Part I.  Where To Go And How To Get There

There are three scenarios of potential future developments in Indonesia. The first is that the projected elections in June will result in a coalition cabinet with the incumbent retaining office or with a new president from the opposition coalition. The second is that social unrest will escalate into so much violence that the military will feel compelled to demand emergency powers and postpone or cancel the elections. The third is that social strife and violence are of such magnitude and scale that its beyond the capability and resources of the military, who also may become embroiled in divisive factionalism, and central authority is fractured and fragmented.

Indonesia is one of the hardest hit by the crises which started as a currency problem in Bangkok, but soon turned into a full-fledged monetary, and economic tsunami which not only pounded the shores of East and Southeast Asia, but also spread to Russia and Brazil. The financial architecture of newly globalized economies of most of the Western Pacific rim, with few exceptions came tumbling down like dominoes. This triggered sudden massive hardships on hundreds of millions of people whose livelihoods became unstuck within less time than it needs to grow rice.

Caught in the maelstrom, wrenching changes were unleashed not only in the realm of economics but also in politics. For decades Indonesia was paraded and perhaps also pampered as a model for economic growth for developing countries by international institutions like the World Bank, the IMF, the Asian Development Bank, etc. Now the euphoria of miracle success stories has come crashing down. Although it is clear what happened, there is still great controversy and debate about why everything suddenly became unglued. Economist usually will tell you tomorrow why their prediction yesterday did not come true today. This time it probably will take years before there is consensus.

On one point there is common agreement. Without the political stability as cornerstone, there could be no sustained economic growth or economic miracles. The problem today is that with the economy in distress, it also created almost unbearable pain for millions of urban poor, and swelling the ranks of the dispossessed, discontent and disenchanted. Hundred of thousands of families suddenly were threatened with hunger, undernourishment, afflicted by disease without access to medicines, unable to continue schooling for their children and facing the spectre of loss of dignity being laid off as well as loss of income.

How to maintain social order and political stability under these circumstance? Of course old formulas of repression and suppression by the use of lethal force against dissent and dissonant voices could no longer be effective. Because the legitimacy of the Suharto’s regime depended largely on the ability to deliver economic growth and the promise of improved basic living conditions, in exchange for waiving or deferring political rights and freedoms. Such as freedom of expression, including freedom of the press, freedom to associate for workers to engage in collective bargaining about wages and working conditions, freedom to dissent from government policy including the right to publicly criticise cronyism, corruption, collusion and nepotism at the highest levels.

The first to cry out were the students in the various university campuses, and soon the chorus of tens of thousands of students were singing the song of "turunkan harga", or bring down prices . But "har-ga" was also an acronym for (Su)harto and family (keluarga). The end result was that within less than one year after the Thai contagion spread, Suharto was out and replaced by his vice president.

His exit also meant the beginning of the dismantling of an authoritarian rule that had lasted over a period that had seen five American presidents come and go. With his departure the tailor-made architecture of power relationships all centred on his personalised iron rule collapsed, and the way was opened towards transition to a more democratic set-up. Of course the challenge is how to get from here to there in times of immense social and economic dislocations.

With the legitimacy of the Habibie’s presidency being questioned, the military image tarnished, the ruling party morally and intellectually bankrupt, the bureaucracy demoralised, it was no surprise that things fall apart. Indeed, foremost on the minds of the many was can the center hold in the aftermath of the May rioting in Jakarta which claimed more than 1.000 lives, and atrocities against scores of women. With the glaring demonstration of the failure of the army to maintain peace and order in the capital city despite massive troop deployment, it was clear that the military chose not to be "the protector of the people", but the praetorian guard. To their credit a few days later the military did escort student demonstrators to the parliament house, and allowed students to demand the resignation of Suharto.

The demise of the Suharto power structure and the loss of credibility of his replacement opened further opportunities to expand widespread public demand for increased democratic reforms. The reform program as spearheaded by the students envisaged in essence the transformation of Soeharto’s personalised dictatorial system into a more representative democratic system, in which the rule of law prevailed over the law of the ruler, human rights acknowledged in operational actions not just by slogans, the legislative bodies not stacked by more than half with presidential appointees , a more independent judiciary system, reduction of military role in all branches of government, and more transparency in policy making and accountability in government decision making.

