Bill Guerin – The financial crisis of 1997 brought Indonesia's previously spectacular economic growth to an abrupt halt. Going through the ensuing rigors of massive political change, economic reform and decentralization has left the country ill-equipped to face the very latest challenges of encouraging new inward investment.

The bombings in Bali not only dealt a body blow to earlier whiffs of optimism that the economy was truly on the mend, but also have cast a giant shadow over the short-term future of Indonesia.

Substantial improvement had taken place in the macro-economy, external debt had been successfully rescheduled through the Paris and London Club deals and the massive sovereign debt had been reduced both as a percentage of gross domestic product (GDP) and in total amounts. Inflation had been threatening danger but the rupiah and the Jakarta stock market had strengthened.

Then the bombers struck in Bali, the tourist resort island that was said to have been many people's only knowledge of Indonesia.

The carnage in Kuta has forced a brand-new set of priorities on the administration of President Megawati Sukarnoputri, and the fight against terrorism will perforce take precedence over the priority of providing jobs for Indonesians.

The problems are multi-dimensional: the sheer scale of the jobless figures, the friction between workers and employers, the very limited availability of government funds, the stalled privatization program and doubts about the will and commitment of the government all make the burden a heavy one.

Jobs are desperately needed. Though last month's Central Bureau of Statistics (BPS) survey estimated the number of jobless Indonesians at only 8.4 million, former manpower minister Bomer Pasaribu says the figures are totally out of touch.

Pasaribu said the number of unemployed was between 40 million and 45 million because the "disguised unemployed" or those working less than 35 hours per week were not included in the BPS survey results. This squares with the Indonesian Chamber of Commerce (KADIN) estimate that 50 million adults nationwide, half of the current labor force, are out of work or not fully employed.

In an era of drastic change in Indonesia's labor situation, as fledgling labor unions experiment with new freedoms and the government struggles to draft new legislation that protects the rights of both workers and businesses alike, continuing controversy over the government's failure to deal with labor legislation to the satisfaction of all parties has played a part in the negative investment sentiment.

There are 62 labor unions registered at the national level but they have been unable to succeed in satisfying the demands or needs of their members. The labor laws currently in force leave workers out on a limb, as there is no time frame specified for settlement of an industrial dispute, and neither are any penalties proscribed for employers who ignore a tribunal's verdict in favor of the workers.

Indonesia's most famous labor activist, Muchtar Pakpahan, head of the SBSI (Indonesian Prosperity Trade Union), says the two new embryo labor bills in parliament have been modified so much by the House of Representatives (DPR) that "they don't please either workers or investors, but they please politicians".

The absence of clear guidelines for relations between employers and workers, added to increasingly strident labor demands, is a recipe for disaster and certain to spook further would-be investors lurking outside a country that is seen as doing precious little to promote its advantages or put its house in order.

Wages are also a highly contentious issue. Before regional autonomy was implemented last year there had been standardized regional minimum wages, or UMR (Upah Minimum Regional), which were determined unilaterally by the Ministry of Manpower in Jakarta. Central government no longer plays a part. Local bureaucracies determine regional minimum wages through tripartite wage committees and the deals need to be approved only by the provincial governors.

The problem with this is that many employers do not pay the agreed rates, either because they are genuinely unable to increase the cost of the labor component of their business, because they know the workers rights are so weak or because of the ease with which they can hire thugs to bully and intimidate workers into submission.

The labor unrest, foreign-investor disputes with local shareholders because of the almost complete absence of legal certainty, the Manulife fiasco and now the widespread security fears were all crucial factors in causing a dearth of foreign investors.

The government has also been unable to kickstart its struggling privatization program, once seen as the salvation of the economy. Reform has scarcely touched the state-owned enterprises (SOEs) and with such a high fiscal deficit, the government's options remain limited. Privatization has turned into a string of postponements, cancellations, inactivity and neglect. Increasing investor skepticism was hardly surprising.

The poor performance and misuse of resources in many of these state companies is a public secret. While some progress has been made since 1998 in reducing blatant corruption, the ongoing climate of legal impunity in Indonesia, coupled with the difficulties of introducing best practices into SOEs, means that the core problem of corruption remains a major impediment to an improvement in performance.

