David Liebhold – The Asian financial crisis of 1997 helped bring down Suharto, so President Abdurrahman Wahid had better pay attention to economics if he wants to hold onto power – and hold Indonesia together. Democracy may have triumphed, but the economy is a mess. Millions of people are out of work, thousands of companies are technically bankrupt and the banking system is choking on bad debt. Unless Wahid can convince investors that it's safe and profitable to return to his troubled archipelago – and soon – the vicious cycle of unemployment, poverty and civil unrest is likely to continue, dashing the hopes of 204 million people for a democratic future.
"This is going to be the biggest challenge for the government," says Mari Pangestu, an economist at Jakarta's Center for Strategic and International Studies. "How much can you deliver and how patient will people be? Wahid will need to package policies the right way."
Even if Wahid's new cabinet takes all the right steps, the challenges are formidable. Borrowers have stopped making payments on about 70% of domestic bank loans, and Indonesians collectively owe the rest of the world an estimated $135 billion. The economy shrank nearly 14% last year. The government expects 0%-2% growth in the economy this year, but an expansion of about 6%-7% by 2003-04.
Where that will come from is a mystery. Only about half of industrial capacity is being used, so there's not much incentive for new investment. Because prices are falling for the commodities Indonesia produces, the value of exports excluding oil and gas has stagnated ($41 billion in 1998, compared with $38 billion in 1996) even as volume has jumped. Two years of rioting, rape and arson have scarred Indonesia's image as a tourist destination. Last week violence spread to the vacation island of Bali, one of the country's last big foreign-exchange earners.
It's hard to imagine a significant increase in consumer spending any time soon. Wages are unlikely to rise, and unemployment is sure to remain high. As long as GDP growth stays below 3%, only a minority of the 2 million people who enter the job market each year can expect to find work. Still, there are a few bright spots. The dramatic fall of the rupiah (from 2,450 to the US dollar in mid-1997 to around 7,400 today) has given a competitive edge to manufactured exports like textiles and garments. Although Indonesian workers are not especially productive by world standards, they are cheap (industrial workers earn about $40 a month). Yet the basic problems of corruption, collusion and nepotism did not disappear with the fall of Suharto or the recent defeat of Habibie.
Wahid's most immediate task will be to convince the World Bank and the International Monetary Fund to resume aid payments – on hold pending a resolution of the Bank Bali scandal, which broke in July when a Standard Chartered Bank investigation revealed that $80 million of the ailing bank's funds had been channeled to Habibie's Golkar party. Looking further ahead, Wahid's ministers must reform Indonesia's deeply corrupt bureaucracy, courts and police. Because civil servants are paid less than they can possibly live on (about $20 a month), corruption is still de facto government policy. Indonesia got its leadership house in order last week, but now it's time to tackle the family finances.