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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

The Way Out

Indonesia can save itself with economic and political change.

A crucial part of the arrangement is that Suharto oversee a peaceful succession -- while he still can. After a decent interval, he should turn full authority over to his vice president


ALL EYES ARE ON Indonesia. Just as signs of stability were starting to re-emerge in South Korea and Thailand, Asia's other most-troubled nations, the rupiah went again into free fall, sparking new worries regionwide. Options now being contemplated may well determine whether the world's fourth most populous country goes over the cliff, dragging neighboring economies after it. Alternatively, the decisions reached may help put Indonesia on the road to rehabilitation. At the moment, pessimistic prospects have the upper hand. Indonesia's currency seems to defy all prescriptions and its banking system is near paralysis. Above all, aging President Suharto clings tenaciously to power, ignoring a rising chorus of calls for new and more vigorous leadership.

Yet Indonesia is not beyond redemption. The huge nation has many assets, including a relatively young population, abundant natural resources and a high savings rate. It has a government which, for all its shortcomings, has run tight budgets. It was not for nothing that international lending agencies so recently praised Indonesia, together with other Asian emerging economies, in glowing terms, or that so many experts were blindsided by the suddenness of the region's downturn. If corrective actions are taken soon, things can be put right again.

The immediate priority is to get a hold on the sagging rupiah. Nothing can happen until exchange-rate stability is restored, no matter what the level might be. Persistent volatility is a time bomb. Banks cannot lend money to Indonesian companies when even companies themselves cannot predict their costs or their prices. Over the past month, the rupiah has fluctuated by as much as 30% in a single trading day. Not even the latest -- and widely praised -- reform package agreed with the International Monetary Fund can begin to do its work until the currency is brought into equilibrium.

The rupiah crisis is tied directly to short-term private sector debt. Indonesia owes about $80 billion to some 100 foreign lenders. Most of the debt, denominated in dollars, is believed to have an extraordinarily short maturity of about a year-and-a half. That means roughly $65 billion of it must be repaid in 1998. As financial analyst C.J. de Koning has argued, such a time frame is "unrealistically short," even under normal business conditions. No one should expect any enterprise to be able to service three-quarters of its entire debt in one year, especially if repayments are to be made in expensive dollars.

Indonesia has been caught in a vicious downward spiral that cannot readily be halted by the usual confidence-building measures, such as signing a big loan agreement or reform scheme. The reason: every time the rupiah shows some signs of recovery, it sets off a frantic scramble among corporations and businessmen seeking to buy dollars to meet the pressing demands of their creditors. That, of course, has only sent the rupiah plunging to fresh depths, making debt repayment even more onerous. The dilemma is likely to persist no matter how much of the country's reserves or IMF loans Jakarta spends trying to prop up the rupiah.

Clearly, the most urgent need, now partially addressed, is to restructure short-term debt so that the annual bill is reduced to more manageable levels and to persuade creditors to roll over or otherwise stretch out payments. Such an approach was essentially what stopped the meltdown of the won a month ago and helped put South Korea back on a more even keel. As in Korea's case, the governments of the big economic powers -- the United States, Japan and Europe -- and the IMF should work with creditor banks and Jakarta authorities in this effort.

Even so, Indonesia's case is more complicated than Korea's because Indonesian short-term debt is owed by far more entities. That makes both tracking and restructuring it more difficult. If such factors prove an insurmountable obstacle to some debt extensions, other arrangements must be tried. A good first step was the move to set up an Indonesian Bank Restructuring Agency to restore bank health and a short pause in foreign currency debt service. The latter is at least better than the alternative, a total and declared debt moratorium, which might completely destroy confidence among foreign investors.

As crucial as any economic initiative is the need for Indonesia to revitalize its political leadership. None of the reforms that Jakarta has agreed to carry out in return for IMF loans will transpire unless the government is firmly behind them and, equally important, is seen to be so. The situation has reached a point where credibility can be restored only by dramatic change and a clear indication of a new course for the country. And that means President Suharto must acknowledge that his 32-year rule is drawing to a close.

It is clear that advancing age and evidence of ill health are major liabilities for any leader in such a time of crisis. With Suharto, though, the bigger problem is his large family and its extensive network of business interests. Any real reform of Indonesia's economy, such as ending cronyism and opening up franchises, will strike directly at those interests. And that, as the markets' thumbs-down response to the Jan. 15 IMF package suggests, is why many investors and Indonesians do not entirely expect Suharto to see the initiatives through, no matter how many agreements he signs. If Indonesia's financial crisis were a court case and Suharto the presiding judge, he would have to excuse himself from the proceedings because the conflict of interest is so obvious.

The nation's well-being aside, there are good reasons for Suharto to work out a smooth transition -- while he still can. One is to avoid the fate of Ferdinand Marcos, the late Philippine strongman, who was forced to flee his country, his family's assets sequestered. Another: to pre-empt the prospect of violent revolution or even civil war. Considerable goodwill still attaches to Suharto, whom many Indonesians consider the "father of development." They would rather see him in honorable retirement than forced ignominiously into exile. The other members of the Suharto clan would have to give up their special advantages, but might retain significant wealth and influence.

Fortunately, a constitutional mechanism is at hand for choosing a successor. The People's Consultative Assembly will meet in March to elect a president for a five-year term. Suharto has already announced that he wants an extension to his presidency, so the vote by the 1,000-member electoral college will be a formality. His re-election will reassure those who have a stake in his rule that their patron will not disappear overnight, a prospect that might prod them into desperate, disruptive action. But the president must name a person of substance as vice president. He should then use his considerable political skills to mobilize the establishment, particularly the armed forces, behind his choice.

Next, Suharto must make sure that his deputy is the one who deals with the IMF and oversees the implementation of reform. Nothing would more surely signal that real power is shifting to the No. 2. If Suharto has indeed decided that Research and Technology Minister B. J. Habibie is the only v.p. he can work with, then the rest of the political élite should, for the country's sake, put aside their reservations and rivalries and give him a chance to prove himself. And the v.p.-designate must promise to carry out all the promised economic reforms. The leader-in-waiting should also set in motion changes in the political system that would open it up to more voices.

A crucial part of the arrangement is that Suharto ease himself out of power. After a decent interval, he should turn full authority over to his vice president and withdraw from state affairs. There are precedents, not least in South Korea. There, as part of a pre-election agreement, Kim Dae Jung agreed to turn real power over to his presumed prime minister, Kim Jong Pil, and settle back as a figurehead for the last two years of his presidency. Such changes, on the economic and political fronts, would give Indonesia an even chance at a recovery that is not only relatively swift but also lasting. Failure to enact them, however, could lead to scenarios that are too awful to imagine.


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