"We have lost precious time," Indonesia's chief economics minister Dorodjatun Kuntjoro-Jakti told an audience of creditors in November.
Indeed, the past few years have been a tragic time of missed opportunities for Indonesia, once one of the world's fastest-growing economies, but now still struggling to recover from the 1997 Asian financial crisis.
Political bickering soured the promise of the 1999 election, welcomed as the country's first free vote in four decades. What ensued was an administrative morass: government seemed to freeze amid the chaos. Less than two years after he became president, Abdurahman Wahid was replaced by his deputy, Megawati Sukarnoputri. Fortunately, Wahid's impeachment, concluding after a year of public political infighting, passed with little fanfare, unaccompanied by the riots and mass demonstrations that preceded the resignation of former president Suharto. But the nonchalance with which Indonesians greeted their new leader reflects the degree of social upheaval befalling the country, which has seen four presidents in as many years.
Ultimately, the crucial factor that plunged Indonesia into crisis remains, and this is the government's reluctance to make tough choices and establish the rule of law.
The sale of state-run Semen Gresik to Mexico's Cemex, for example, is now delayed by a year after local officials threatened to take it over. This sop to protectionist sentiments followed the insistence by the national parliament to review the sale of plantations held by the Indonesian Bank Restructuring Agency, (Ibra) to a Malaysian firm.
From rampant corruption among the bureaucracy, to the nationalist sentiments that prevent assets sales and the privatisation of state companies, all signs show that the government lacks a sense of crisis, prompting investors to stay away. Foreign investment approvals in the first nine months of 2001 plunged to US$6.05 billion from US$12.25 billion in the same period last year. "Decision-makers are not making decisions," says noted economist, Sjahrir. "If there is no decision-making, you have a lot of collective violence, and no respect of the law."
The government's new decentralisation program has added more fuel to the combustible mix. Businesses complain of greedy district officials, now the bosses in the provinces. Finance Minister Budiono has urged the cancellation of 71 high-cost regional taxes, but the Interior Ministry has yet to formalise revisions to regional autonomy - another example of bureaucratic inertia.
The ripple effect of this paralysis is everywhere. It appears in Indonesia's habitual rocky relations with the International Monetary Fund (IMF). Thailand and Korea no longer require IMF bailouts like they did in 1998. Indonesia does. The IMF in November approved a US$360 million tranche of a US$5 billion loan after an eight-month delay caused by stalled reforms. Perhaps aware of the challenges ahead - the agreement added 18 more conditions to the 35 already listed - the government asked for until the end of 2003 to complete the program. But in order to carry out reforms, officials must regard the choices as their own, not the IMF's. As IMF Jakarta chief David Nellor says: "The government has to own this policy and has to be convinced of it, and has to convince others."
The IMF is not alone in pressing for change - and Indonesia desperately needs help in order to plug the estimated 42 trillion rupiah (US$4.2 billion) budget deficit, worth about 2.7% of the country's Gross Domestic Product (GDP). But again, help is conditional upon reform. Some US$1.3 billion of a US$3.14 loan pledge for 2002 will be released upon the successful privatisation of state enterprises, legal reform, and bank restructuring.
Considering Indonesia's track record - US$9 billion worth of aid pledged since 1998 has yet to be disbursed because of reform letdowns - that's a tall order. The implications of more failure are grave for education, health, infrastructure, and economic growth in general. "In the short term, (reform failures) mean tighter budget spending. In the medium term, it means lower growth," says the IMF's Nellor.
Economists have already revised their once-rosy growth forecasts. According to Indonesia's Central Bureau for Statistics, GDP growth for 2001 is 3.5%, considerably lower than the 4.7% posted in 2000. With the slowdown of the US economy, Indonesia's main trading partner after Japan, the government downgraded its initial projected growth for 2002 from 5% to 4%.