The new president quickly pledged to put new elections on the political agenda. The elections would be held under new rules, new participants (multiple parties instead of only three), new referee (not the playing captain of the ruling party) and new electoral commission with more party representation. The army supported it, the ruling party endorsed it, and most important the old parliament approved it, although most members would probably lose their seats.

The amazing thing was that the old (Suharto’s handcrafted institutions) hardware embraced the new software smoothly without a hitch. Was this a political miracle?

How was it possible that consensus could be forged during tense days of high uncertainty, severe turbulence and political turmoil? If compared with the strained negotiations between the Indonesian government with the IMF over the conditions for the rescue package, which had to be renegotiated several times, the conflict resolution amongst the Indonesian political actors could arrive at a core consensus about the direction in a less formal way, but yet not less binding.

What was the mechanism of discourse and consultation? Most are not aware, or do not recognize it. The ways and means were almost invisible to those who only observed the formal channels of political communication, which was barren and short-circuited, deadlocked and paralysed. Yet the outcome of the "alternative" was clear. The important point is that the informal networks were effective to bridge the gap between the conflicting parties to reach a compromise solution – new elections.

To have an agreement on common direction of the ship of state, by different stakeholders when buffeted by hurricane force winds and waves, has a reassuring influence on the state of mind. The passengers and some of the crew may have doubts about the competence of the helmsman, but at least there is no quarrel about the destination.

Everyone agrees that the crisis in Indonesia is multifaceted. The social unrest and distress cannot be alleviated without solving the economic problem, but the economic problem cannot be separated from the political problem. The political problem is one of lack of legitimacy. The solution is only possible through elections that could provide a new mandate and legitimacy to a more democratically conceived government. Of course there still are many hurdles, obstacles and pitfalls that could hamper or disturb the process. Not to forget or discount the spoilers.

We should not underestimate or discount the capacity to make trouble by remaining interest groups, or dark forces who resent the fact that their hero Suharto was ousted in disgrace. The residue of power amongst loyalist to the deposed strongman by some accounts is still quite formidable. Some of the recent disturbances and incidents of violent clashes in several areas over the past few months, were ascribed to the "emperor strikes back". So is the capacity to buy influence, or engage in so-called money politics.

So far over a hundred parties have registered. And some are already campaigning. Many people are skeptical that elections could be done at all, given the prevailing economic hardships and social distress, uncertainties of the security aspect. They believe the necessary conditions are not in place, and that there is insufficient time to organize the whole thing.

There is also distrust about the government’s motives and sincerity, and loudly express their doubts that the military is seriously committed to safeguard the election process. There are even allegations that at least some elements from the military are inciting religious and ethnic conflict with the purpose of deliberately fomenting unrest as a convenient pretext to re-impose stringent authoritarian controls. Some even suspect that if the security situation gets out of hand, a contingency plan is in the making to resort to martial law and declare emergency rule.

It may be farfetched, but such is the climate of distrust that has replaced a climate of fear, indeed the military are hard pressed to prove good faith and only their attitude, behavior and actions can regain the trust. Only time will tell.

In the meantime, general Wiranto, the armed forces commander, has reassured that the army will maintain strict impartiality in the election process and maintain equi-distance to all parties. The problem is not only that old soldiers never die, but so are old habits. More than thirty years of continuous army support for Golkar, the ruling party and Soeharto’s highly effective vehicle to maintain and sustain power, would be very difficult to erase without intensive re-training and reversing an ingrained mindset.

The military has done some rethinking of their future role in national politics. They are aware that over the thirty years in the new order, they were excessive in applying or implementing the doctrine of dwi-fungsi or dual function which was the foundation for military involvement in national political affairs.