The socio-economic plight of the workers and the poor of Indonesia needs to become a matter of daily priority and concern for the politicians. This is all the more crucial given that increased poverty and despair may spawn a breeding ground for the rabid fundamentalism that, until now, has originated only from a few small pockets across the country.

But can the politicians rise to the occasion? In the mad dash to generate budget revenues and argue over new regulations, few in the corridors of power in Jakarta have been asking themselves: How will our decisions affect the investment and business climate?

The Indonesian Bank Restructuring Agency (IBRA) this week complained that legislators were responsible for delays in the planned selloffs of three banks. For example, IBRA wants to sell 71 percent of the government's 99.36 percent stake in Bank Danamon, as part of the reform agreed with the International Monetary Fund (IMF) in the last Letter of Intent. Bank Danamon should have come under the hammer by the end of July but the sale of the "crown jewel", Bank Central Asia (BCA), took almost two years to conclude.

IBRA chairman Syafruddin Temengung said progress was so slow that he had asked State Minister for State Enterprises Laksamana Sukardi to send a letter to seek the support of the legislature. Although state-asset sales do not require the DPR's approval, the government is clearly wary of bypassing legislators who are likely to create a political furor if they have not been asked to agree the specifics of each and every selloff of national assets.

IBRA was accused last month of offering bribes to some legislators to smooth the path. A couple of legislators blew the whistle but IBRA denied the charges.

The 2003 state budget in any case left little room to maneuver and was mainly geared at servicing the country's massive sovereign debt levels rather than drive the economy and stimulate growth. The most recent (August) amendment to the draft budget proposed a Rp54.5 trillion (US$5.9 billion) expenditure, equivalent to some 2.8 percent of GDP, on development.

A substantial increase in development spending, most of it on infrastructure, will be needed to stem the rising jobless figures. The government has announced that it will do just that, saying on Tuesday it would raise development spending for 2003, but has given no figures or details of what will be involved.

Any increase in development spending and the consequent hike in the budget deficit need to be accompanied by new and creative ways of stimulating the badly needed growth that will follow on from meaningful increases in job opportunities. Growth will follow on from any increased domestic consumption by those who are currently out of the loop, ie, the jobless.

The deficit in the August version of the draft budget was about Rp26 trillion or 1.3 percent of GDP, but injecting sufficient cash for development will widen the gap substantially.

During most of the New Order era, agriculture was the backbone of healthy employment figures, which rarely rose above 3 percent, but now this sector is reeling from the poor state of the economy and is no longer be able to absorb those thrown out of work in the factories and thus mask the specter of massive unemployment. Yet creating the jobs needed for the estimated 2 million workers entering employment each year needs an annual growth rate of at least 6 percent.

This level of growth can only be attained through investment. Most local companies are not able or willing to make substantial investments, and domestic banks are currently unable to carry out their role of financial intermediaries thus eliminating a major source of capital for domestic business.

Sustainable economic growth can only be achieved through investment. The past two years saw Indonesia reach 3-4 percent growth on the back of strong domestic consumption amid the drop in foreign and domestic investment and falling exports.

For the foreseeable future Indonesia will only be able to count on foreign investors, though it is fairly safe to assume that creditor countries will be ready, post-Kuta, to provide more loans to help cover the larger-than-expected budget deficit. The country will be dependent on such external resources, either investments or loans, for a long time to come.

Allocating the funds needed for infrastructure development in Bali alone will widen the budget deficit. The plunge in hotel occupancy rates in Bali, now down to single digits, in effect means the island is on the brink of collapse, and needs emergency aid to rebuild the infrastructure. Confidence is another matter altogether. Not only did the bombers knock Bali off the radar screens of would-be tourists, but they reached out to the international business community, bolstering the already negative perception of Indonesia.

Conservative estimates suggest that Indonesia will need more than $130 billion in investment over the next decade to provide an infrastructure that can support the growth of 6-7 percent per annum necessary to absorb these new entrants into the labor force and prevent the country from lagging farther behind its competitors, such as China and Vietnam, as a competitive industrial platform.

Short of a revolution in state practices, a more equitable distribution of Indonesia's undoubted wealth, and a true reformation of society, the stage is being set for a crisis in government.