General

 

Indonesia is a unique country. The last 5 years of reformation efforts give mixed signals on what will be the direction of this large country. If one stands at the nice spot at the Grand Hyatt hotel and looks at the newly renovated welcoming statue circle, he would be amazed by lines of US$ 200,000 (each) cars trapped in the famous Jakarta busy traffic. If one drops by on week ends at Plaza Senayan, a shopping mall selling expensive branded goods, there would be thousands of Jakarta’s big spenders gathered there. So where does the economic crisis show?

 

For the first time after several years of weakening Rupiah, the currency has been able to show its stronger muscle against the greenback. It has been strengthened 8% this hald-year period, and still, analysts predict the strengthening of Rupiah has not reached its final destination. Also, for the same period the stock exchange index has improved from 506,071 to 506,781, the inflation is manageable at the single digit rate, the interest rate of the Bank Indonesia certificates has lowered to also reach a single digit figure, and the general macro economic conditions show improving figure of 3.5-4% growth this year, and is expected to improve slowly over the next years, particularly after the 2004 general election, provided the political conditions remains manageable. It is also fortunate that the oil price, after the Iraq war, is still at a high level, beyond the assumption used for the state budget.

 

All this occurred in the middle of a painful civil war against the separatist movement in Aceh, the purchase of US$ 215,819 million Sukhoi jet fighters and MI-35 combat helicopters from Russia which has not only raised concern from used-to-be friendly Washington, but also moved some fractions in the Indonesian parliament to establish an investigation team to review irregularities in the proposed purchase through a counter trade deal. To many analysts, this is seen merely as a political move to destroy the pathway of President Megawati to her second presidential candidacy in the coming 2004 general election. It also happened during a public debate on whether or not Indonesia shall terminate its program with the IMF which will eventually affect the Paris Club and London Club negotiations on the state and private debts rescheduling. To much surprise, the improvement of macro economic indicators is still underway regardless of the fact that corruption is still Indonesia’s major obstacle, and there is no commitment from the Government; neither is there real and strong internal move from the institutions within the judiciary systems to boldly and seriously commit executing legal reforms.

 

Economy, Business and Law Reform

 

The Indonesian government has been pushed by nationalist economists, opposition political leaders and some factions in the parliament to terminate the programs with the IMF in the year 2004 if not earlier. Discourses are underway to choose an elegant and safe exit. It is likely that Indonesia will retain some forms of cooperation with the IMF, at least the monitoring of the use of the funds, and implementations of some programs which basically not only concerns the IMF and international community, but also Indonesian pro-reform activists. The termination may affect the Indonesian position in the Paris Club and London Club negotiations, and further may also affect the Indonesian budget, balance of payment and foreign exchange reserve. The proposed termination has pushed the Megawati administration to obtain alternate funding from other sources. Her visit to Japan recently and approach to donor organizations such as the Asian Development Bank were bold signals, while nobody knows whether the terms of the loans would be more or less beneficial compared to what IMF has been offering so far. Beside strong support to terminate the IMF programs, the Indonesian government has been under pressure to explain to the Indonesian people what would be the impact of the termination to economic activities, social and welfare programs, reform programs, and basic economic conditions of the people, especially to those economically less-fortunate.

 

The Indonesian government sets priorities of economic reform by way of selecting, among others, the following pillars of reform in order to have a balanced budget, move economic activities, get the best deals to recover the State’s assets, and build and empower institutions required by a typical government applying good governance principles: (i) bank restructuring and settlement of the liquidity supports to the collapsed banks with the banks’ owners, and selling of assets recovered by IBRA (Indonesian Bank Restructuring Agency) at reasonable commercial price, (ii) privatization by way of improving, and selling equity participation in profitable, state-owned companies, (iii) tax reforms in order to establish a more simplified but effective  tax systems, (iv) eradication of corruption by establishing the Indonesian Anti Corruption Commission, and (v) reform the civil services and judiciary institutions.

 

IBRA, pursuant to the laws that established IBRA, will have to complete its duties by the year 2004. Despite critics that IBRA is seen not as a success story in restructuring the banking industry and recovering the State’s assets, it has been discussed widely that IBRA’s duties will be terminated by 2004, if not earlier, which will be started this year by speeding up the assets sales, negotiating the terms of the settlement with the banks’ owners to reach an acceptable recovery rate, and on the other side of the coin sending the dossiers of difficult cases to the Round Building (gedung bundar), the name of the Attorney General offices for further criminal indictment process.

 

Privatization, in the strategic plan of the Ministry of Privatization and Development of State-owned Companies, is focused in the efforts to distinguish, among others, those state-owned companies (BUMN) that contribute growth of assets, profits and sustainable businesses, and those which do not, and also those which are qualified as strategic businesses that must remain be owned and managed by the state, with or without subsidy, and those which are commercially viable to be taken over by private sector. Arguments on which businesses and companies shall be kept by the state give signals to the business that the government is not very consistent in the privatization efforts. The other critique is that the government is seen to ignore the interests of the public by changing the purpose of the privatization, i.e., from efforts to improve efficiency in the BUMN in order to better serve the public, to sell best-performing BUMNs such as those in telecommunication and banking sectors, and use the proceeds to try to balance the state budget. Semen Padang and Indosat cases are among samples of highly criticized privatizations, both from the investors and local interests perspective, although for totally different reasons.

