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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
REVIEW ARTICLES
Ross H. McLeod
To cite this article: Ross H. McLeod (2001) REVIEW ARTICLES, Bulletin of Indonesian Economic Studies, 37:2, 259-264, DOI: 10.1080/00074910152390928
To link to this article: http://dx.doi.org/10.1080/00074910152390928
Published online: 17 Jun 2010.
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REVIEW
ARTICLE
Anthony
L.
Smith
(ed.),
Gus
Dur
and
the
Indonesian
Economy
RossH.McLeod*
TheAustralianNationalUniversity
Thisisacollectionofpaperspresentedat an InstituteofSoutheastAsianStudies conferenceheldinJanuary2000,on Ab-durrahman Wahid’s first 100 days as presidentofIndonesia.The23 contribu-tors are mainly prominent Indonesian academics,ministers,bureaucrats, busi-ness people and commentators, along withrepresentativesoftheIMF,theWorld Bank and USAID, plus oneAustralian academic.
Despiteitstitle,relatively littleofthe bookisaboutGusDur.Fewofthe origi-nal conferencepaper chapters provide any evaluationofhis presidency—per-hapsnotsurprisingly,asitwassimplytoo earlyatthetimeforanyclearpictureto haveemerged.Thosewhorisked extrapo-lating theirimpressions ofthe first 100 daysintothefuturemaynowregret hav-ing done so. For example, Emil Salim discernsapreoccupationwith ‘capacity-building to createemployment’ on the part of thepresident (p.214), but this seemsnottohavebeenborneoutby sub-sequentdevelopments.Hisassertionthat GusDur‘ismarketfriendlyandnot op-posedtoforeigninterests’(p. 214)now needstobeweighedupagainstthe presi-dent’sdecisiontosavethedeeply insol-vent Texmaco conglomerate from the marketdisciplineofseizureofitsassets, andagainstanumberofcasesinwhich foreigninvestorshavebeenleftwith
vir-tually noprotection fromeitherthe po-liceorthecourts.
Likewise,inMohammadSadli’s two-page contribution thepresident’s per-formanceisrateda‘B’,withtheprospect ofimprovingduring2000to‘B+’,inlight oftheauthor’svariousperceptions: min-istersworkingwelltogetherbasedona common consensus;a ‘shadowcabinet’ of technocrats providing analternative sourceofpolicyadvice,andlikelysoon tobeappointedtotheformalexecutive; andGusDurhavingagoodfeelfor prob-lemsinAmbon,MalukuandAceh,and notstandingidlyby.Noneofthese per-ceptionshaswithstood thetestoftime, and ProfessorSadli’s morerecent com-mentariesonGusDur’sperformance sug-gest that the initially mediocre but promising student has subsequently earnedafailgrade.
RossH.McLeod 260
reportsthefigureof8%(p.43).Smith as-sertsthat‘unemploymentroseto approxi-mately20million’duringthecrisis(p.5), butthenputsunemploymentat6.3%(of aworkforceofaround87million),which translatesto5.5million;adifferent esti-mateof6.4millionisprovidedbyAnggito Abimanyu (p. 102). Both Smith and NasutionreporttheamountoftheIMF’s bailoutofIndonesiaas$43billion(pp.5, 39).Thisfigureappearsfrequentlyin re-lationtotheIMF’sfirstbailoutpackage, but it is incorrect. The true amount is about $10 billion;even ifcontributions fromtheWorldBankandtheAsian De-velopmentBankareincluded,theamount is onlyabout $18 billion. The IMF in-creaseditspromisedassistancebyabout $1billion in1998,andfurther,byabout $5billion,in2000(seeIMFPressReleases dated 5/11/97, 15/7/98 and 4/2/00), bringing thetotaltoapproximately $16 billion.
