Indonesia: Economic Recovery Retarded By Political Tensions


Dr Howard Dick

The past two months have highlighted the nexus between economic recovery and political normalisation.

On the economic front, there is actually good news. The economy is again growing. Expected 4 per cent growth this year would be well below the pre-crisis boom but double the rate of growth of population. The driving force is government and consumer spending. Government is running a deficit of 5 per cent of GDP, financed mainly by foreign loans. At its recent meeting in Jakarta, the multi-nation Consultative Group on Indonesia (CGI) pledged US$4.7 billion (about half from the World Bank and Asian Development Bank) for Year 2000. After signing of a new Letter of Intent, the IMF is expected to disburse another $5 billion over three years.

The middle class are spending again after bank interest rates have fallen from their crisis peak of 60 per cent back to normal levels. In Jakarta, signs can be seen in the return of traffic jams and the revival of shopping malls. As the better-off spend, there are multiplier effects.

Unfortunately, recovery is fragile and sustained growth is not assured. Investment has failed to pick up because business confidence is still weak. Restructuring of the banking system and corporate debt has been frustratingly slow. Ethnic and religious strife continues to frighten foreign investors. Private money is not yet returning.

The dampening effect of instability was very apparent in Singapore. In mid-January Chief Minister Goh Chok Tong visited Jakarta to boost confidence with an A$1 billion investment and aid package. A week later senior Indonesian economists met in Singapore to review the first 100 days of the Abdurrahman Wahid government and delivered an upbeat assessment. The front page of the Straits Times, however, was dominated all week by demonstrations and blockade of the Singaporean joint venture industrial estate and resorts on nearby Bintan Island, nominally over a land compensation claim.

The incident on Bintan was trivial compared with worsening religious strife in Maluku, a vicious outburst of anti-Christian violence in Lombok, and anti-Christian riots in South Sulawesi. In early February a large bomb was detected just before it exploded and destroyed the old mosque beside the palace in Yogyakarta. This had been planted just two days before a big muslim festival.

Conspiracy theories deserve scepticism but the evidence of provocateurs in Maluku and Lombok and the bomb attempt in Yogyakarta fit a pattern of ethnic and religious provocation. Allegations were made of a conspiracy of destabilisation linking Suharto loyalists, diehard generals, religious extremists and perhaps some elements of the Central Axis, the frustrated junior party in the coalition government.

The recent escalation of strife coincided with a more open power struggle in Jakarta. The President has been steadily tightening civilian control over the Army and insisting upon accountability. The report on East Timor of the Indonesian Human Rights Commission into East Timor implicated 32 military officers, including not only senior generals but also General Wiranto himself. The President then called for his resignation.

By the end of February it the President had established his authority. Wiranto eventually resigned, there was no military revolt, and his subordinates were in turn sidelined. Public relief was palpable.

The military reshuffle may well be a turning point. Hitherto troublemakers have been able to act with impunity. In a volatile environment, government efforts to reassure foreign governments and foreign investors have been open to sabotage by ultra-nationalist and extreme religious groups. Bank recapitalisation and debt restructuring were thereby impeded. A more virtuous cycle may now be possible.

WATCHPOINT: Will President Wahid be able to consolidate civilian control over the Army and isolate religious extremists?


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