 

After 5 years of reform efforts, the government fails to show that corruption is being eradicated in Indonesia. In the past, during the Suharto government, corruption was wide spread among the elite decision-making people, and when it related to big or monopolized projects, it mostly connects to the Suharto family. Now, it is a general notion that corruption is wide spread on every level of bureaucracy and society, including private businesses. In short, corruption is now perceived as having been "retailed".  

 

Law reform has been wrongly perceived, not only by the government and high ranking officials, but also some donor countries and agencies, in that it is merely to do with modernizing the old and non-competitive rules and regulations, or simply by changing the old laws to new laws. The problems are basically rooted in the weak and non-performing institutions, no transparency and accountability in the process of managing the judiciary systems, corruption and incapability of persons in charge in the judiciary systems. Only recently, efforts are focused in the reform of institutions such as the Police, Attorney General and the Courts. This may take decades of reform efforts as it also involves budgeting, civil service reform, and change in the working culture, attitude and environment. One of the key factors to eradicate corruption is to establish an independent anti corruption agency and anti corruption courts. The new law on anti corruption has given a mandate to the government to establish the commission. Months have lapsed, but even the proposed team to elect the members of the commission has not been approved by the President. This shows the weakness of the government in executing the reform agenda, or simply indicates political motives not to take a stand against the old, existing and future corruption in Indonesia, as many government agencies and high ranking officials will be likely netted by the new anti corruption law and the anti corruption commission. Some obvious samples of such indecisiveness include how the case of Akbar Tanjung (the speaker of the parliament, who has been sentenced guilty for corruption and the now case is being adjudicated for final decision by the Supreme Court), and the case of A. Rachman (the Attorney General who has been accused of giving false information in the transparency process required for the high ranking officials) are handled. The two are still holding their offices, and Mr. Tanjung is even thinking of running for the Presidency election in 2004 through a convention initiated and controlled by Golkar.

 

The tax reform is underway with the main feature of simplifying the multi tariffs systems to become one or two tariff systems.  Some proposals have been discussed to also applying a tax amnesty in order to bust corruption in the tax offices and at the same time making sure that the achievement of the target-oriented tax office will be satisfied. The problem is that many people who have been cheating their tax liabilities will still benefit. The other problem is that, if tax amnesty is applied without settling at the same time corruption issues from the liquidity support cases, it may become an ineffective measure.

 

The civil service reform is believed to be the central issue before Indonesia could do an effective law reform. As long as the police, prosecutors and judges are among those who receive salaries between US$ 50 to 500 a month, and their career development is not based on a merit system, corruption will always haunt the reform efforts. Budget is always the central issue, and there is no courage from the government to (for example) do unpopular downsizing of the inefficient civil force into half.

 

Politics

 

When all other parties claiming to be reformist or supporters of reform fight each other internally or become more rigid to internal democratization process, Golkar, the party in power supporting the corrupt Suharto regime, declared that it will hold a convention to elect its presidency candidate. This process invites outsiders who meet the convention rules to join the convention. One of them is Nurcholish Madjid, a prominent Islamic leader, frequently called “Guru Bangsa” (great teacher of the nation), who declared last April that he will run for the presidency. Others who will join the convention are among others Akbar Tanjung, the chairman of Golkar, Wiranto (the former military chief of staffs), Susilo Bambang Yudhoyono (the present Coordinating Minister of political and security affairs), Yusuf Kalla (the present Coordinating Minister of Public Welfare), Sultan Hamengkubuwono XI (the Sultan of Yogya), Prabowo Djojohadikusumo (the famous general who was the son-in-law of Suharto). Tanjung’s ticket to the convention was granted by the Parliament when the Law on Presidency Election was passed this July. The law says that an accused could run for the presidency. Tanjung was convicted a corruption case by the District Court of Central Jakarta and the High Court of Jakarta, and the case is now being adjudicated by the Supreme Court in the appeal proceeding. Golkar and PDIP (the Megawati’s party) joined the coalition to pass the law. PDIP returned the favor to Golkar as Golkar agreed to a provision that the candidate for the president does not have to be a college graduate. Megawati has never completed her undergraduate study.

 

Political analysts believe that Golkar tends to set up coalition again with PDIP to reach simple majority for the reelection of Megawati as president, who may offer Tanjung a vice president post. This is a negative sign for the reformists who accuse that Megawati is not committed to reform. Although Golkar is the only party offering a convention, and it seems to have started a democratization process, political analysts do not see chances for the independent contenders to be elected as the Golkar's candidate great as Tanjung is very much in control of the Golkar political machine from the leaders to grassroots. Nurcholis, the only strongest contender of Megawati and Tanjung, may have to turn to other smaller political parties, which is possible, since the requirement to run for the presidency allows political party or a group of political parties that reach at least 3% votes to nominate its or their candidate. Once nominated, it would be easier for the candidate to challenge the others with support from bigger political party (ies) since the election system will be a direct election system, so for the first run, people will elect the president and vice president directly to nominate 2 candidates. The second run will appoint the president and its vice. If they votes are tied, the authority to decide will then be assigned to the People’s Assembly. Nurcholis has a good chance. He is well perceived as an independent social democrat, and his Islamic teaching represents a more liberal and modern interpretations of Islam acceptable to majority of Indonesian, Moslem or not, and definitely world leaders from liberal and democratic countries, and of course the investors from international community.

 

The election process will start in the first quarter of 2004, and the president and its vice will be elected in the third quarter of 2004. During the process, investment analysts believe that investment and business activities will be on a wait and see mode, but the good news is that the election is expected to be more peaceful and cleaner than before.