Themainvalueofthisbook,therefore,is notasanassessmentofGusDurorofthe economy.Rather,giventhatitcontains pa-persbysomanyrepresentativesof Indone-sia’seconomicintellectualelite,itisasa contributiontodebateontheimmenseand intractableproblemsthecountrythenfaced, andasampleoftheprofessionaladvicethat wasavailable,directlyorindirectly,tothe newpresident.Astheeditorputsit,‘The recordoftheseproceedings[inthisvolume] isavailableinordertoassesstheviewsof decision-makersandacademics...’(p.xv). Sincethepresidentmakesnoclaimtoahigh levelofeconomicexpertise,noproper evalu-ationofhisperformancecanignorethese views.
The individual chapters vary enor-mouslyastoqualityandlength:two(by Professors Anwar Nasution andAris Ananta, respectively) are well over 20 pages,theremainderlessthan10,some onlytwoorthree.
Severalcontributorsdiscussthecourse ofIndonesia’seconomiccrisisandhowit
hasbeenhandled.Theiroptimistictone seemsmainly toreflectthe speed with which highinflationwasovercome, in-terestrateswerereducedandtherupiah recovered lost ground in late 1998 and 1999.Thisreviewerwassurprised, there-fore,tofindvirtuallynoreferencetothe crucialroleofBankIndonesia(BI)inthe managementofmonetary policy in the longchapterbyitsSeniorDeputy Gover-nor,AnwarNasution.FormerIMF repre-sentative in Jakarta,Josh Felman,and USAID representative, Anthony Chan, rightlycreditBIfortheseachievements, butaretoopolitetodrawattentiontoits loss ofmonetarycontrolduringthe pe-riodSeptember1997throughJune1998, whichwaslargelyresponsibleforthe dra-maticinstabilityofthesemonetary indi-cators during that period. Itis lefttoa Ministry of Finance official, Bambang Kusumanto,tohintatthiswithhis some-whatoblique referenceto‘aninitial pe-riodofseveremonetaryturbulence’,and agentlesuggestionthat‘therewere short-comingsinhowliquiditysupportto com-mercialbankswashandled’(pp.60–1).
un-changed and reduce both narrow and broad money by reducing banks’ re-serves.Ifsuchrunsareaccommodatedby centralbanklendingtothebanking sys-teminamountssufficienttoreplacecash withdrawnby depositors, base money willincreasebythisamount,butnarrow andbroadmoneywillbeunchanged.But BI’sloanstothebanksgreatlyexceeded theadditionalamountthepublicwanted tohold ascash,and itwasthis that re-sultedinexcessivemoneygrowth.
Infurtherdiscussionofthetroublesof thebankingsystemitisalsoassertedthat the newlyestablished IndonesianBank RestructuringAgency(IBRA)‘assumed thefunctionoflenderoflastresort’(p.43). Thisappears true only in the layman’s sensethatalenderoflastresortaimsto preventbanksfromfailing.Inthe conven-tionalunderstandingofthistermasused byeconomists,alenderoflastresort pro-videsloanstocoveratemporary liquid-ityshortfall;IBRAwasactuallyconcerned with banks’ insolvency, not their illiquidity, and soprovided them with newequity,notshort-termloans.
AccordingtoProfessorNasution,the crisiswascausedby:regionalrecession; currencyrealignment;contagioneffects; falling business confidenceleading to capitaloutflow;abnormalweather con-ditions; falling oil prices; financial sectorfragility;aninappropriate combi-nation of exchange rate andmonetary policies; rapid accumulation of private foreigndebt;andreducedqualityof in-vestment (pp. 25–6).In thisreviewer’s opinion itis not particularly helpfulto presentsuchalonglistofthingsthatwent wrong. It is necessary to distinguish causes from symptoms,to distinguish problemsrelatingtothehandlingofthe crisisfromfactorsthatinitiatedit,to dis-tinguishproblemsthatweredrivenby in-appropriate government policies from thoseoverwhichthegovernmenthadno control,andtomakesomeassessmentas
towhichcauseswereofmajorimportance andwhichwerenot.