Four new paradigms were defined to reform the dwifungsi concept and align it with the demand of the post-new order reform era. One, that the military should not take the front seat in the social-political function. Two, that it need not occupy (positions of power), but suffice by using its influence. Three, that it no longer would side with one or more than one grouping outside the military. Four, that it should be willing to share power. These new paradigms were discussed at armed forces seminar in Bandung in September last year.

Some criticism was voiced that it still smacked of arrogance and missed the point that sovereignty belonged to the people, and that the implication as if the military were superior to the people was mistaken. It was the military that should obey the people, and not the other way round. On other occasions military leaders stated that they were not only redefining their role in nation building, but also repositioning themselves apparently alluding to a new awareness for reform.

SUMMARY

Indeed the first case scenario is the best for Indonesians. Hopefully it is also the most likely. The second and third scenarios would be fatal to Indonesia. At best the second scenario would lead to a kind of Burmese disease, military rule with economic and political stagnation. There is no way to repeat the new order formula for economic growth and political stability by repression. You cannot fry the omelet twice.

The third scenario clearly will create so much instability in the region. Visualize a Yugoslavia variation in the archipelago astride the trade routes of Southeast Asia and sea lanes between the Pacific and Indian oceans. Its implication and consequences are too frightening to contemplate. With some luck and strong support from the US and international community it can be averted.

PART II. ELUSIVE SOLUTIONS FOR COMPLEX PROBLEMS

BACKGROUND

The trigger of the economic crisis in Southeast Asia is currency turmoil, which started in Thailand, and seems to have no ending in Indonesia. To the US dollar, the Thai baht is now about 30% lower than its pre-crisis level, while the Indonesian rupiah is down 70% since mid 1997.

What happens in Indonesia is perhaps the first in the modern history of economy. In 1998 GDP shrank 15%, inflation hit 80%, and present unemployment rate is high. Between 20 million and 50 million people are estimated to live below the poverty line. The social implications are terrifying, although real conditions are not as gloomy as initially predicted.

The country has completely lost investors confidence. A recent survey conducted by the Asian Wall Street Journal says that only 2% of its respondents pick the country as an attractive place for direct investment. Portfolio investors have also jettisoned Jakarta listed stocks. Foreign stock brokers which in early 1997 dominated 60% market share now only account for less than 40% of daily transactions on the Jakarta Stock Exchange.

Why Indonesia fell this deep is a question that has not been satisfactorily answered. Even in third quarter of 97 there were still people saying, "Indonesia is not Thailand. It will not suffer like Thailand." The Indonesian government and its foreign lenders, particularly the World Bank and IMF are still announcing that Indonesia has a fundamentally strong economy. And look where it is now, even worse than Thailand.

Many easily blame the corrupt crony capitalism adopted by the Indonesian system led by former president Suharto. Corruption, collusion and nepotism, in Indonesian popularly abbreviated as KKN, create high cost economy. Protection to certain business groups causes misallocation of resources and over-capacity in a number of industrial sectors. Rampant imprudent – and illegal – banking practices result in hundreds of trillions of rupiah in bad debts. Reckless businessmen – assisted by western bankers – take advantage of the world liquidity drive and borrow in foreign currencies much more than they need without hedging their exposures. Furthermore, there are widespread substantial mark ups and financing mismatch: short term debts to finance long term projects.

It’s not like these conditions are unique to Indonesia. What really made it difficult for Indonesia to recover is that the country underwent a bloody political turbulence at the height of the currency crisis. Iron-fist-tyrant Suharto was replaced with a weak president Habibie following two days of horrible riots in Jakarta in May 1998. Political struggle amongst the elite has seemingly disabled the government to focus on the economy and alleviate the poor and the newly poor from their hardships.

PROSPECTS

Key to a recovery in the Indonesian economy is the return of foreign investors’ confidence and, indeed, their money. At present, even local businessmen are hesitant to invest. They are all waiting for the general elections (scheduled for June 7^th), then the presidential election (scheduled for November 10^th). Thus, we will not be surprised if the earliest inflow of significant capital will only occur in the year 2000. This investment will perhaps take a year to translate into real economic growth. That is provided that all this political process will result in a stable and pro-business government.

