Indonesia's Dangerous Vacuum In Economic Leadership

Indonesian President Abdurrahman Wahid has saved the world's fourth-largest nation from violent collapse. Since taking office last October, this master of Javanese politics has used his reputation as a tolerant Islamic cleric to pacify riots, wrest power from a military establishment that ran the country under deposed President Suharto, and defuse a coup threat by former armed forces commander General Wiranto. He has duped opponents by offering them top jobs, sacking them when they least expected it, and replacing them with trusted allies. And he has managed it all despite his diabetes, blindness, and inability to walk unassisted.

But Wahid has failed to apply his political acumen to economic policy--an area where Indonesia certainly needs major change. Sources close to the President say he regularly falls asleep in meetings with Cabinet ministers and foreign officials when trade, investment, or economic planning are discussed. Unable to read documents and suspicious of the technocrats whom he appointed to the Cabinet in compromises with erstwhile rival Vice-President Megawati Sukarnoputri, Wahid acts on rumors and accusations about Megawati's party whispered by allies in private meetings. The result is that Indonesia has no economic policy other than a pledge to follow vague guidelines and meet growth targets set by the International Monetary Fund.

INEPTITUDE. This economic ineptitude could cause grave harm and create an opening for Wahid's political rivals. Some analysts believe Indonesia is set on a path similar to that of the Philippines in the mid-to-late 1980s. There, five years of aimless leadership by disparate anti-Marcos forces under President Corazon Aquino followed the fall of dictator Ferdinand Marcos in 1986. That period of disarray left the Philippines in the lower ranks of Asian economies, where it still wallows. Now, in Indonesia, Wahid continues to put off key reforms such as pay increases for civil servants, the removal of fuel subsidies, and management changes at state-run enterprises. "The policy drift is delaying the economic recovery that everyone is waiting for," says Bruce Gale, regional manager of Political & Economic Risk Consultancy Ltd. in Singapore.

Indonesia can hardly afford prolonged stagnation. While the economy is expected to grow 5% this year--above the IMF's target of 4%--that's still not much after a 13% contraction in 1998 and no growth in 1999. The restructuring of nearly $80 billion in private debt remains on the back burner. Some investors are already threatening to pull out if Wahid doesn't pursue more business-friendly reforms. In early May, British American Tobacco said it would shut down one of its Indonesian plants: The government has introduced taxes that BAT claims will price its cigarettes out of the market.

What's the way out of the economic morass for Wahid? His advisers are trying to recruit technocrats whom the President trusts. But the problem is identifying suitable candidates, they say. Wahid has fired four ministers since January and is planning to sack the central bank governor. Investors are impressed with just one replacement: Cacuk Sudarijanto, Wahid's friend and former director of operations at IBM Indonesia. Now, as chairman of the Indonesian Bank Restructuring Agency, Cacuk has made his mark by selling the Astra International conglomerate, seized from Suharto cronies, to a consortium of investors.

Such examples, however, are the exception. That's why most analysts believe Indonesia is sure to fall further behind its more prosperous neighbors. For the island nation, the Asia crisis may be giving way to something more local, but just as ruinous.

Before it's here, it's on the Bloomberg Terminal.