A fight for Indonesia's economic soul
By Bill Guerin
JAKARTA - After nearly a decade of economic restructuring and financial
de-leveraging, Indonesia has finally returned to a position of fiscal strength
from the 1997-98 Asian financial crisis. Much of the credit for the turnaround
lies with Coordinating Minister for the Economy Boediono, who has held senior
economic posts in two post-1997 administrations.
An economist trained at Wharton, the business school of the University
of Pennsylvania, the former finance minister and now chief
economic policymaker has in recent years had a free hand in steering economic and
financial reforms, under both
former
president
Megawati Sukarnoputri and current leader Susilo Bambang Yudhoyono. In
managing the national finances, he has faced down vested political interest
groups in Parliament and the bureaucracy and moved to restore
foreign confidence in central bank independence.
Boediono's
independent and apolitical control of Indonesia's economic levers to some
analysts represents a sort of throwback to former dictator Suharto's New Order
regime, whereby he insulated a group of US-trained economists, popularly known
then as the Berkeley Mafia, from political interference so as to steer the
economy's liberalization and export-oriented growth.
Yet while Suharto's economic mandarins hovered above the cut-and-thrust of
daily politics, Boediono frequently finds himself at loggerheads with the
country's powerful, pro-business vice president Yusuf Kalla over economic
policymaking. Kalla serves as chairman to the powerful Golkar party and has an
exceptionally powerful voice inside Yudhoyono's cabinet, particularly over
government spending decisions.
Now
some wonder whether Boediono's position could be
in jeopardy as a new consensus builds around the
notion that it's time for Indonesia to re-gear
economic policy from pro-stability to
pro-growth.
As a former head of the
National Development Planning Agency (Bappenas)
and deputy governor of Bank Indonesia, Boediono
inherited control of a financially battered and
stagnant economy under Megawati. Foreign investors had abandoned the country as a regional
basket case where politics superseded the broad economic interest. In one of
several controversial decisions, in June 2002 the Commercial Court declared
that Canadian insurer Manulife was bankrupt. This ruling was instrumental in
showing just how much the new administration was in the grip of powerful vested
interests.
Megawati, a former leading figure of the political-reform movement that
followed the 1998 downfall of Suharto, had no clear strategy to stop the rot
and revive the economy when she assumed the presidency in July 2001. Then the
country was still reeling from the Asian financial crisis. Government budgets
still showed huge deficits and were sustained by expensive external funding.
The conditions attached to the International Monetary Fund's rescue package
emphasized financial belt-tightening over fiscal stimulus and bank
restructuring over issuing new loans. By 2001, the IMF-imposed belt-tightening
was stirring nationalist complaints that were further spooking foreign
investors. It was around then that Megawati handed the economic reins to
Boediono and, in a politically risky maneuver, he shunned economic nationalists
and moved to regain the IMF's confidence rather than challenge the agency's
neo-liberal economic orthodoxy.
Steady technocratic hand
While many analysts agree that Megawati's government deserves credit for
restoring a modicum of political stability, it was Boediono who played the
largest role in steering the economy back on track. Following the IMF's
prescriptions, belt-tightening policies in effect curbed inflation, reduced
government debt to manageable levels, and restored depleted national coffers.
Fast-forward
to the present, and Yudhoyono's weak representation in the House of
Representatives has nationalistically thwarted many of his government's economic
reform policies, including liberalization measures. With the
legislators from his own small party and the few others who consistently
support him, at best he holds consistent sway over only 100 votes in the
550-seat legislature.
Faced with stiff parliamentary resistance, Yudhoyono moved to
empower Boediono's sway over economic policymaking. In December 2005, Yudhoyono
tapped the tested technocrat to replace Aburazil Bakrie, an influential
political operator inside the Golkar party whose family has big business interests
that allegedly feed on government contracts, as chief economics minister.
Significantly, Boediono said at the time that he would decline the new post if Bakrie
were still part of the president's economic team.
Boediono's
appointment restored foreign confidence in the government's technocratic
credentials and provided Yudhoyono with an important political bulwark
against his more business-minded deputy Kalla. The president told a press
conference just before Boediono's appointment that he wanted the revamped
cabinet to be more effective and cooperate better as a team.
The
implication, albeit unspoken, was that Yudhoyono needed to rid his economic team
of vested-interest groups that were starting to raise new international concerns
over the quality of his government's macroeconomic management. When Boediono
and his technocratic ally and finance minister Sri Mulyani Indrawati took
the reins in 2005, they faced a faltering economy and alarmingly high inflation
levels. Indrawati replaced Golkar heavy Jusuf Anwar, a Kalla ally who had
control over development project budgets.
Together they moved to restore some market confidence in the country's reform
direction, which to many foreign investors at the time were headed in the wrong
direction. The massive reduction in fuel subsidies in 2005 triggered a
political mini-crisis but, as the World Bank points out, the savings in
subsidies left an extra US$15 billion to spend in 2006, $10 billion of which
was earmarked for development programs.
