It’s not easy being the Hamlet of Southeast Asia. Megawati agonized for months over whether to be or not to be president in 2001. She hesitated to participate in the war on terror until last fall’s bombing in Bali forced her hand. Now, as she navigates a minefield of economic woes, the housewife turned president is wavering between the competing–and often contradictory– demands of the international financial community, the tycoons who control the economy and the vast majority of the archipelago’s 215 million people living in poverty. Megawati craves the political support of the masses and the relief funds of the international community. But her biggest allies, in the end, may actually be the Suharto-era cronies who helped trigger the 1997-98 financial crisis. For them, Megawati is rolling out the welcome wagon. As one Western banker asks: “Who else can or would want to save Indonesia?”
Salvation may be too much to ask for a fledgling democracy plagued by separatist struggles, sectarian clashes and a terrorist threat brought home by the blast in Bali that left nearly 200 dead. And in any case, Indonesia’s economy has already come off life support. Over the past two years the massive public debt left by the Asian financial crisis has been shaved from more than 100 percent of GDP to 70 percent. The budget deficit has fallen from 5 percent of GDP in 2000 to an anticipated 1.8 percent in 2003. Even the shock of the Bali bombing couldn’t knock the economy off course last year: inflation remained a manageable 10 percent, the currency stabilized at about 9,000 rupiah to the dollar and the stock market was ranked the second best performer worldwide. International donors rewarded this progress last week by giving Indonesia the $2.65 billion in debt relief it had requested.
But investment is essential to jumpstart a sluggish economy that’s hovering at 3.5 percent growth. Multinationals are still being scared off in droves, taking with them several billion dollars in investments every year–and hundreds of thousands of badly needed jobs. Swedish furniture retailer Ikea has shifted orders for chairs, tables and wardrobes to craftsmen in Vietnam, among other places. Reebok and Nike have cut orders in Indonesia and consolidated operations in Vietnam and China. The biggest jolt came late last year when Sony announced that it would relocate its audio assembly plant in Jakarta to Malaysia, which has higher wages but a better legal system. Overall in 2002, foreign direct-investment approvals dropped 35 percent, while domestic investment approvals plummeted 57 percent. “Unless investment rates can increase, employment simply won’t be able to grow and poverty won’t be reduced,” warns Andrew Steer, the World Bank’s country director for Indonesia.
Indonesia’s leaders blame the retreat on the so-called CNN effect–unflattering television images of street protests and ethnic violence that have frightened investors. To counter such images, Megawati has launched “Investment Year 2003,” a campaign designed to persuade investors that it is safe to bring their capital back to Indonesia. Businessmen, however, say the exodus of investors is not driven by bad publicity so much as more deeply rooted problems–limited legal guarantees on projects, low worker productivity, fears of terrorist attacks and the high bribes to military and government officials required to do business. “This is not a promotion problem,” says one American businessman who’s been in Indonesia for 25 years. “This is not a good place to invest right now, and everyone who’s serious knows it.”
With foreigners staying away, where can Megawati look for help? The same Indonesian magnates who helped precipitate–and then profited from–the Asian financial crisis. Just a day before imposing the price hikes in early January, Megawati announced that she would not prosecute “cooperative” bankers accused of misusing about $16 billion in taxpayer-financed loans. (Back in 1997 and 1998, the bankers allegedly channeled illegal amounts of bank funds to their own affiliated businesses–a factor that helped trigger the crisis–and then siphoned off much of the liquidity support that came from the government.) Under Megawati’s decree, known as the “release and discharge” policy, the bankers would be free from criminal charges if they made a good-faith effort to pay back a portion of their debts. Giving these cronies more carrot than stick, it is hoped, will encourage them to bring back the billions of dollars they placed offshore during the crisis. “If you release and discharge, the money comes and the economy rolls,” says Pande Radja Silalahi, an economist at the Jakarta-based Centre for Strategic and International Studies.
“The Return of the Cronies” sounds like a bad sequel to many Indonesians. They are already furious that Suharto’s business pals drove the country to the brink of default and stuck them with the bill. Letting them off the hook, even partially, may lead to a massive and possibly violent backlash against Megawati’s government. “It’s complete hypocrisy because the government doesn’t recover billions of dollars from the cronies, and instead raises the rates of power, fuel, power and electricity,” says one former official with the Indonesian Bank Restructuring Agency (IBRA), which is tasked with selling off the assets tycoons hand over to cover their debts. Even Kwik Kian Gie, the former economic minister who now heads the National Development Planning Agency, says it is dangerous–and illegal–to offer amnesty to Suharto cronies until their cases go through the courts. “They’ll be bringing back stolen money,” Kwik says, “and they could get involved in monkey business again.”
Bankers aren’t the only ones getting off lightly. IBRA is also moving quickly to restructure debt in other major industries, including the timber companies that have illegally destroyed the Indonesian rain forest. Asia Pulp & Paper, whose Suharto-era forest concessions helped it develop the world’s largest pulp and paper mill, is also Indonesia’s largest debtor, owing $13 billion to foreign and domestic banks. IBRA hopes to restructure that debt by the end of March, satisfying half the creditors and leaving the same family in charge of the conglomerate. Thomas Walton, the World Bank’s lead environmental expert in Indonesia, expressed outrage at the decision: “Basically IBRA is saying: ‘You’ve behaved badly, but we’re giving you a break’.”
Megawati’s supporters say she has no choice but to embrace the cronies. Otherwise, the economy will wither. So IBRA is racing to resolve the 49 biggest debt cases by this fall. The agency has identified five debtors who have fulfilled their obligations, including the Salim Group, Indonesia’s largest conglomerate during the Suharto years. (The group gave back assets worth just 38 percent of its $6 billion debt.) Another 15 “uncooperative” debtors have had their cases handed over to the attorney general’s office for prosecution. The rest, such as Sjamsul Nursalim, head of Gajah Tunggal, Indonesia’s largest tire company, must wait to see if they get the seal of approval. The company handed over assets to cover its $3.4 billion debt, but they sold for only $455 million–and some were called into question. One of the assets, for example, was a shrimp farm in Sumatra allegedly valued at $2.2 billion. But according to current and former government officials, the farm turned out to be worthless. It was, says former economic czar Kwik, “a big hole–no water and no shrimp.”
Megawati’s biggest problem may not be cronies or corruption, but a lack of clarity. Her multiparty coalition government has no clear guiding ideology, no vision of where it wants the economy to go. “In the morning, the government is capitalist, at midday it is socialist, and at nighttime it is communist,” jokes Silalahi, the economist. Indonesia’s ideological confusion runs deep, with much of the current “reformasi” thinking guided by knee-jerk opposition to anything associated with Suharto. That includes the dictator’s fairly open stance toward foreign investment, which arguably helped transform Indonesia from an Asian basket case in the mid-1960s into a modest success story.
Nobody expects the investment climate to improve overnight. The deep-rooted legacies of corruption and lawlessness, now more “democratized” because power is no longer held by one party, also won’t disappear quickly. But so far, Megawati has not reassured the world that eradicating either of these are top priorities. “When there is a clear map and a clear vision, the private sector responds fairly quickly,” says the World Bank’s Steer. Don’t hold your breath. Indonesia’s Hamlet has a hard time making up her mind.
