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World Bank blasts 'Asia model'

Sydney Morning Herald - December 11, 1997

Louise Williams, Jakarta – In one of the sharpest criticisms to date of East Asian business practices, a World Bank executive has warned that monopolies linked to President Soeharto's inner circle of family and friends are blocking Indonesia's economic recovery.

Speaking to Indonesian and foreign business leaders yesterday, the bank's representative in Indonesia, Mr Dennis de Tray, said the collapse of the rupiah represented "depreciated credibility" in the commitment to make essential reforms.

Mr de Tray said barriers to recovery included the Soeharto Government's failure to cancel the national car project, for which the President's sons have tax and tariff concessions, the retention of agricultural monopolies linked to the political elite, and the controversial national aircraft project controlled by a senior minister.

He said these were "must-dos" which were not included in the reforms announced with the $US38 billion ($56 billion) rescue package agreed with the International Monetary Fund.

"In themselves these are not major drains on the efficiency of the economy, but they are important because they would send signals about how business will be done in the future, they are absolutely critical as signals and they remain so," he said.

Instead, regional governments, including Indonesia's, were sending mixed signals suggesting less-than total commitment to the difficult decisions which had to be taken.

Local radio stations in Jakarta reported that the rupiah had failed to recover yesterday following its dramatic 10 per cent collapse over fears for Mr Soeharto's health.

The currency has lost 45 per cent since July and failed to rally yesterday despite official denials that Mr Soeharto had died and assurances that he would attend the ASEAN summit in Kuala Lumpur later this month.

Mr de Tray said the regional economic crisis demonstrated a failure of policy.

"The world has decided the East Asian economic model is due for a change," he said. "It's not a matter of tweaking at the margins, it's a matter of fundamental change in the nature, culture and process of business in East Asia."

The World Bank executive pointed to the personalised nature of business in Asia, which has relied heavily on political and family connections, lacking transparency and accountability.

This model had delivered miraculous growth to the region for almost three decades. "But the world has decided the mechanisms which delivered growth and reduced poverty in the past are not the same mechanisms which are needed to prepare the countries of the region for the next three decades."

The challenge for East Asia, Mr de Tray said, was to recognise that operating in a global economy meant credibility, transparency and competitiveness were the bottom line.

"The world is saying change, and not everybody and not every government is convinced that is correct."

He said the personal nature of business dealings in Asia had eroded the quality of information about the economy to the point that the region was facing "the complete collapse of the credibility of both public and private information".

"In an environment where credibility is scarce, governments have to be absolutely clear on what direction they are going to take and this has not happened sufficiently across the region," he said. In particular, Indonesia was facing continued uncertainty.

Not only had the rupiah depreciated by almost 50 per cent, the country was coping with the results of a severe drought, coupled with doubts over Mr Soeharto's health, the succession and presidential elections due next March.