Published: Jul 22, 2007


Sugeng Bahagijo

Despite its authoritarian and repressive politics, in the years before the economic crisis of 1997 many people praised the Suharto government’s economic performance. Some even called it the ‘Asian miracle’. Three decades of high economic growth allowed for huge public investment in agriculture, health and education. The result was a massive reduction in poverty, a dramatic improvement in the key indicators of human development, and greatly expanded infrastructure, including irrigated rice fields, schools and health centres. The 1997 Asian economic crisis ended this apparent miracle. When the depth of the crisis became apparent, Suharto and his ministers asked the International Monetary Fund (IMF) for help.

The IMF was established more than 50 years ago to assist developing countries, especially in times of economic difficulty. Member countries in crisis can ask the IMF for emergency assistance, and the IMF works with them to solve their economic difficulties. But how do they do this, and whose interests is their economic advice designed to serve? What alternatives are there to the IMF program?

IMF-inspired policies

The IMF took charge of economic policy in Indonesia early in 1998, but was unable to stem the worsening crisis. As a result, poverty in urban and rural areas rapidly rose due to thousands of factory closures and sharp increases in the price of basic necessities. This was exacerbated by a long ‘El Nino’ dry season that hit farmers hard. Then, amid massive street protests, Suharto resigned. His replacement, B J Habibie, felt he had little choice but to allow the IMF to become Indonesia’s ‘de facto’ economic minister.

By 2002, however, the Indonesian government was forced to terminate its IMF-inspired economic austerity program. Opposition from both legislators and the public regarding the impact of the IMF economic measures proved too much. The IMF had demanded changes in economic policies in order to secure the confidence of ‘the international market’. This involved trade liberalisation policies (zero percent tariff for international goods), the privatisation of state-owned industries and deregulation of most economic activity. These policies were welcomed by international financiers, but they exacerbated the plight of the poor, who were already suffering from the crisis that had precipitated the IMF’s intervention.

In place of the unpopular IMF program the government created a ‘home-grown’ economic strategy prepared by its own ministries of finance and economics. In reality, however, not much changed. The new policies were simply a continuation of the IMF strictures from 1997 to 2002. The IMF ideology still held sway among economic policy makers.

It is true that since the IMF’s intervention some major economic indicators have improved. Economic growth is now more than 6 per cent – double that of Australia. Government debt is declining, the inflation rate is under control and domestic and foreign investment has returned. Yet despite the rosy picture painted by economists, at least 110 million Indonesians – equivalent to the total population of Malaysia, Vietnam and Cambodia – still live on less than two dollars a day. Thousands of children and their families remain undernourished, especially in Eastern Indonesia.

The crisis for the poor is still so severe that last year the National Planning Agency (Bappenas) and the United Nations Development Program (UNDP), called for a doubling of government spending on social services like food production, education, health and better physical security. But will the current IMF-inspired, economic policies allow such spending on poverty alleviation?

Impact on the poor

The IMF aid in 1998 involved a pledge of more that $ 40 billion in emergency loans to serve as guarantees for international imports and exports. In practice the country could not use most of this money because it was merely deposited at the Bank of Indonesia to serve as a guarantee for international financial and trading transactions. The government only ever had access to $ 9 billion. But these loans still provided the IMF with effective control over economic policy. Four times between 1998 and 2002, the IMF, dissatisfied with the slow implementation of its policies by the government, postponed the transfer of these loan funds. It eventually got its way.

In return for IMF assistance, Indonesia was required to implement dozens of new policies – on inflation and interest rates, banking reform and privatisation, and the removal of tariffs on imports. Social subsidies for farmers and the poor, such as those on gasoline, were reduced or abandoned. The result was impressive, at least in the eyes of the IMF. The prices of basic necessities (sembako) such as rice, eggs, cooking oil, and gasoline, quickly rose and became ‘competitive’ by international standards. However, the minimum wage remained stagnant, and so the living standards of the average Indonesian declined greatly. The IMF also successfully demanded the closure of 16 insolvent banks, which further exacerbated the crisis for small business and ordinary people.

The privatisation program demanded by the IMF resulted in ten major state-owned companies, covering banking and finance, telecommunications, housing, public works and infrastructure, being privatised by 2004. This then led to plans by local government to privatise public hospital services: in Jakarta, 16 public hospitals are currently awaiting privatisation. The national-level privatisation program is now being taken up by local government all over the country, as district level governments acquire more authority under a new decentralisation program. These plans will allow local governments to improve their financial base, but at the cost of making access to medical treatment much more difficult for the poor.

The burden of debt

The IMF policies have put unsustainable pressure on the government budget, forcing it to allocate enormous sums of money for debt repayments, at the expense of funding social services. For the 2002 fiscal year, debt repayments totalled US$ 13 billion (Rp 130 trillion), or more than three times the total public sector wage bill, including the military, and eight times the education budget. The IMF has also consistently refused to consider any radical moves to relieve the government of its massive debt burden through debt cancellation. These policies will, if continued, make the proposal of Bappenas and the UNDP to double the spending on social needs impossible to ever implement. Perhaps if the economy expanded greatly it could sustain both debt repayments and adequate social services. But some economists say the debt burden is a true Catch-22 situation. The absence of relief from crippling debt repayments politically and ideologically reinforces the present economic policies; conversely, the failure to develop alternative policies prevents a full economic recovery which might make it possible to repay the debt and maintain social spending.

Another effect of the IMF policies has been a decline in public investment. This is important because public investment, and the economic expansion which results from this, is essential if poverty is to be reduced. But public investment by the government in 2000, during the IMF program, was only a little more than half that of 1990, when the economy appeared to be booming under Suharto. Private investment declined in a similar fashion over the same period.

Alternatives

Given the huge numbers of poor Indonesians and the resultant simmering discontent, economic policy has a significant impact on broader issues such as the development of democracy and political stability. Many argue that what Indonesia needs is an economic policy based on a strategy of ‘equity-based’ growth that is rapid enough to significantly improve the absolute condition of the poor and equitable enough to improve their relative position. This would require more expansionary economic policies to jump start the economy and reduce unemployment. Such policies could involve expanding public investment in areas which directly benefit the poor and reducing the emphasis on restricting inflation. It may also involve mobilising domestic resources for investment, focusing on agricultural and rural development for the poor, and on financial reforms which directly assist the poor.

To do all this, Indonesia would need to reverse the IMF goal of restricting inflation and be prepared to have budget deficits of more than 3 per cent of GDP. This would enable the government to invest more to support the industrial, manufacturing,and agricultural sectors. Indonesia must also take measures to deal with the unsustainable level of foreign and domestic public debt, to allow the budget to be allocated for domestic investments. Large investments are needed in both labour-intensive infrastructure and to protect essential social services such as education and health, which are operating at minimal levels.

For many economists, the application of alternative economic policies, specifically designed to provide jobs and welfare for the massive number of people plunged into poverty after the economic crisis of 1997, will not only directly benefit the poor, but will make Indonesia’s economic recovery more sustainable.

Sugeng Bahagijo (sbahagijo@theprakarsa.org) is the associate director of Prakarsa, which conducts research on globalisation and civil society.

Inside Indonesia 84: Oct-Dec 2005