target for AFTA. According to Indonesia's original AFTA schedule, for tariff rate categories between 5 and 20 percent pre May 1995, tariffs will already reached a maximum of 5 percent in 2000. For tariff categories between 25 and 40 percent pre May 1995, tariffs will be reduced to a maximum of 20 percent in 1998 and to a maximum of 10 percent (rather than 5 percent) by the year 2003. Average AFTA preferential tariff rates are to reach 3.69 percent in 2003. As of October 1998 under its AFTA commitments about 6622 tariff lines (91.8 percent of total) were already in Indonesia's inclusion list, whereas 541 were still in the temporary exclusion list, 4 in the sensitive list, and 45 in the general exception list. In December 1998 ASEAN governments agreed to achieve a minimum of 90 percent of their total tariff lines with a maximum 5 percent tariff by 2000 and 100 percent of items in the inclusion list with a maximum 5 percent tariff by 2002. The latter can be seen as defining what the realization of AFTA mean. In Indonesia's current time table of tariff reductions there are about 68 tariff lines that will be behind schedule in 2002, and these relate mostly to chemical and plastic products (Tarmidi, 1999). In March 1999 ASEAN economic ministers discussed a proposal to agree on achieving a 0 percent tariff for at least 60 percent of items in the inclusion list by 2003. Subsequently, in June 1999 Indonesia announced that 55 percent of items in its inclusion list will have 0 percent tariff in 2003 and pledged to make efforts to reach the 60 percent target.
Tarmidi (1999) thought that under the current circumstances it is only fair to expect that Indonesia would backslide from its international trade liberalization commitments both under the WTO and AFTA. This is not Indonesia's official policy. However, recently it has raised import tariffs in regard to a number agricultural products such as rice and sugar in order to protect the farmers. Fane (forthcoming) detected that Indonesia's MFN trade liberalization has fallen behind the target for tariff reductions in the May 1995 package. Nonetheless, he pointed out that the trade regime has become much more open. Apart from automobiles and alcohol, the highest tariff rate is now 25 percent and this rate only applies to 45 tariff lines, mostly in the steel and chemical sectors. In June 1999 the government significantly deregulated the automotive sector. In addition, in the new IMF-supported program, the government announced the plan to have a three-tier tariff structure in place by the end of 2003 with rates of 0, 5 and 10 percent for all items except automobiles and alcohol.
Overall the crisis thus far has not caused Indonesia to become more inward looking. Yet pressures appear to be mounting. The question is whether Indonesia's regional and international commitments can help to ward off the demands for greater trade protection. ASEAN has been weakened by the crisis. But this is partly because of Indonesia's reduced role in it (Basri, 1999; Wanandi, 1999). The crisis has not generated fresh momentum towards regional agreements and identification (Emmerson, 1999). Countries in the region might turn their attention away from the region. Singapore, for example, is making the efforts to strengthen economic ties with countries outside the region to aid in its recovery (Lim, 1999). A weakening of regional cohesion could be detrimental to the region. ASEAN and APEC attempt to redress its deficiency in dealing with the crisis by incorporating the finance ministers into their core agenda.
The impact of a "regional" crisis. A discussion of the impact of the Indonesian crisis cannot be isolated from an examination of the regional implications of the crisis that has affected a number of countries in the region. Intra-regional trade has suffered from the crisis. Trade in East Asia has contracted (Garnaut, 1998b). APEC governments, the United States and Japan in particular, have agreed to stimulate their domestic economies in order to pull the region out of the malaise. Despite Japan's domestic fiscal stimulus programs, it has not been able to act as an important locomotive. Much of the burden has rested with the United States. To some extent, China continued strong growth has helped the region. Perhaps rather surprisingly, foreign direct investments (FDI) into the region have not been affected much by the crisis. Thailand experienced an upsurge of FDI, in part due to increased mergers and acquisitions (M&As) involving foreign investors. Indonesia has been the exception where FDI has dried out and, in fact, it has experienced a net FDI outflow in 1999. Despite the uncertainty about the strength and timing of the recovery, multinationals have stayed put in the region because of the regions longer-term prospects (Proff, 1999), and some are devising strategies "to embrace the uncertainty and develop tools to manage through it." (Blaxill and Sander, 1999:106). Economic recovery in the region remains fragile but there is increased optimism that the region will soon return to a higher growth path. It is recognized that sustained recovery can be achieved only if countries in the region continue with their reforms. Yet there are some concerns that signs of a rapid recovery in the region will weaken the momentum for reforms.