However, this does not necessarily mean that Indonesians will have to wait for the turn of the century to see an improvement in the quality of life. A return to political stability will restore confidence. This is enough to strengthen the rupiah and the stock market.

Arithmetically, using the Thai baht as a benchmark, the rupiah should be trading at about Rp 4,000 or stronger to the US dollar. That is 125% higher than the current level of about Rp 9,000 to the US dollar. Remember that the baht strengthen by 30% in 1998, while the rupiah slid further by 30% during the same period. (In fact, the rupiah performed even poorer when Habibie was announced as vice presidential candidate in early 1998 and at the time of the May riots.)

The stock market will also perform strongly. The strength of the rupiah will ease financial burdens of many major Indonesian companies. They will reap foreign exchange gains, instead of the heavy losses they suffer in 1997 and 1998. These gains may even be enough to bring negative equities back to positive. Lower debt to equity ratios will reflect healthier balance sheets and strengthen companies’ bargaining position in facing their bankers, either for debt restructuring or fund raising exercises. These financial strengths will be discounted in higher share prices.

What is interesting to observe is the structure of the Indonesia Incorporated after the crisis. The number of large business groups/companies will decline, as many will have collapsed during the crisis. Some of the surviving ones will be the result of mergers. On the other hand, the number of small to medium scale business will rise if the currently influential minister Adi Sasono (cooperatives and small to medium scale business) has his way.

There are two imminent issues important to follow: (1) the reform of the banking sectors, which will include recapitalization of viable banks and liquidation of others, and (2) the implementation of the monopoly law.

The reform of the banking sector.

This is a tricky issue. Analysts estimate that 60% - 70% of Indonesian banks Rp 700 – 800 trillion assets in the form of credit is non performing. Loose banking regulations and lack of enforcement combined with imprudent banking practices by under qualified bankers is a recipe for danger. An environment infested with corruption, collusion and nepotism enables the president or other powerful members of the authority to influence bankers to provide credits to non-viable projects belonging to a relative. Bank owners order around its directors (some of whom are the owners themselves) to breach legal lending limits. The integrity of these borrowers is so questionable that people widely believe that most of these credit lines are schemed to steal depositor money. No wonder the banking sector is in such a bad shape.

To reform the banking sector drastic measures are needed. At end 1997, the government liquidated 16 banks, including 2 major banks, with dire consequences. A confidence crisis resulted in such a severe rush that the government had to inject over 140 trillion rupiah of liquidity support into bleeding banks. Also, the government had to announce that it guarantees all third party liabilities in a bank to restore confidence. However, some of these banks are so badly bruised that the injected liquidity support was greater than their equity base. As a consequence the government closed more banks and took over management of a number of the hard hit banks, which are still considered to be viable or to be to large to go under. The latter include two of the country’s largest: Bank Central Asia and Bank Danamon.

An important decision was made. The government decided that it would save depositors money at the expense of the purchasing power of all Indonesians. The guarantee means financing. Since the government does not have the money to finance these guarantees (which if it does will come from taxpayers’ money), it has to borrow, in which case tax payers’ and their descendants’ money will be used to repay the debts.

Then the government announced that it would split banks into three categories, A, B, C, based on CAR calculations. Category A does not need to recapitalize. Category B has to recapitalize. However, the government will provide 80% of the required fund! Owners of category C banks have to inject a certain amount to be classified as B before being allowed to recapitalize, and use, or, cynically, steal the government money. Otherwise, they will have to liquidate. Critics are quick to cry foul. Lobbying rather than real financial strength apparently enables certain banks to be classified as B, while straightforward calculation based on available figures show that they should be in C.

The Lippo Bank case

The first bank that has obtained government approval for an injection of public funds is Lippo Bank. The government plans to inject Rp 3.7 trillion to the bank, its 80% share of the Rp 4.7 trillion required recapitalization fund. Controversies surround the transaction. Why Lippo? Why so fast? How about valuation? These question arises because the process is not transparent.

