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Philip Bowring

CABINET changes suggest that Indonesia may be veering from its commitment to market-oriented trade and industry policies, with profound implications for Asian trade pacts.

    President Suharto, at the beginning of his sixth five-year presidential term, has swept out Economic Co-ordinating Minister Radius Prawiro; Finance Minister Johannes Sumarlin and central bank governor Adrianus Mooy.

 Meanwhile, followers of Research Minister B.J Habibie, guru of economic nationalist groups, are in the Cabinet.

  Indonesia's steady economic progress during the past 25 years, despite roller-coaster oil prices, owed much to market orientation, but such economic reform has stalled in the past 18 months.

  If the country cannot maintain both its economic growth - averaging a little more than six per cent a year for the past two decades - and its market opening during Mr Suharto's last years, a reaction is possible once he has gone, perhaps to a form of economic Peronism.

   That would not just be bad for advocates of open systems: it would endanger regional co-operation and it would hurt East Asia's sense of economic community.

   In the 1970s and early 1980s, industrialisation, financed by oil money, was mostly inefficient and protected. Indonesia did not think of itself as potentially competitive and obstructed trade liberalisation through the Association of Southeast Asian Nations.

  The crisis caused by the mid-1980s oil price collapse induced liberalisation of foreign investment into export industries.

   Labour-intensive export processing boomed. Non-oil exports now account for 70 per cent of exports against 30 per cent a decade ago. But domestic-orientated industries are often no more than hugely protected assembly operations, while downstream industries - often the labour-intensive parts - suffer from high cost inputs.

  The simple answer among technocrats who have run macro-economic policy successfully for 25 years is: slash tariffs, abolish monopolies and investors will rush into potentially attractive sectors.

   But liberalisers are under attack for several reasons:    Financial liberalisation in the late 1980s ran out of control, leaving banking collapses, high interest rates and company bankruptcies.

     Fear that many foreign-owned labour-intensive industries could leave at any time.

       Nationalists claim that the industry is demeaning, has a marginal impact on employment of a workforce growing by two million a year, may be hit with quotas in the West and is adding to regional income disparities.

   Concern that Indonesia lacks basic industries. Without force feeding, some say, of basic and technology-intensive industries, the country will fall behind not only neighbouring giants China and India, but even lesser neighbours Thailand and Malaysia.

   The country is deficient in capital and skills. Yet government involvement has a record of inefficiency and political patronage.

   The existence of many import, export, domestic trading and utility monopolies or oligopolies which provide easy money to the well connected.

  Many Indonesians fear that more liberalisation would just lead to the more market-aware Chinese who run most of the conglomerates getting richer.

  Getting rid of the monopolies is politically difficult, and is often opposed on the grounds that it is the quickest way to build a capitalist class. And industrial reform is being held back by fall-out from the financial deregulation excesses.

  However, the World Bank is pressing hard for the removal of monopolies as necessary for a stable macro-economic framework.

     Global assistance is badly needed to plug a US$4 billion yearly current account deficit.

 Private sector borrowing during the financial boom has pushed up the debt service ratio to more than 35 per cent. Long-term money is needed, yet net multilateral capital flows to Indonesia are now only about $1.5 billion while debt interest is more than $3.5 billion.

  Compared with China, Indonesia can be regarded as a model of an unrigged exchange rate, fiscal responsibility, market access for foreign goods and the human rights and personal freedoms to which the West gives so much attention.

 But Indonesia's growth and reform could flag if foreign agencies withdraw funds as they become preoccupied with lending to China. Playing into the hands of anti-market Indonesian forces would hurt ASEAN and world trade.



Foreign funds needed to avert danger of flagging market reform