Salil Tripathi, Jakarta – If it sounds too good to be true, it probably is. Perhaps International Monetary Fund chief Michel Camdessus should have kept that investment axiom in mind before committing $33 billion to Indonesia--where President Suharto personally signed off on a wrenching reform package in January without a peep of protest.
Eight weeks later, Suharto is sending very different signals, and the IMF is clamping the money tap. The 76-year-old leader, who was re-elected on March 10 to a seventh term, declared that the reforms do not accord with Indonesia's constitution. What's more, he continues to flirt with the idea of creating a currency board to peg the rupiah to the U.S. dollar. Economists warn that Indonesia lacks the reserves--and probably the resolve--to make it work.
What kind of game is Southeast Asia's grand old man playing? Some say political poker, bluffing the IMF to rake in support at home. But increasingly, it is beginning to look like more than that. Suharto may be convinced that his enterprise--Indonesia--is simply too big and too important for the world to allow it to fail.
"It wouldn't be surprising if he thinks like that," says a U.S. official. "After all, we've been saying that Indonesia is an anchor stone in Southeast Asia. But that misses an important nuance: How do you actually go about preventing failure?"
The stakes in this game are high. With its credibility increasingly under question, the IMF can't afford to step down and give Jakarta money without hard evidence of reform. That leaves Indonesia, where prices and unemployment are rising sharply, in the middle of a dangerous stand-off between its gunslinging president and the IMF sheriff.
To show that it meant business, the IMF postponed a review of the rescue package until April. Only after that, the Fund said, could it disburse the next sorely needed tranche of $3 billion. But Suharto's gambit puts the Fund and its biggest backer, the United States, between a rock and a hard place. They can cut off Indonesia, possibly tipping the world's largest Muslim state into an ocean of civil unrest. Or they can succumb and bail out Suharto on his terms, which may prompt the U.S. Congress to withhold a requested $18 billion in additional funds.
Suharto's strategy seems to be working, at least partly. Leaders from Malaysia, the Philippines, Thailand and Australia have urged the IMF to go easy on Indonesia. And the IMF's first deputy managing director, Stanley Fischer, has said the Fund was prepared to be "flexible"--and that it would weigh humanitarian issues in deciding when it would release the funds.
But on the other side of the street, the IMF is still getting political support from the G-7 countries, as well as from the World Bank and the Asian Development Bank, which have suspended funding. The U.S. and Germany have sent high-level envoys--former Vice-President Walter Mondale and Finance Minister Theo Waigel, respectively--urging Suharto to stick to the IMF deal. But their visits may have served only to convince Suharto that he is a major leader in whose personal survival the world has a serious interest.
Suharto takes great pride in being known as Bapak Pembangunan (father of development). But the onset of the economic crisis has made a mockery of his regime's singular achievement: In nominal terms, Indonesia's per-capita income has fallen by three-quarters since last July, and Jardine Fleming expects to revise its forecast of economic contraction from 10% to 15% in 1998.
Indonesia's leader has reasons to cling to the old order, which has also enriched his family and friends. Despite the IMF's call to dismantle them, family-and crony-run monopolies are still in place, and new ones are being created. What's more, the central bank continues to provide liquidity to dozens of near-insolvent banks. Implementing IMF reforms would restore confidence, but it would also destroy the Suharto family's economic empire.
Suharto is keen to find a quick fix that will allow him to maintain both his family dynasty and his leadership. Notes Andrew MacIntyre, an Indonesia expert at the University of California in San Diego: "Suharto has been fighting for his political survival. He cannot survive if the economy does not recover. The economy cannot recover until the rupiah can stabilize. And investors will not return until there is increased political confidence."
The president seems to be adopting a two-pronged solution. First, he won approval for emergency powers that authorize him to curb social unrest and subversive acts. This strengthens his position while allowing his successor wide powers in the event of a transition during his five-year term. Second, he still seems to be preparing to set up a currency board, to peg the free-falling rupiah to the U.S. dollar. Currency-board specialist Steven Hanke, a professor at Baltimore's Johns Hopkins University, has returned to Jakarta.
Markets fear the controversial rate-fixing mechanism may be in place soon, even though the IMF has warned that such a measure would oblige it to suspend aid. Meanwhile, a paper Hanke prepared that essentially absolves Suharto of blame for the crisis circulates widely among Jakarta's business elite. The substance of the 50-point IMF programme, it reads, "undermined the current establishment just in a period when political stability was needed the most." Some accuse the IMF of not understanding this political reality. But the Fund is successful because it is apolitical and recommends sound economics. Indonesia is not the first to implement an austerity drive at the IMF's insistence. Brazil, Mexico, Poland, Russia and Argentina have all undergone gut-wrenching reforms.
For its part, the IMF is perplexed that Indonesia would renege so quickly on its promise to implement reforms. Says Simon Ogus, chief economist at SBC Warburg in Hong Kong: "You can't admit yourself to Betty Ford's [alcoholism] clinic and then request a case of Scotch." If the patient persists, the doctor can only pack up and leave, as the IMF has said it would.
An Asean diplomat explains why the president agreed to the deal: "You can't expect Suharto to behave like a Western-educated leader. He signed the agreement because he didn't want Camdessus to go home empty-handed; he never meant to implement it."
Still, Suharto hasn't burned his bridges with the IMF. His respected economic adviser, Widjojo Nitisastro, is leading a delegation to Washington this month. Notes Max Corden, an Australian economist at Johns Hopkins: "Suharto has been wise in listening and accepting excellent advice from professor Widjojo and others in the past." Perhaps Suharto will surprise the world and fold, accepting the IMF's terms.
Rajeev Malik, senior economist at Jardine Fleming in Singapore, agrees there could be a turnabout, but also warns of the worst-case scenario. "Indonesia may recede into a cocoon, close its capital account, nationalize the export-oriented commodity-producing private sector, or default on its official government debt," Malik says. "That shouldn't happen, but in these times, one can't rule out Indonesia turning isolationist."