Regional strategic balance. Thus far there have been no further economic and social disasters in the region. No new political tensions have emerged, and the region's strategic environment has not deteriorated. However, there may be some longer-term strategic shifts in the region resulting from the different responses to and abilities to cope with the crisis both on the part of the crisis-affected countries themselves as well as on the part of other regional countries, including the United States. Wanandi (1998) discussed possible changes in the relative balance of power amongst the great powers in the region: the United States, Japan, and China. The United States, while initially reluctant to take a role in efforts to overcome the financial crisis, has subsequently taken an active role in it since no other power has the same reach and leadership in the region. However, this can cause some backlash as concerns emerge about US domination and intervention in the region. On the other hand there is the concern about the lack of consistency and staying power of US policies towards the region. Paul Dibb (AJRC, 1998) and Wanandi share the observations that during the unfolding of the financial crisis in East Asia, China has come out as a more decisive player in the region than Japan. Despite the huge resources Japan has given to the crisis-affected countries, it has failed to stimulate its own economy. Its regional initiative to establish an Asian Fund also failed because it was poorly handled. China on the other hand has increased its stature by taking part in the international rescue operations and by pledging not to devalue its currency, and equally -- if not more-- important, by maintaining its internationally oriented economic policy and strong economic growth. Yet Wanandi argued that keeping the regional balance of power essentially requires strong US presence in the region and maintenance of the US-Japan alliance. Stuart Harris did not think that the relative increase of China's stature vis-à-vis that of Japan would upset the overall strategic balance in the region (AJRC, 1998). Instead, this tends to improve it. On the other had, Dibb postulated the emergence a more asymmetric geopolitical outlook in which the gap between those countries that do rather better and those that do rather worse will be more pronounced.
Divergence of policies and competition of ideas. Not much attention has been given to the impact of the crisis on economic policies in the region and the consequences for the region of greater divergence in those policies. Montes (1999) pointed to three economic issues in the current debate on economic development policies in the region, namely: (a) openness; (b) Asian governance; and, (c) sources of growth. Malaysia's policies appear to diverge from those of Indonesia and Thailand. Perhaps this divergence is more pronounced because of the rhetoric rather than the substance. Increased divergence in economic policy may affect regional cohesion, but it is not at all clear why some competition of ideas about development should not be good for the region.
The above discussion has underlined Garnaut's conclusion that the dangers to the region would come mainly from long-delayed recovery, polarization of explanations about what the crisis and of ways to overcome it, controversy about the role of the IMF and the United States, and slow growth in a less internationally oriented region (AJRC, 1998). Developments in Indonesia do have an influence on each of the above areas, in some areas the influence will be more pronounced than in others. But they are closely intertwined with each other.
Revisiting the Crisis
The major change in economic policy in the region that can have a major implication for the region is a retreat from reliance on markets and on the international economy. As proposed at the outset, this change in policy depends on the lessons learned from the crisis, the actual experience in dealing with the crisis and in resolving it, as well as anticipation about the state of affairs when the crisis is finally over.
