Indonesia: Accelerating Down A Slippery Slope


Dr Ross H. McLeod

Notwithstanding a few encouraging signals, the economic and political outlook for Indonesia is as bleak as it has been at any time since the turmoil of the mid 1960s. Few ministers and other top civil servants have both the capability and the will to find ways to overcome the crisis: Soeharto’s legacy to the nation does not include a strong and dedicated bureaucracy. For months, economic policy-making has been taking a back seat to political manoeuvring designed to strengthen various individuals’ and groups’ positions in the post-Soeharto era, rather than to hasten recovery.

The more optimistic observers have focused on the stabilisation of prices and the exchange rate in the latter half of 1998. In addition, it is now realised that some of the earlier estimates of increases in unemployment and poverty were unduly alarmist. On the other side of the ledger, however, the official estimate is that output fell by about 14 percent in 1998, and there are no obvious signs yet of a growth recovery. The value of oil and gas exports has fallen significantly because of a slump in world oil prices, while other exports have merely held steady in dollar terms—despite the immense boost to competitiveness that should have resulted from depreciation. ‘Improvement’ in the current account has been achieved only by virtue of the enormous reduction in demand for both imported and domestically produced goods and services, which mirrors the reduction in output, and therefore provides no basis for satisfaction.

Labour-intensive job generation programs have done little to boost demand. Plans to privatise many state enterprises have come almost to nothing. The government’s scheme for voluntary restructuring of private sector foreign debt has found almost no takers, and the process of recapitalising both private and state-owned banks is mired in uncertainty as to whether the government even knows what it is doing, let alone whether it can achieve it.

The most fundamental issue of concern is the position of the entrepreneurially skilled ethnic Chinese community that has been the driving force on which Indonesia’s past rapid growth has been based. Without its enthusiastic participation the economy simply will not get going again, and foreigners will remain most reluctant to return. Yet the government has done virtually nothing to encourage Chinese Indonesians to believe that they are welcome and that they have the right to be protected by the law and the armed forces. On the contrary, a feature of the Habibie government has been the emergence of pressures to implement populist economic policy aimed at reallocating business and redistributing assets away from them to cooperatives, small businesses and indigenously owned conglomerates.

WATCHPOINT: Nothing could be less helpful to the recovery process than government policies that appear to be anti-ethnic-Chinese.


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