The sale of non performing loan to asset management units

Banks have to deal with ballooning NPL. Economic slowdown, liquidity crunch and high interest rate environment has caused widespread defaults. Not to mention that a number of mega projects supported by the KKN are accidents waiting to happen from the beginning anyway. An asset restructuring will reduce the amount of funds required for the recapitalization. Conveniently, the government sponsored the establishment of asset management units (AMU) which will buy the banks’ non-performing loans (NPL) and package it for sale in a later time.

Two important issues have to be settled before the sale should be allowed to take place. First, the banks’ legal liabilities must not disappear after they sell the NPL. Second, the sales price of the NPL has to be fair both by the banks as sellers and by the AMU as the buyers. Once again, AMU will use public funds. If the banks are allowed to sell the NPL at inflated prices it means that the authority is robbing from the people. Even par value is considered steep. As a comparison, some say that there should be discounts up to 70%.

Nevertheless, a reform of the banking sector is much needed. Foreign investors will positively view any progress in this matter. The key is to make sure that the process is clear and transparent, and that it should be socialized to satisfy the public demand. In short, do not insult their intelligence.

Anti monopoly law

The government recently announced an antimonopoly law. The draft is not yet available. However, certain criteria have been made public. The law does not stipulate a market share benchmark against which a player can be considered as monopolizing a market. It says that a monopoly will be determined by means of analyzing market behavior. Frankly, this explanation is still a bit confusing. The law also exempts cooperatives from being caught under the antimonopoly law. This reflects the influence of the above mentioned Mr. Sasono.

It is not clear as to what will happen to the likes of Indofood, which is controlled by the Salim family, a Suharto crony, which dominates about 70% - 80% of the wheat flour market and 90% of the instant noodle market. Or, the Sinar Mas Group, which has about 70% of the domestic market for paper, even after exporting more than half of its output.

Some monopolistic/oligopolistic companies may have to export its way out of the antimonopoly law. In this case shortages in the domestic market has to be avoided. Some may have to sell its assets to reduce their control of the domestic market. Here, pricing/valuation is crucial. Nevertheless, Indonesia Incorporated will go through drastic changes two – three years down the road.

SUMMARY

This is a crucial year for Indonesia. While neighboring Thailand, the place where it all started, seems to be on its way to a recovery, so many uncertainty remains in Indonesia for the foreseeable future.

A smooth general and presidential election, which will produce a stable and pro-business government, is a pre-requisite for Indonesians to enter the new century with a smile.

People will demand more transparency in the government decision making process. The public needs to know how the government plans to spend their money. Most importantly Indonesians need to be assured that none of the old KKN practices which have brought down a traumatic economic crisis will ever occur again.

Restored investors confidence and the return of their money to Indonesia will help boost an economic recovery. We believe that the early birds will start investing in the year 2000. Then, the beginning of a steady and solid growth can expected to follow the year after.

About the author:   Mr. Katoppo is a member of the editorial board of Suara Pembaruan daily newspaper. He is also the Director of P.T. Sinar Kasih. He has also been President, Director and Chief Editor of Pustaka Sinar Harapan publishing; Lecturer of Journalism and newspaper management at the University of Indonesia, and Faculty of Political and Social Sciences; Commentator and Analyst of Social Political Affairs in Indonesia; and, Member, International Press Institute. Mr. Katoppo is founding member of Indonesia Democratic Forum; Indonesia Centre for the Study of Human Rights (YAPUSHAM); Institute for Study Freeflow of Information (IAIA); Association for Sustainable Conservation of Indonesian Environments; and Sejati Foundation. He is former Managing Editor/Deputy Publisher of Sinar Marapan Newspaper. From 1973 to 1974, Mr. Katoppo was a Fellow at Stanford University Professional Journalism and from 1974 to 1975 he was a Fellow at Harvard University Center for International Affairs. His publications include "50 Years Bung Karno" editor (1982) and "100 years Kartini" editor (1978).

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