A careful listing of the sequence of events and developments that led to the outbreak of the crisis and its unfolding will go a long way in explaining the causes and unfolding of the crisis in East Asia. However, events do not always happen in a neat sequence, and developments in the different realms, regions and markets often overlap and are in conflict with each other. There are conflicting and complementary explanations about the crisis in East Asia. Hill (1999b) reviewed six broad sets of factors: (a) international financial market instability; (b) international capital market instability; (c) macroeconomic policy weaknesses; (d) "over-guaranteed but under-regulated" domestic financial sector; (e) Asian-style 'crony capitalism"; and (f) mishandling by international financial institutions like the IMF. Radelet and Sachs (1998b) have also examined an additional factor, namely shifts in international market conditions. These refer to the global glut in labor-intensive manufactured exports, the rise of China as a competitor, and the effect of NAFTA on Southeast Asia's exports to the United States. They do not think that the crisis resulted from these shifts in the international market. They also do not think that the crisis was an inevitable result of the Asian capitalist model. Rather it was caused by the accidents of partial financial reform that exposed the Asian economies more directly to international financial market instability. Sikorski (1998), however, attributed the crisis to the failure of Asian capitalism as well as a failure of market capitalism that led to a loss of confidence in Asian capitalism, also suggesting both internal and external causes of the crisis. It has become evident that the crisis cannot be attributed to a single cause.
The crisis can be seen from various points of view and professional backgrounds. In his analysis, Jackson (1999) pointed to the fact that political scientists and journalists tend to depict the crisis in Indonesia as being almost solely the product of "familism" and cronyism. Economists saw the plummeting rupiah (the Indonesian currency) as a product of a regional panic and overvalued currency, while market analysts perceived the crisis as involving weak banks and real estate speculations, in addition to fixed exchange rates, partially overvalued currencies, and political uncertainties. These views are complementary. A careful analysis of the sequence of events would clearly show that in the case of Indonesia there was a combination of economic and political causes of the crisis. To some, political factors tend to weigh more heavily. Lowry (1998) argued that the crisis in Indonesia in large measure reflected the fundamental shortcomings of a political system that has failed to keep abreast of economic and social developments. In the course of the crisis the economy has become captive to politics (Forrester, 1999).
Political factors are thought to have played an important role in the unfolding of the Indonesian crisis because its depth cannot be accounted for by flaws in economic fundamentals. Radelet and Sachs (1998a) have argued that Indonesia's economic fundamentals were not especially poor. They concluded that Indonesia appeared to be a clear case of contagion leading to panic, and ultimately to a severe, unnecessary economic contraction. The contagion from Thailand acted as the trigger that resulted in a panic. Radelet (1999a) observed that the panic that helped spread the crisis into Indonesia did not originate solely with local investors or households as has been proposed earlier (Soesastro, 1998a). He pointed to the fact that Japanese banks were also quick in withdrawing their credits from Indonesia so as not the be caught in a similar situation as in Thailand where they had to agree to keep US$ 19 billion in trade and other credit facilities open for certain Thai commercial bank borrowers. However real that contagion was, there is no denying that structural vulnerabilities were present in the economy (World Bank, 1998), and were largely overlooked under the prevailing notion of "economic fundamentals". A more robust definition of fundamentals should now include governance, the institutional setting, and the legal system (Sadli, 1999; Hill, 1999b). It is important to analytically distinguish between the trigger and the structural vulnerabilities leading to the crisis.
However, in responding to the crisis it may be difficult in practice to deal only with either one of those factors as both the trigger and the structural weaknesses have led to a loss of confidence in the system. Sachs and Woo (1999) have been critical of the way the crisis has been handled, particularly by the IMF. In his view the imposition of tight monetary policy and contractionary fiscal policy caused unnecessary economic contraction. This controversy remains unsettled. There was also the view that the IMF should not have included structural reform measures as they do not directly relate to problems of financial panic. Yet the dynamics at the time required the inclusion of structural reform programs because the public and the markets consider them necessary to restore confidence in the government and in the economy (Soesastro and Basri, 1998).