To be sure, Boediono hasn't always had his way, nor has Yudhoyono. After last
month's passage of a new negative investment list, which imposed new barriers
to foreign investment across several local industries, Boediono did his best to
neutralize widespread foreign-investor perceptions that the list was
protectionist, saying it gave investors greater "clarity" about which areas of
the economy they were welcome to participate in.
Notwithstanding such hiccups, Boediono is broadly viewed in international
markets as a capable set of technocratic hands. In his recent prepared speeches
abroad, he has said that political considerations should not be allowed to
interfere with economic management. Yet he has faced consistent challenges from
Kalla, who before Boediono's appointment as coordinating economic minister
rammed through unopposed several spending measures in Yudhoyono's first
cabinet.
Unwelcome oversight
Last September, Yudhoyono suddenly announced the creation of a new presidential
advisory body that would evaluate and monitor the cabinet's performance and
report directly to him. Significantly, coordination of the oversight unit was
placed under Boediono.
After widespread reports of peeved Golkar legislators, Kalla and Yudhoyono met
in private and, despite denials from the president's office that no changes
would be made, it was soon announced that although the unit would remain in
place, its tasks would be reconsidered. Most saw this as a victory for Kalla
and a blow to the president's chances of uncovering where bureaucratic
resistance and poor coordination were thwarting his economic policy and reform
directives. The oversight unit still exists, though very little has been heard
of it since.
Meanwhile, Kalla has won praise from the country's banks and business community
for his aggressive approach to economic policymaking, and he has clashed openly
with Boediono and Sri Mulyani over what he perceives to be their overcautious
approach to managing the national finances. In particular, Kalla has objected
to their joint reluctance to release funds allocated for fiscal stimulus. At
the end of 2005, nearly 70% of funds earmarked for development projects had not
been disbursed.
Boediono's approach was made clear during a 2006 keynote address he made in
Bali. "Restoring stability and accelerating government spending are necessary
but not sufficient to sustain higher growth in the longer term," he said. "The
key to sustaining growth is to use increasing confidence in our macro and
fiscal position to encourage private investment, especially in the context of
reforms that reduce the obstacles."
Boediono has remained tight-lipped concerning media criticism of government
contracts, particularly in the infrastructure sector, won by companies owned by
or associated with Kalla's and Bakrie's families. Big-ticket state projects won
by the Bakrie Brothers conglomerate include a $1.26 billion gas pipeline
connecting East Kalimantan and Central Java as well as the $1.4 billion Tanjung
Jati A power project.
The government's so-called "crash-start program" saw the award of $8 billion
worth of coal-fired power projects, many without a tendering process. Not
surprisingly the program, which was widely reported to be the brainchild of
Yusuf Kalla's brother Achmad Kalla, owner of the Bukaka engineering company,
sparked media allegations of conflicts of interest.
One winner was infrastructure specialist PT Bosowa Energi, part of the Bosowa
Group, a diversified conglomerate with businesses that include a turnpike
operator owned by Yusuf Kalla's brother-in-law, Aksa Mahmud. Mahmud,
coincidentally, is also deputy Speaker of the People's Consultative Assembly
(MPR), Indonesia's highest legislative body.
Still there are indications that Kalla's faster, looser approach to government
spending is gaining political ground on Boediono's penchant for caution and
probity. A World Bank report titled "Indonesia Public Expenditure Review 2007"
released late last month commended the country's "bold reallocation of
resources" and noted that there are now sufficient financial resources to
address development needs better.
While the report did not attribute the successful turnaround to any particular
individual, it did note that prudent macroeconomic policies, particularly
maintaining extremely low budget deficits, have been instrumental in the
recovery. However, some economic analysts also read the report as an implicit
endorsement of Kalla's stance, including its mention that now is the time to
build on past achievements and deploy more state resources on education, health
care and infrastructure.
In March, Boediono signaled that he could be persuaded to slacken certain
strictures on the economy and realign his pro-stability toward more pro-growth
initiatives. For instance, he recently told reporters that stronger economic
growth in 2008 would be achievable with "more relaxed monetary policies". Yet
Boediono still faces an uphill task in building a political consensus around
the need to speed up structural reforms and foreign participation in the
economy ahead of what are expected to be hotly contested 2009 elections.
With an estimated 60% of Indonesians without access to piped water and more
than 70 million with no electricity, the need to get allocated funds out of the
bureaucracy and into the grassroots economy is politically urgent. An even
bigger problem, as Boediono conceded in Washington in April, is the
government's inability to ensure that policies and reforms are actually
implemented as designed.
Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000,
has been in Indonesia for more than 20 years, mostly in journalism and
editorial positions. He specializes in Indonesian political, business and
economic analysis, and hosts a weekly television political talk show, Face
to Face, broadcast on two Indonesia-based satellite channels. He can be reached
at softsell@prima.net.id.
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