But analysts say the government's numbers are far more optimistic than their own estimates. Think-tank Consensus Economics says growth in 2001 was 2.9%, and forecasts growth in 2002 will be the same. Economist Umar Juoro from Jakarta's Center for Information and Development Studies projects growth in 2002 to be 3.5%, and attributes slower growth to lacklustre investment prospects. "Legal certainty here is still poor, and the security situation has not fully improved, so investment remains minimal," says Juoro.
Bara Katoppo of Investment and Business Advisory Services (IBAS) says of the deteriorating investment climate: "This year was bad, but next year will be worse".
Economic indicators support the pessimism. The Jakarta Composite Index rebounded to 443 points in September following a smooth political transition, but has since slid back below the 400 level.
The rupiah rebounded to 8,600 to the US dollar following the installation of President Megawati, but reality soon replaced the initial euphoria. Since then, the thinly-traded currency has scaled new lows of 12,000 rupiah to the dollar. Analysts say the rupiah will not strengthen as long as the private sector needs to service its estimated US$110 billion debt; the three-year-grace period of an eight-year debt restructuring deal signed by 38 banks ended in August. "The rupiah will continue to weaken over the next three years with companies needing to pay their debts," says Ferry Wong, head of research at Vickers Ballas Securities. The rupiah, says Wong, will remain above 10,000 (to the dollar) for all of 2002.
Government debt also drags down growth. In 2000, the government spent 40% of its budget on servicing its estimated US$134 billion debt. This money should be freed up for development spending, say analysts. "The government should negotiate better terms of repayment," says IBAS's Katoppo.
Inflation is likely to worsen as the currency grows more fragile. The government has already revised its initial inflation projections of 9.3% to 11.9%. But as fuel costs increase by 30%, electricity tariffs by 17%, and telephone tariffs by 15% in 2002, skyrocketing prices may be inevitable. The government is responding by planning to reduce base money growth from 20% to 14% in order to keep inflation rates at 9-10%, levels advised by the IMF.
But analysts say unless interest rates are eased, and they have inched up to 17.6% in recent months, far higher than government's initial assumption of 15%, inflation will increase. Industry players blame the government for maintaining for too long burdensome fuel-subsidy policies that now have to be lifted. "Who is at fault for the subsidies? Why should we pay for that? It isn't fair," says Anton Tardia, a manufacturer of Adidas shoes and chief of the Indonesian Footwear Manufacturers Association.
In 2000, exporters like Tardia were the main engine of economic growth, as exports grew 28% that year. No longer. Trade and Industry Minister Rini Soewandi says that orders from the United States, the destination of 26% of Indonesia's exports, are declining. The Central Bureau for Statistics claims that average monthly exports in 2001 were valued at US$4.9 billion, compared with US$5.12 billion in 2000.
The textile industry, which employs some 1.2 million people, expects its output to decline by 25% next year, and the shoe industry by 10%. That makes it tough for the government to achieve next year's target of US$48 billion for non-oil and gas commodities. It did not help that oil and gas exports fell flat in the first half of 2001 due to disruptions in gas producing sites such as the troubled region of Aceh.
So Soewandi is looking at other markets: Central Asia and North Africa for manufactured products, and China for commodities such as palm oil and fisheries. But analysts say expansion into these markets is difficult considering their low purchasing power. "Unless the US economy recovers, times will be very difficult," says Ferry Wong from Vickers Ballas.
Soewandi offers another suggestion: fortification of the buoyant domestic consumer sector. "We need to strengthen purchasing power in this country. We need to do more infrastructural projects so [the sector] can absorb more manpower and stimulate the domestic economy and help the domestic producers with local demand," she says.
It's an admirable proposition, but an unrealistic one. The budget deficit is unlikely to be balanced by proceeds from privatisation and assets sales, as both programs fall far short of targets, and are likely to be paid by development funds. That's bad news for the country's growing number of unemployed and poor - those who suffer most from the country's chronic economic crisis, prompted by chronic government complacency.