Hill (1999a and 1999b) also suggested the distinction between "core" and "exacerbating" factors. The core technical factors explaining the crisis are fixed or quasi-fixed exchange rates in the context of rapidly rising short term debt and weak financial systems. Hill observed that these factors were common to Indonesia, Thailand and, to a lesser extent, Malaysia. Jackson (1999) identified an additional factor that was present in all crisis-affected countries (perhaps with the exception of Malaysia), namely paralysis of political decision making at the onset of the crisis. This could be seen as an exacerbating factor. Hill's overall conclusion appears to accord with the general consensus in Indonesia, at least thus far, namely that international factors have contributed to the crisis, but the crisis itself is first and foremost a domestic one in its origin and prosecution. It is not surprising, therefore, that the debate and the policy agenda have largely focused on domestic matters.
The Recovery Agenda
Analyses of the Indonesian economic crisis have focused largely on the domestic roots of the crisis. They have identified all the various factors that have been examined above. Some have pointed to more specific issues and developments, including -- most importantly-- policy incoherence (McLeod, 1998 and 1999), highly protected state-owned enterprises (Nasution, 1998 and 1999), and a corrupt regime and bureaucracy (Basri, 1999). All these factors will need to be considered in devising the framework for recovery. The most authoritative official document outlining such a framework has been produced by Bappenas, Indonesia's development planning agency (Bappenas, 1999). It proposed a policy agenda that begins with efforts to safeguard the recovery. These consists of macroeconomic management, bank restructuring, corporate restructuring, and resources allocation that would rebuild the economy. In addition it provides increased social support for the poor that includes food security, supplemental feeding programs, health care, education and regional job creation programs. These will be followed by efforts to strengthen the foundation for long-run growth. These include human resources development, strengthening the role of technology, strengthening market institutions, promoting good governance, infrastructure development, and environmental reform. Perhaps not surprisingly, but certainly deficient, is the absence of any regional or international economic diplomacy initiative.
The Bappenas document and the latest Letter of Intent (LOI) with the IMF define the national agenda. For the short term specific and detailed policy actions have been stipulated in the LOI (Government of Indonesia and Bank Indonesia, 2000) that will be regularly reviewed with the IMF. The economic agenda of the Wahid government is also influenced by the Broad Outline of State Policy (or GBHN) that has been formulated by the People's Consultative Assembly (MPR) in October 1999. It instructed the government to take steps to accelerate the recovery of the economy. There is a clear macroeconomic framework for maintaining stability (Indrawati, 1999; Goeltom, 1999) and support from the IMF helps ensure the implementation of this framework. Bank and corporate restructuring that are also a key to the recovery is more difficult to implement. The problem, and perhaps a real dilemma, faced by the government is that in undertaking that task it will have to deal with problems of KKN (corruption, collusion, and nepotism). Some are criticizing the government for giving too much attention to this latter problem, but others are of the view that the government has done nothing on the KKN problems. The government will have to find the right balance between tackling KKN and concrete efforts to revive the economy. In the broadest sense of its meaning, tacking KKN should include efforts to improve public and corporate governance.
In the economic realm alone the agenda is already overloaded. On top of this there is equally a challenging political agenda of managing the process of democratic transition and consolidation. Implementation of the economic agenda is full of risks. Firstly, it has to be undertaken within a changing political context in which the parliament has become more assertive and wants to participate more actively in economic policy decisions and implementation that were previously the exclusive domain of the executive branch. Secondly, it has to take into consideration the demands for greater regional autonomy while the framework for devolving power from the centre to the regions will involve a lot of trials and errors for many years to come. Thirdly, the government, despite the strong political legitimacy of the leadership, is not an effective government because of lack of cohesion and coordination amongst economic ministers that are drawn from different partners in the coalition. Under these circumstances it will be difficult to achieve policy coherence, which is a key requirement to restore public and market confidence.
The task of this government is enormous because of the inextricable relations between challenges in the economic field and developments in the political realm (Soesastro, 1998b and 1999b), or as dramatically described by Emmerson (1998), between a polity being pulled uncertainly towards democracy and en economy being dragged into depression. The road to recover is likely to be a long one (Radelet, 1999a and 1999b).