Inananalysisofthecrisisthatdiffers radically fromNasution’sandmost oth-ers,ArisAnantaarguesthatithada sin-glecause:policymakers’failuretoengage in ‘people-centred development’. In elaboratingthisviewhebeginswiththe suggestion thatpastpolicies havebeen directed solelytoboosting(or,more re-cently,restoring)growthofnational in-come (p. 118). He alsoasserts that the measurementofeconomicdevelopment hingestoo muchon indicators‘suchas GDPlevels,theinflationrate,theinterest rate,andthecurrentaccountbalance’(p. 120),althoughthelastthreeofthese vari-ables are indicators of macroeconomic performanceratherthanmeasuresof eco-nomicdevelopment.GDP(percapita)is indeedwidelyregardedasthemost use-ful singlemeasureofdevelopment, but mostpractitionersdonotrelyonit exclu-sively. They useit alongsideindicators likelifeexpectancy,literacy,povertyand so on,however, rather than following Ananta’spreferredapproachof arbitrar-ilycombininganarbitrarilychosensetof suchindicators,asisdonewithmeasures suchastheHumanDevelopment Index (HDI).Anantaarguesthatstrivingto in-creaseameasureliketheHDI,ratherthan nationalincome,promisesmore sustain-ablegrowthbyhelpingtoavoidtherisk offuturecrises.Theunderlying implica-tion—thatifSoehartohadspentmoreon education,healthandsoon,thepresent crisiswouldhavebeenavoided—seems implausibletothisreviewer,however.
RossH.McLeod 262
governmentshouldpaymuchmore at-tentiontoissuesoflawandorder. Moreo-ver, his trade and industry policy recommendations appearcontradictory. Citing‘thedangeroftoomuch depend-enceonexports’and‘theimportance of strengthening food production’, he fa-voursdomesticmarket-leddevelopment, andarguesthat‘industrialisationshould notoccur attheexpenseofagricultural development’.Yetatthesametimehe ad-vocatesfreetradeand‘lettingthemarket decide’(pp.124–7).
Boediono hassome thoughtful com-mentsaboutthegovernmentbeingona learning curveand theadministrationin limbo,andworries,presciently,thatif vari-ousissuesarenotsoonresolved, ‘implemen-tationproblemswillrise,moralewill fall, governmentservicedeliverywillsufferand legitimacywillagainbeanissue’(p.50).He and some other authors, particularly AnggitoAbimanyu,argueinfavourof trans-formingtheshort-termsocialsafetynet pro-grams generated duringthecrisis into sustainableanti-povertyprogramsinthe longerrun.Itissurprisinghowpopularthis ideahasbecome,giventhegovernment’s straitenedfinancialcircumstancesforthe foreseeablefuture,andgiventhatpoverty wasbeingreducedveryrapidlyunderthe policiesoftheSoehartoregime.Thelatter observationconformstotheviewthatthe bestwaytoattackpovertyinthelongerrun is tofocus on generatingrapid growth throughopennessoftheeconomyand ex-tensiverelianceonfreelyfunctioning mar-kets.AsMohamad Ikhsanputsit(while himselfsimultaneouslyarguing‘theneed for bettertargetedsocial safetynet pro-grammes’):‘expansionoftheeconomyisthe bestremedyforpoverty…’(p.115).
Chancorrectlypointsoutthatthe reso-lution ofbankinganddebtproblems is cruciallydependentonimprovementsin thelegalsystem,anddrawsattentionto the ‘generalperception ofa lack of ac-countability’ onthepartofbothprivate
andpublicofficials(p.65).Most observ-erswouldagreethat‘thekeyquestionis from wherewillthe newforcecome in ordertochangethedirectionoftheold ways ofpolicy-making’ (p. 68). On the otherhand,Chanmaybeoverstatingthe importance ofrecovery of the banking sector torecovery of the economyasa wholebyignoringthefactthatformal fi-nancialinstitutionsarenottheonlysource offundsforinvestment.
