Indonesia: An Uncertain Business Environment

1999

Dr Hal Hill

Despite the current daunting challenges, there is some moderately encouraging economic news coming out of Indonesia: * A measure of short-term macroeconomic stabilisation - albeit precarious - has been achieved. * Non-oil exports in volume terms are holding up fairly well, although the performance in the other crisis economies is better. * There is unlikely to be any serious backtracking on trade policy reform. * In the run-up to the June general elections, indications are that the major political actors are basically pragmatic on major economic policy issues, although statements are generally long on rhetoric and short on detail. * Additional international assistance is likely to be maintained for at least this and probably next year, thanks in large part to Japanese generosity.

However, there are major problems in financing Indonesia's recovery. The current IMF assistance package was 'front-loaded', and (US)$8.9 billion of the $11.2 billion of committed funds has already been disbursed. Foreign investors are clearly holding back, as preliminary estimates for 1998 reveal: Indonesia experienced a net FDI outflow of $1.3 billion, whereas the four other crisis economies in East Asia together received $16.7 billion.

Part of the problem relates to the uncertain domestic political environment. But in addition several recent policy initiatives are seriously damaging business confidence. Three examples illustrate the dimensions of the problem.

Example 1: A Competition Commission. Parliament has just passed a law to establish, subject to presidential ratification, a powerful Competition Commission. It is doubtful whether, at this juncture in Indonesia's history, such a commission is needed. An open trade regime can act as a check on monopolies in most cases. Many of Indonesia's anti-competitive problems have been the direct result of government-sanctioned monopolies, in the form of protection for cronies and state-owned enterprises. It would have been far simpler to remove these distortions at their source, rather than to create a whole new, complex apparatus.

Example 2: Cooperatives and subsidised credit. Minister Adi Sasono has captured the high ground with his promotion of the concept of ekonomi rakyat - 'people's economy' - and the promotion of cooperatives, small-medium enterprise (SMEs), and affirmative action for pribumi (native-born Indonesians). In principle, such goals are laudable. But are subsidised credits and cooperatives the best tools to tackle this problem? It seems unlikely: * Indonesia already has a well-functioning small-scale credit scheme, known as Kupedes. * SMEs are not the worst affected group of enterprises in the current crisis; large debt-laden conglomerates are generally in much worse shape. * And, in spite of the widespread and popular appeal in the country, there is no evidence that cooperatives have the capacity to function as effective business units.

These credit subsidies can be substantial - loans at 10%, when deposit rates are still close to 40%. There is a very real danger that the subsidies are creating a new group of rent-seekers, just as Indonesia is trying desperately to get rid of the old groups.

Example 3: Private plantations under threat . Cooperatives are also featuring prominently in new plans to develop the cash crop sector. Under a regulation drawn up in January by the Department of Forestry and Estates, private plantations above a certain size will be forced to progressively divest shares to cooperatives. It is still unclear how, how much, and how quickly this divestment process will take place. But already, and combined with the general breakdown in law and order in much of the country, it is creating much insecurity in the industry. Export growth is one of the keys to Indonesian recovery, and the performance of cash crops is critical to rural prosperity. It would be tragic indeed if their performance was throttled by this new decree.

WATCHPOINT: Economic as well as political moves continue to inhibit investor confidence.

 

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