The extreme economic and political crisis that Indonesia has experienced and still suffers from is clearly indicated by the dramatic deterioration in economic indicators. The value of the currency fell from about Rp 2,500 per US$ at the onset of the crisis to Rp 17,000 in January 1998 but has stabilized to about Rp 7,500 in the beginning of 2000. The economy shrank by about 14 percent in real terms in 1998 and inflation during that year reached almost 80 percent. This was Indonesia's worst economic performance over the past 30 years. However, the most serious problem was the total loss of confidence on the part of the populace and international investors in the economy and the government. This led to the huge outflow of capital and a series of bank runs. In an attempt to make an end to panic withdrawals of funds by depositors the government instituted a blanket guarantee. This has cost the government thus far about Rp 54 trillion or US$ 7.5 billion at the exchange rate in January 2000. However a much larger amount of emergency liquidity assistance to banks was provided by Bank Indonesia as a lender or last resort. It remains a matter of dispute between Bank Indonesia and the Ministry of Finance as to how large that emergency liquidity was, but it is estimated to be in the order of US$ 25 at the exchange rate in the beginning of 2000.
Banks have been the hardest hit by the crisis (Delhaise, 1998, Nasution, 1999). On the one hand depositors withdrew their money. On the other hand, their corporate borrowers ceased to pay interest or to repay their debt. Non-performing loans increased rapidly from around 14 percent at the onset of the crisis to perhaps 50 percent at the height of the crisis. In some state banks, the proportion of non-performing loans is estimated to have reached 70 percent. A program of bank and corporate restructuring was introduced as part of the agreement with the IMF. A major component of this is bank recapitalization. The plan is to recapitalize all state banks, all regional development banks with a capital adequacy ratio (CAR) of less than 4 percent, and so-called Category B private banks, namely those with a CAR of between minus 25 and 4 percent if they have a sound and realistic business plan and if the owners and management have passed a fit and proper test. The cost of bank recapitalization is huge. A major part of the cost is borne by the government and is financed by issuance of government bonds. This could amount to about US$ 52.5 billion at the exchange rate in the beginning of 2000. Hence the total cost of bank restructuring of about US$ 85 billion, which includes the cost of bank recapitalization, issuance of bonds to cover the emergency liquidity and government blanket guarantee. This is almost the same amount as the cost of bank restructuring in Mexico. In Mexico this accounts for about 20 percent of GDP, but in the case of Indonesia the cost of bank restructuring that is borne by the government accounts for about 80 percent of GDP. This is a staggering amount. On top of this, the government has an external debt of about 60 percent of GDP. The total public debt now amounts to about 140 percent of GDP. The burden to the government is enormous. Total public debt service payments in fiscal year (FY) 1999/2000 (ending 31 March 2000) is about Rp 55 trillion, which amounts to 26 percent of total expenditures or 4.5 percent of GDP. In the year 2000 budget (1 April to 31 December 2000), total public debt service payments increased to Rp 59 trillion, which amounts to 32 percent of total expenditures or 6.5 percent of GDP.
The restructuring and rehabilitation of the banking sector is entrusted upon the Indonesian Banking Restructuring Agency (IBRA), an institution established under the Ministry of Finance with a lifetime of 5 years. IBRA has acquired assets from failed banks and banks that have been taken over as well as non performing loans of state banks and recapitalized banks. It has been estimated that over 70 percent of corporate assets are now in the hands of the government. In a sense it is "nationalization by default". Since the government does not intent to control these assets it will have to dispose of them. In addition to restructuring banks, IBRA task is to help recover government funds that have been used to restructure the banking sector. Maximizing asset recovery is thus a major objective of IBRA. The Asset Management Unit - Credit (AMC) arm of IBRA manages about Rp 207 trillion of loan portfolio which consists of approximately 170,000 debtors. Most of the value is concentrated in the large corporate loans. There are 1,339 corporate debtors (0.8 percent of debtors) with loans above Rp 50 billion with a total loan of about Rp 172 trillion (82.8 percent of loans). About 40 percent of the loan portfolio is in manufacturing.