Sri MulyaniIndrawati,atthetimeof theconferenceaprominentmemberofthe NationalEconomicsCouncil(whichhas since been abolished by thepresident), raisesanumberoffiscalissuesthatneed tobeaddressed,butprovidesfew solu-tions. Sheisconcerned thatstimulating growthbyrunningabudgetdeficitmay createundueinflationarypressure.Infact the link betweengrowth and inflation appearsnegligible:Indonesiawasableto experience82% inflationin1998by vir-tueofveryrapidmoneysupplygrowth, even thoughoutput fell by about13%; anditwasabletoholdinflationnearzero whilegeneratingpositivegrowthin1999 andearly2000,bykeepingmoneygrowth low.Whatmatters,therefore,isthatthe deficitshouldnotbefinancedby exces-sivemoneycreation—anissuetheauthor ignores. This possibility appears to be ruledoutbythecentralbanklaw,which prohibitsBIfromlendingtothe govern-ment. Whether thegovernmentwill be able toborrowenough elsewhereto fi-nancecontinuinglargedeficitsisunclear, however. Itsdebt is alreadyvery large and,asitexpands,thetemptationtofind somemeanstoinflateawaythe rupiah-denominated component becomes stronger.Potentialpurchasersof govern-mentbondswillrequireincreasinglyhigh nominal rates to protect themselves against this possibility,adding further pressureonbudgetsinthefuture.
budget-aryproblems,althoughitismisleadingto say(p.61)that‘thefiscalcostof restructur-ingthebankingsector[hasbeen]realised immediately and paid up-front’ (by recapitalisingfailedbanksusing govern-mentbonds).Onthecontrary,althoughthis
recognisesthecostsinanaccountingsense, thesecostsarenot‘paidup-front’,but am-ortised over thematurity ofthe bonds. Kusumanto himselfimplicitly acknowl-edgesthisfactbecauseheisfullyawareof theheavyburdenthatamortisingthebonds willimposeonthebudgetformanyyears tocome.Healsorecognisestheimportant budgetaryconsequencesofrupiah depre-ciation throughitsimpactonthe govern-ment’sforeigndebtrepayments:itisnotonly thecorporatesectorwhoserupiahliabilities havegrownenormouslywiththecollapse ofthecurrency.Surprisingly,heappearsto underestimatethiseffect,assertingthat‘net externalpublic obligationshave[almost doubled]’(p.62),whereastherupiahcostof foreigncurrencywasalreadyaboutthree timesthepre-crisislevelatthetimeofthe conference.Itshouldbenoted,however,that theneteffectonthebudgetisoffsetbythe increaseintherupiahvalueofthe govern-ment’sforeigncurrencyrevenues, includ-ingthosederivedfromoilandgasexports. Theauthornotestheimportanceofselling bankingandcorporateassetsthathavefallen intothegovernment’shandsandof priva-tisingstate-ownedenterprisesandbanks, bothbecauseofthegovernment’s demon-stratedlack ofsuccessasabusiness man-agerandbecauseof theneedtogenerate cashtocoverbudgetaryoutlays(p.63).But hehaslittletosayaboutthepolitical obsta-clesthatcontinuetoimpedethisprocess.
Along with othercontributors, Mark BairdoftheWorld Bankpointsoutthat raisingthesalariesofcivilservantswill notsufficetogetridofcorruption.Healso justifiablybemoansthelackofdiscussion ofhowtheycanbeheldaccountablefor theirperformance,notingthatthiswillnot be possible‘unless thejudiciarycan be
strengthened’(p.95)—apointechoedby EmilSalim(p.213).Bairdalsoemphasises theurgencyofreducinglargebudget sub-sidies forelectricity andfuel,and high-lightsthemajorrisksinthecurrentpush fordecentralisation—inparticular, ques-tioningthelogicofpushing responsibil-ity for so many programsdownto the districtlevel.
SriAdiningsihemphasisesthe impor-tanceofrestructuringthebankingsystem. Unfortunately,however,sheoffersfew sug-gestionsastohowtoacceleratetheprocess beyondageneralplea‘toproperlyenforce theruleoflaw’(p.182).Thisreviewerwas bemusedbyherpredictionthatthetrendto deregulationofbankingsystemswas ‘ex-pectedtocometoIndonesiasoonerorlater’ (pp.181–2),giventhatsheherselfbriefly de-scribesIndonesia’sfar-reachingbanking de-regulation policiesofthe1980s andtheir dramaticimpact(p.175).
