Politics gets in the way of Indonesian economy

The recent Astra deal brought a glimmer of hope to the Indonesian economy.

But it might be too soon to break out the champagne – even if US$506 million (S$869 million) makes its way to the state coffers from the sale of assets of the Indonesian car industry’s crown jewel.

Why the pessimism? In essence, it is because of the gap between intentions and implementation in economic policy-making – a gap made worse by President Abdurrahman Wahid’s chaotic management style.

Whatever optimism foreign investors might have in Indonesia has to withstand buffeting from ministerial infighting, policy flip-flops, rumours of a Cabinet reshuffle and a proliferation of economic advisory teams.

Economic czar Kwik Kian Gie, Finance Minister Bambang Sudibyo, Investment Minister Laksamana Sukardi and Trade Minister Jusuf Kallaare came into government on the coat-tails of two broad political alliances.

There was hope that while there were competing political agendas between ministers loyal to Dr Amien Rais’ Islamic-leaning Central Axis and those linked with secular nationalist parties, the lack of substantial differences in the economic platforms would limit disputes.

But a report by Jakarta-based consultancy Van Zorge notes: “Virtually every major economic policy – and several minor ones – has been the subject of debilitating wrangling … competition between rival ministers promises to continue to paralyse the government’s economic decision-making.”

DECISION REVERSALS

AS THE following examples documented by the report reveal, the record over the last five months suggests anything but coherence and consistency in economic policy-making:

* Control over state banks.
A presidential decree in December put Mr Laksamana in charge of all state-owned financial bodies, in line with International Monetary Fund requests.

But after the apparent intervention of National Assembly chairman Amien, another decree was issued that allowed Mr Bambang control over state banks.

* The Texmaco corruption scandal.
Mr Laksamana and Attorney-General Marzuki Darusman sought to indict Texmaco Group owner Marimuthu Sinivasan, who has close links to the Central Axis, for allegedly receiving US$1 billion in dubious loans during the financial crisis. But other ministers brought the case to a halt with a less-than-transparent debt settlement.

* Plantations.

A turf war between the secular nationalists and the Central Axis took the form of a tussle between Agriculture Minister Mohammad Prakosa, of the Indonesian Democratic Party-Struggle (PDI-P), and Forestry Minister Nur Mahmudi, who is linked closely to Dr Amien’s National Mandate Party.

Mr Abdurrahman first transferred authority over plantation issues from Mr Nur to Mr Prakosa. But five days later, he issued another decree reversing his earlier decision and giving Mr Nur full control.

* Astra.

The failure to sell off Astra assets three months ago offered the clearest example of how political wrangling threatened to derail economic recovery.

The dispute pitted allies of Islamic parties against foreign and ethnic Chinese investors with ties to a secular-nationalist president. Further evidence of high-level politics: The decision of the capital-market regulator Bapepam to side with Astra’s management.

A CABINET DIVIDED

BLUE-CHIP Astra may have struck a deal, in the end, with Cycle & Carriage, but the incontrovertible fact is that economic policy continues to flounder aimlessly under the weight of Cabinet factionalism and rivalry.

It is not helped by the fact that the inexperienced Mr Kwik, who holds the influential post of Coordinating Minister for Economy, Finance and Industry, is unable to impose his leadership on other ministers – even his PDI-P colleague, Mr Laksamana.

Mr Kwik came close to quitting over yet another scandal in government, this time involving his son Inghie, who was castigated publicly by Mr Laksamana for his sale of the Humpuss terminal to the Hongkong-based Hutchison Port Holdings. Humpuss is owned by former President Suharto’s son Tommy Mandala Putra.

Mr Laksamana said Mr Inghie, an executive of the Asset Management Group of Indonesia, had no right to sell the firm as it was one of the debtor companies under the Indonesian Bank Restructuring Agency (Ibra).

Mr Inghie denied any involvement in the sale, arguing that he acted only as a consultant to Hutchison. Mr Kwik suffered most from the political fallout, with his enemies, especially ethnic Chinese conglomerates critical of his harsh policies towards them, making the most of the controversy to oust him from Cabinet.

Ultimately, it was the intervention of Vice-President and PDI-P chief Megawati Sukarnoputri that put the brakes on the resignation. Sources said she insisted he retain his post as a strict party order, principally to keep the PDI-P’s grip on the key economic portfolio.

It did little, however, to assuage Mr Abdurrahman’s concerns over Mr Kwik’s ability to run the economy. The President’s response has been to set up an advisory team, headed by Professor Widjojo Nitisastro, the architect of Indonesia’s economic development from 1967 to 1983.

Operating on the principle that the more advisers, the better the advice, Mr Abdurrahman has surrounded himself with well-known figures. His foreign advisers include Senior Minister Lee Kuan Yew and former US Federal Reserve chief Paul Volcker.

In Indonesia, he also gets counsel from senior economist Emil Salim, who heads the National Economic Council (DEN) and ethnic Chinese conglomerate boss Sofyan Wanandi, who is chairman of the National Business Development Council. But what seems to be happening is that the more advisers, the more confusion there is. Ironically, this is a view expressed even by members of the advisory bodies.