Disposing of the assets of these large corporations is not an easy task. Many of the large debtors are related to Soeharto. They have not been cooperative, and the Habibie government did little to help IBRA recover the assets from Soeharto's related companies. IBRA also face resistance from the original owners or the management as in the case of the sale of Bank Bali and Astra. IBRA has estimated to achieve an asset recovery rate of about 32 percent. Its plan is to dispose of the assets at a rate of about Rp 40 trillion per year from 2000 to 2004. Less than half of this amount will be contributed annually to the budget to help finance the cost of interest that accrue from issuance of government bonds to restructure the banks.
Sachs and Woo (1999) are on target when pointing to the importance of "getting institutions right". In the final analysis, it is the executing agencies that are most important in the successful implementation of policies to revive the economy. In resolving the crisis new institutions, IBRA, INDRA, and the Jakarta Initiative Task Fore (JITF), have been established. Together with Bank Indonesia, the Ministry of Finance, the State Minister for Investment and State Enterprises all those "crisis" institutions are involved in the gigantic task of credit restructuring, which is key to the recovery of economic activities. Coordination amongst these institutions and agencies is at best very weak and of an ad-hoc nature. This led to the slow banking and corporate restructuring. During the Habibie Administration there was a lot of political intervention towards those "crisis" institutions. IBRA that currently manages a huge part of corporate assets have been the target of political intervention.
During the very first few days of the Wahid Administration there were attempts by certain political groups to gain control over IBRA. The new IMF-supported program stipulates measures to empower IBRA. There are suggestions to further strengthen IBRA by making it a fully autonomous agency. An earlier IMF-support program transformed Bank Indonesia into an independent institution. It remains to be seen whether independence of these institutions would help expedite the process towards banking and corporate restructuring by insulating them from political interests. The political environment under which these institutions have to operate has become more complex as the political system opens up. Insulating them from political influences becomes a necessity but these institutions must also increase their transparency and accountability.
Tentative Conclusion: Back to Policy
Institutions do matter a great deal, but policies remain most fundamental. Recent developments in Indonesia, in particular in relation to efforts by IBRA to develop asset disposal strategies, there is a great danger that political intervention and political influences are exerted under the disguise of an "industrial policy". If IBRA falls into this trap it will seriously derail the debt restructuring program and put Indonesia's economic recovery at a great risk. The argument in support of an industrial policy to guide IBRA is the fact that it is currently in control of such huge industrial assets and can thus decide on the direction of Indonesia's industrial development. This is a very dangerous argument, but it appears to have gained increasing appeal amongst the nationalists, the protectionists, and various vested interest industrialists.
Indeed, there is a lot of talk about "industrial policy after the East Asian crisis". Two trends can be identified. One is to move from outward orientation to new internal capabilities that would see the emergence of competition policy to replacing the role of activist government (Mody, 1999). This creates an enormous challenge to governments to develop sophisticated new skills in public administration in order to be able to deal with the more complex mandate that the shift implies. The other is a longing for old style industrial policy of selective targeting, including a move back from outward orientation to a new rationale for import substitution. The region has had an experience in industrial policy. It should not forget that experience, its inherent dangers (of encouraging rent-seeking activities), its pitfalls, and above all its high cost (see, e.g. Smith, 1995).
The corporate structure and governance mechanisms in East Asia have been under scrutiny in the wake of the crisis and the Asian development model, if indeed there is one, has come under attack. But it does not follow why a reorientation should involve a retreat from a reliance on market and on the international economy. In fact, it should lead to a strengthening of that orientation. Moreover, good industrial policy still is an open trade regime that fosters a competitive environment and ensures effective allocation of resources. The proposition advanced here cannot be summarized in a better way than that by Lim (1999:26-27):
The trajectory of the crisis to date -- from its origins through its policy responses and consequences -- appears to suggest that reliance on open markets and international capital flows brings increased vulnerability to bad politics and bad policy choices as well as bad loans and bad investments that can only be resolved through more openness, more competition, and more exposure to political and market disciplines [emphasis added].
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