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In Indonesia, a Year of Reforming Dangerously

Last week's rumor of leader's ill-health hit the currency hard. Is political reform due?

For a nation as wide as the US and a population almost as large, Indonesia this week found out just how much a lack of real democracy can torpedo its well-being.

Ruled for three decades by a former general with a one-word name and little tolerance for dissent, Indonesia's currency fell in value by nearly half in the past week on rumors that President Suharto was seriously ill. He has no clear successor.

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With a recession now forecast for next year, reform of Indonesia's politics and its patronage-plagued style of rule now seems almost as urgent as its ability to fix its shattered economy.

"People are increasingly starting to doubt the leadership's commitment to carry out reforms," says one foreign broker, who asked not to be identified. "We need a clear policy statement from Suharto."

Officials rush to assure the world and the 200 million Indonesians that Suharto, despite having to miss two big international meetings, is still in command. Before cameras, he cooed with his parrot and inspected his Harley-Davidson motorcycle.

Meanwhile, his finance minister, Mar'ie Muhamad, has had to spend time trying to convince officials within the International Monetary Fund (IMF), the World Bank, and the United States government that Suharto's plans to reform the economy under a $38 billion international bail-out package will, indeed, overturn a long tradition of corruption and other business practices now seen as negatives by foreign investors.

When the rupiah, Indonesia's currency, lost much of its value last week, investors did not only blame the downward spiral on the rumors about the president's health. They also linked the currency plunge to a growing perception that the government has done little to reduce the looming debts that are crippling Indonesia's enterprises.

In October, Indonesia agreed to a radical reform program set by the IMF and the World Bank, designed to stabilize the rupiah, clean up the banking sector, and prevent inflation from spinning out of control. The IMF, World Bank, and the Asian Development Bank, along with the US and other donor countries, have pledged $38 billion in stand-by credits to help Indonesia.

Part of the price tag is that Indonesia must curb the network of patronage and bribery that has consistently placed it at the top of worldwide surveys on corruption.

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Last year, the IMF and World Bank launched a global crusade against corruption, which economists blame for slowing down growth and widening the gap between rich and poor. The abuse of rescue funding has left the two institutions open to accusations from critics in Washington that they are bailing out unscrupulous investors and governments with taxpayers' money.

In Indonesia, government regulations and practices have tended to favor a small group of businesses, many owned by Suharto's family and closest friends, who have helped secure his grip on the country.

Confounding critics

But Suharto has confounded skeptics by pledging to make the government more accountable, such as requiring that state enterprises make public reports on their financial status.

"Greater transparency is essential," Finance Minister Mar'ie said in New York Dec. 13. "Full disclosure allows investors to assess the risks appropriately at the macro and the micro level and will enhance confidence in the market."

One of the government's most radical pledges was to abolish a reforestation fund, where fees are supposed to be paid into the fund for every tree logged in Indonesia. But the fund has been used for building aircraft and pulp mills owned by the president's associates instead of replanting trees.

"A minister basically has his own account and he can do what he wants. He can have a big reception," says Iman Taufik, a prominent businessman. "This can't keep going on. How can you have a reforestation fund to pay for a plane? It's crazy."

Depending on how broadly the pledge is interpreted, it could also spell the end of government use of Jamsostek, a state-owned social insurance company. The World Bank said in May that 40 percent of Jamsostek's total assets were "not accounted for," return on investment was "virtually nil," and warned of a "misallocation of funds."

Attorney General Singgih said last month that his office was investigating the alleged use of 3.1 billion rupiahs ($530,000) from the Jamsostek fund to pay members of parliament who voted in favor of a bill that restricts labor rights.

The reform promises look radical, but so far the government has delivered very little. It canceled the licenses of 16 failed banks, including some owned by Suharto's son, daughter, and half-brother. But only weeks later the president's son reopened branches of the bank under a new name - even though the assets were supposed to have been frozen - to be later sold off to pay debts.

Suharto impressed his critics by freezing a host of expensive infrastructure projects that were sponsored by members of his family, aides, and friends. But shortly after he agreed to the IMF package, he revived eight projects, including some sponsored by his children.

While Jamsostek was embroiled in the scandal over its funding for parliamentarians, Suharto ordered it to provide low-interest loans to small enterprises - something that would be funded directly from the budget in other countries.

Suharto children

The World Bank halted a loan to PLN, the country's power distribution monopoly, citing a lack of transparency in signing too many power-purchase agreements with private producers. Many power plants are built by companies sponsored by the president's children and friends, and they charge prices in dollars which were high by industry standards and became unaffordable after the rupiah crashed.

One such power plant, sponsored by Suharto's daughter, was among the projects that had been revived by the president.

After meeting a group of visiting IMF delegates in Jakarta last week, business executives said they appeared increasingly doubtful that Suharto was serious about carrying out his reform package. But others argue that the government merely needs time to prepare the reforms and overcome opposition within various ministries.

"It's not going to be neat," says Dorodjatun Kuntjoro-Jakti, a prominent economist. "There will be a lot of pushing and pulling. But it will be done."

Dorodjatun cites the historically close links between private industry and government that have served to cement political support for many Asian leaders.

The Javanese, who represent more than half of the Indonesian population and dominate its politics, have had a strong tradition of patronage for centuries that reaches from the top down to every village and farm.

"You have this fundamental structure in this region - corporate governance," Dorodjatun says. "You can't change it just like that."

Had it not been for the financial crises in Thailand and South Korea, "we would not have been so easily convinced" of the need for reforms. "But we have seen the fatalities around us," Dorodjatun says.

Kadhim Al-eyd, IMF representative to Indonesia, already sees positive signs of change. "The government did not say it would all happen at once," he says. "There's a commitment to transparency and that's the key thing."

"The government has set the tone. You can see evidence already in the public debate," Kadim adds, referring to the unusually open debate about the Jamsostek fund.

Public demonstrations against corruption have been held, Indonesians have demanded that the labor minister be sacked, and workers are demanding their contributions to the insurance company be returned to them.

"How they [government ministers] allocate resources becomes a matter of public policy," Dorodjatun says. "And now the public expects greater transparency."

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