Everlasting woes – The economy will not recover under current policies

Indonesia, ‘The model pupil of developing countries’, as the World Bank once put it, is now looking into a deep pit.

After six years of crisis, there are no signs of recovery for Indonesia. Key economic infrastructure has continued to degrade. Parts of many cities, especially outside Java, are now experiencing regular electricity blackouts, as the power capacity drops due to lack of maintenance or to just bad, uncoordinated, planning. The railways have seen a 64 per cent increase in accidents due to ageing tracks and facilities.

So what has happened to the Indonesian Miracle?

Drowning in debt

Public debt, foreign and domestic alike, exploded after the state took over many failed businesses in the aftermath of the 1997 crisis. These takeovers were demanded by the so-called ‘international market’ as a way of guaranteeing the interests of foreign lenders, who were owed millions by the bankrupt companies. By the end of the year 2000, the foreign debt had reached a massive Rp 1,400 trillion (A$ 280 billion). Bank Indonesia had lent Rp 136 trillion to otherwise bankrupt private banks while the government directly invested Rp 670 trillion in bonds now held by these banks. Then there is the more than US$ 60 billion of debt owed by the government to foreign lenders.

The budget for the fiscal year 2002 was literally suffocated; 25 per cent (Rp 88.5 trillion) of it went into the payment of the interest on loans alone. As a result, spending on social infrastructure plummeted. Health and education spending, for example, goes nowhere near meeting the needs of a population suffering deteriorating social conditions. In the 2001 budget, the percentage allocation to education fell to the lowest it has been since Indonesia became independent in 1945. The government guaranteed that things would improve, but the current allocation for education is only Rp 13.6 trillion (A$ 1.56 billion) — just four per cent of the total state budget, not the 24 per cent promised.

The privatisation of state owned enterprises and divestment of private companies taken over by the state was supposed to help pay off foreign debt. But this scheme has not really helped. Since 2000, the government has tried to sell two dozen companies. Only a few like the cement manufacturer, Semen Gresik, and the telecommunications giant, Indosat, have been sold.

Sometimes privatisation costs the government more than it raises. The divestment of government-managed banks has drained government funds rather than supplemented them. Take the case of Bank Central Asia (BCA), the biggest private bank taken over by the government. In 2002, a 51 per cent share of BCA was sold to US company Farallon. Farallon paid only 10 per cent of the value of the investment the government had made to keep the bank running.
Dictated to by the IMF

One of the hottest issues around the Indonesian economy is the country’s relations with the International Monetary Fund (IMF). The government’s contract with the IMF regarding its loan to strengthen foreign reserves will end this year. In the last three years, the agreement was renewed at least 20 times. Each time, more and more stringent conditions and policies were introduced. These agreements have been of great concern for many groups, especially grass-roots mass organisations. The IMF-sponsored policies of privatisation and deregulation have progressively dismantled measures that were protecting the Indonesian economy from outside penetration.

The IMF-sponsored programs have been a particular blow to agriculture. The IMF insisted that effective tariffs and quotas on sugar, tobacco, soybeans and rice were abolished, and that these commodities no longer be sold centrally through a logistics board. The results have been devastating for national food production.

According to the National Sugar Council, the share of locally produced sugar fell from 95 per cent of overall consumption in 1995 to just 55 per cent in 2002. To make matters worse, liberalisation of the sugar market has encouraged speculation and politically-motivated profiteering in the sector. In March 2003, prices shot up in some regions and sugar disappeared from the market in others. Raids by sugar farmers on warehouses and trucks found huge stock of unreported sugar imports. No wonder that thousands of angry sugar farmers swarmed the imported sugar warehouses in Central Java and dumped imported goods into the streets and rivers.

Soybean farmers have also been unable to compete against cheap imports. In 2002, national soybean production was half that of 1996. Cheap imported rice also has resulted in a downturn of national rice production. Even natural supply is being privatised. In August 2003, farmers protested a law allowing water springs to be owned by corporations.

Outside the 21 million peasant families, urban livelihoods are also under threat. The government and its privatisation schemes have faced resistance from the workers who fear the downsizing policies that often accompany privatisation. In 2003, the new board of directors of Semen Padang, a subsidiary of Semen Gresik (owned by Mexican Cemex) found out how angry workers could get. They were not able to enter their own offices because the factory was barricaded by its trade union. There has been similiar unrest in Indosat throughout 2002 and into 2003. In June 2003, maintenance workers at Garuda, the country’s state owned airline, went on strike. They were protesting their transfer to a newly created subsidiary — usually a preparatory step for privatisation.
The wrong sort of investment

The Indonesian economy is marked by certain ‘innovations’ that appear to defy many Western economic theories. Since the Asian economic collapse in 1997, foreign investment has dropped every year, often by more than 50 per cent annually. The same applies to domestic investment, which dropped again by almost 50 per cent in this last year.

Some commentators get so desperate for good nvestment figures that they resort to pointing to the investments made by former formal sector workers who have been forced to take up ‘informal’ jobs like street peddlers and ojeg (a motorcyclist for hire). Their combined investments in otorcycles, as well as other ‘capital’ goods, like stoves for cooking in street-stalls, are so great that many of the defenders of government economic policies use them as proof that the economy is running well. But one thing is forgotten: those purchases were made by using severance pay, by mortgaging homes or taking credit from loan sharks. This is not a sign of economic recovery but a symptom of crisis.

Left political parties, anti-globalisation NGOs, student groups, concerned intellectuals and individuals continue to point to the extent of poverty, of people robbed of their wellbeing. Yet, there seems to be plenty of money around to invest in construction of huge mall developments. It might be true that interest rates are high and investments are down, but in Indonesia, there is high influx of money from ill-gotten sources. Money laundered from corruption, smuggling, narcotics, prostitution, and gambling means that there is plenty of funding for these sorts of projects. The government has made no effort to suppress this kind of ‘investment’. As a result, Bank of Indonesia officials are warning that Indonesia may face penalties from the Paris based Financial Action Task Force — the body responsible for policing international monetary laundering.
Challenge ahead

Most political actors are now focusing on next year’s general election. But while the economy and social conditions appears to continue on a non-stop downward trend, no mainstream political parties are trying to address the situation. Their concerns are to do with future power sharing deals, the laws governing the presidential election, the bicameral parliament and so on. As a result, the majority of the citizens have come to distrust and lose interest in the political processes, and especially the political elite. In a poll published in Kompas on 3 July 2003, 46 per cent of respondents could not name any leader they supported. President Megawati scored only seven per cent.

Many people have protested the impact of the government’s economic policies on their lives. Now there is a need for more than that if the same protests are to grow enough to overcome conservatism and apathy. The protests of workers against privatisation, or farmers against commercialisation of water springs or of cheap rice imports need to become the base for a new democratic force. Such a force could fight the political decay and so allow for an effective challenge to the current elite and its policies.

written for Inside Indonesia No 76, Oct-Dec 2003

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