Prominent economist Sri Mulyani Indrawati, a member of DEN, told The Straits Times: “We have a president who is not familiar with economic issues. He wants to have safety valves as a contingency.

“He wants to check and re-check with others to make sure he has got things right on the economy. And he also wants to tell the international community he has sound advisers.

“But at the end of the day, creating more economic advisory teams will not help much. In fact, it will only add, possibly, to more confusion. There is no clear chain of command.”

But what powers do the advisers actually have? In reality, none. There is a world of difference between advisers and the executive branch. Members of the different teams disclose that they do not even have resources, and are forced to rely on their own networks and ad hoc funding.

Dr Hadi Soesastro, of Jakarta-based think-tank the Centre for Strategic and International Studies, while describing Prof Widjojo’s team as “ridiculous”, believes that the group of advisers should be considered part of the presidential office for them to have any clout. It would then have the authority to summon ministers.

But at least one member of the new four-man team – the brainchild of palace aide Bondan Gunawan, to bring some resolve to policy implementation – says that as advisers, their recommendations would go straight to the President, bypassing any bureaucratic tangle. Notes the source: “Pak Kwik was upset that some memos were being sent to the President by some people offering suggestions on how to improve the economy.

“He will be even more upset now with a new team looking over his shoulders. All our input will go straight to the President and, if he likes our ideas, the ministers will just have to implement them. I doubt Cabinet members are going to be happy with this … ”

Prof Widjojo’s team, which includes members drawn from other advisory bodies, to reconcile different agendas, is tasked primarily with monitoring the implementation of the IMF’s letter of intent, to ensure that several economic deadlines are met this month.

These include implementing trade liberalisation measures, corporate debt restructuring and changing the boards of directors of banks and state-owned enterprises.

INVESTORS’ REACTION

JUSTIFYING the need for a body to advise the President outside the formal structures of power, Mr Faisal Basri, another member of the new team, told The Straits Times:

“The government is beginning to feel the heat. We need to resolve old problems fast, even if it means creating special teams. If we don’t get our act together, it will delay fresh money from the IMF to bail out the economy.

“Investors are going to react negatively and this will further dent the government’s credibility.”

Certainly, there is a ring of truth here. The IMF has indicated that it might delay releasing the second tranche of its US$5-billion bailout fund for Indonesia.

Explaining the delay of US$400 million in loans to Indonesia, the IMF representative here, Mr John Dodsworth, says it was due mainly to Jakarta’s delay in implementing economic reform.

For observers looking at Indonesia with rose-tinted glasses, the IMF’s pessimism appears unfounded. Other crisis economies in Thailand and South Korea have bounced back strongly and Indonesia – on paper at least – could do the same.

Indeed, the economy has been crawling back after being hit two years ago by the financial crisis. The rupiah, which traded at 2,500 to the US dollar prior to the crisis and fell as low as 17,000 in 1998, is now trading at around 7,500.

Inflation, which peaked at 80 per cent during the downturn, is zero. And the government has projected 3-to 4-per-cent growth for Indonesia this year.

If anything, the data suggests macro-economic stability is taking root. But foreign investors continue to wait on the sidelines for a more fundamental restructuring.

The Jakarta elite might be beating their chests in triumph over the Astra sale, but critics charge that there are no grounds for celebration over one deal when the government should have closed several other deals by now.

As The Jakarta Post notes in a stinging editorial, titled Superfluous Advice:

“Whatever the advice Widjojo might prescribe, nothing will improve the economy unless the tens of thousands of bad corporate debts … are satisfactorily restructured or sold to new investors.”

The English-language daily also points out that the Indonesian economy is being shepherded closely, with the IMF’s letter of intent as guide.

“It is so detailed, with policy measures and their implementation schedules, that Kwik’s team now works like a cockpit crew flying a jumbo jet with an automatic pilot.”

The real question, however, is whether the crew can fly the plane alone.

And the answer, to a large extent, depends on the President and his political goals.

The 59-year-old Islamic cleric is consolidating his power. He received plaudits for his effective sidelining of former military strongman General Wiranto and his band of supporters in the army.

There is a thread of consistency in his treatment of the armed forces (TNI). It seems clear which generals are entering and leaving the TNI.

POLITICISING ECONOMICS

THE economic landscape, however, is foaming with inconsistency.

Policy flip-flops have been due largely to concessions given to the Central Axis, which Mr Abdurrahman sees as a countervailing force to the military.

And that has also meant not reshuffling the Cabinet, even if he has doubts about a number of his economics ministers. The formation of different advisory teams can be explained partly by his lack of understanding of economic issues, but, more importantly, by a need to balance his adversaries in the Cabinet.

On the surface, the Javanese game plan appears confusing, just as it did in his handling of the military. But it is really an attempt at divide and rule, to keep everyone off balance. Only the mercurial politician is in control.

With the military out of the way for the moment and the Central Axis on the defensive, Gus Dur will be able to focus more on getting the economy back on its feet, including, possibly, replacing several ministers after the National Assembly session in August.

One might expect greater consistency. But politics will continue to shape the contours of economic policy-making.