RossH.McLeod 264
Duringthe surprisingly long lag be-tweentheconferenceandpublicationof thebook,theconsiderableoptimism evi-dentinmanychaptershasevaporated.As Mohammad Sadliputit recently:‘It is impossiblethesedaysforJakarta intellec-tualstotalkabouttheircountry optimis-tically’(TheStraitsTimes,27/3/01).Two ofthecontributors,LaksamanaSukardi and Jusuf Kalla,were relieved of their cabinetpostsnotlongaftertheconference, andthedismissalofLaksamanawas per-hapsthefirstmajorindicationthatlittle by way of reform asi was likely to be achieved underGus Dur. Laksamana’s chapterbrimswithlaudatorystatements ofprinciplethatheexpectedthe govern-menttofollow,andwithoptimistic pre-dictions astowhatitwould be able to achieve.Buthisassertionthat‘victory... belongstothosewhostandforgenuine democracy,justice,fairnessand prosper-ity’ (p. 145)now seems aforlorn hope ratherthanastatementoffact.AsHoward Dickrightlypredicted(p.91),‘Ifthe com-mittedreformersbecomeoutnumberedin cabinetbyadministratorsandpolitical fix-ers,thereformprocesswillbevulnerable.’ Inretrospectitcanbeseenthatthe con-ferenceupon which thisbook isbased wasprobablyheldtooearlytoyield any-thingmorethansuperficialassessments ofGusDur’sperformanceortoprovide accuratepredictions ofwhatthe future held.Such assessments andpredictions seemtohavebeentoogreatlyinfluenced by theresumption ofeconomic growth and the stabilisation of key macroeco-nomicindicators,allofwhichwere attrib-utabletopoliciesadoptedbeforeGusDur took over from B.J. Habibie (notwith-standing Anwar Nasution’s contrary claimthattheHabibiegovernment‘could nottake[the]bold… measures… nor-mallyrequiredbyashort-runstabilization programme’;p.25).Nodoubtthegreat senseofreliefthatIndonesiahadrecently managedtocomethroughitsfirst
genu-inely democratic presidential election withoutmajordisruption,afterdecades ofneardictatorshipunderSoeharto,also played apartincreatingthisfalse opti-mism abouttheeconomy.(Itis surpris-ing, however, that none of the contributorssawanyreasontocomment on the then very recentand traumatic eventsinEastTimor,notleastbecauseof theimmensedamagedonetoIndonesia’s internationalreputationandtheresultant hardeningofattitudestothecontinuation offinancialassistance.)
Thesesuperficialindicationsofincipient recoveryfromthecrisis andofsuccessful transitiontodemocracyledtocomplacency amongthosewhofailedtoappreciatethe importanceofalonglistofremaining eco-nomicconcerns:theenormouscostof bail-ingoutfailedbanks’depositorsandother creditors; theincreaseinthepublic sector externaldebtburdenresultingfromthehuge depreciationoftherealexchangerate;the negativeconsequencesforcorporatesector recoveryofthefactthatdebtisnot recover-ableiftheruleoflawisabsent;theimmense politicaldifficultyofsettingrealisticfueland electricityprices,givenwidespreadpublic resentmentofconglomerateowners effec-tivelyhavingtheirdebtsrepaidbythe gov-ernment; the seemingimpossibility of overcoming endemic corruption, from whichsomanypartieshadbecome benefi-ciariesunderSoeharto;thestrong opposi-tion to divestment of state-owned enterprisesandbanksfrompoliticalparties whoviewedthemasactualorpotential in-strumentsofpatronage;andthesuffocating effectofcommunalviolenceoninvestment. Ifasimilarconferenceweretobeheldnow, onemightexpectalloftheseissuestobe given muchgreateremphasisthaninthe presentvolume.
Note
* The author gratefully acknowledges