ASIA'S ECONOMIC FLU
January 9, 1998
Indonesia, once at the forefront of Asia's economic miracle, now faces economic catastrophe. Following a background report, Margaret Warner and guests discuss Indonesia's latest crisis and its global significance.
MARGARET WARNER: Late last night when President Clinton telephoned President Suharto, he told the Indonesian president he must do more to carry out the promised reform. Also yesterday, the IMF said managing director Michele Camdessus will go to Jakarta in the coming days. Today Indonesia's stock market fell an additional 1 percent. But its currency bounced back slightly in trading against the dollar. For more on all this we're joined by Robert Barry, former U.S. ambassador to Indonesia from 1992 to 1995, and Nariman Behravesh, chief international economist for Standard & Poor's DRI, an economic consulting firm. We invited the Indonesian embassy to send a representative but officials there declined. And welcome, both of you. Mr. Behravesh, first, before we get into what happened this week, give us a brief primer on Indonesia economically. How real is this economic miracle, and, if so, why did it collapse?
A RealAudio version of this segment is available.
January 9, 1998:
A background report on Indonesia's economic crisis.
December 29, 1997:
The Boston Globe's Asia bureau chief discusses the region's economic crises.
December 26, 1997:
South Korea is promised an emergency $10 billion loan by early January.
An Online Forum on the economic situation in Asia.
November 26, 1997:
What did the APEC summit accomplish?
November 25, 1997:
Asia's leaders search for answers at the APEC meeting in Vancouver.
November 24, 1997:
The APEC conference shows a grim economic forecast for Asia.
October 28, 1997:
The instability of Asian stocks causes worldwide fluctuations.
Browse the NewsHour's coverage of Asia.
The CIA Worldbook entry for Indonesia.
International Monetary Fund
The economic miracle explained.
NARIMAN BEHRAVESH, International Economist: Well, the economic miracle in Indonesia was very real. They grew very rapidly, 7, 8 percent a year some years but is unsustainable because a lot of it went into investments and exports from a few industries like autos, like petrochemicals, and so forth. And what happened was there was a lot of excess capacity that was built in Indonesia and other parts of Asia, and eventually, that excess capacity became too big of a burden. Part of the problem, as well, was that this excess capacity was debt financed, and Indonesia now has a very large foreign debt, about $130 billion.
MARGARET WARNER: And is that owed by private companies, or by the government?
NARIMAN BEHRAVESH: Roughly half of it is owned by private companies; the other is government debt.
MARGARET WARNER: Your take on the Indonesia economic miracle and why it went bust.
ROBERT BARRY, Former U.S. Ambassador, Indonesia: Well, I'm not so sure that in the long run Indonesian economic growth is not sustainable. I think the fundamentals there are still sound. The trade performance remains good. Of course, this is a natural result of the currency depreciating so much.
MARGARET WARNER: You mean, because their goods are actually cheaper overseas?
ROBERT BARRY: Yes. I think that partly this is a crisis of confidence and partly this is a result of another triple whammy that's hit the Indonesians. It's not just the currency crisis or the capacity of the industry. There's a big problem with the agricultural sector because of the drought and the forest fires. And there's concern because it's the end of President Suharto's fifth term, and the elections to the presidency are going to be coming up in early March about continuity and stability of leadership.
MARGARET WARNER: Mr. Behravesh, why do you think that after the IMF package was announced, some $40 billion, Indonesia has continued to slide, and we're seeing the kind of things we saw this week?
Nariman Behravesh:"The markets, I think, are being very clear. They don't see any real reform coming out of Indonesia."
NARIMAN BEHRAVESH: The markets, I think, are being very clear. They don't see any real reform coming out of Indonesia. The budget that was submitted earlier this week was really very unrealistic. In fact, it has expenditures going up 30 percent when, in fact, the IMF was looking to see cuts in subsidies, say food and fuel; they were looking for increases in taxes. None of this has really happened. Moreover, the Indonesians have promised to close down 16 banks. Much of this hasn't happened. Of course, one bank that was closed belongs to the President's son. It reopened less than a month later under a different name. So, essentially, what's going on is a lot of game playing. The Indonesians are dragging the feet and not doing what the IMF has asked them to do.
MARGARET WARNER: Which is exactly what?
NARIMAN BEHRAVESH: Which is exactly to tighten fiscal policy, tighten monetary policy, to reform their banking system, to postpone large infrastructure, high-visibility infrastructure projects. They just haven't done this. And I think one of the reasons the markets are spooked is that they see this. It's very clear that the countries that have implemented the IMF programs, like Korea now, like Thailand, aren't seeing this massive crisis of confidence.
MARGARET WARNER: You know this regime and this president. Why do you think they aren't living up the IMF reforms?
ROBERT BARRY: Well, in part, they're caught between a rock and a hard place. The IMF is putting out a very serious deflationary program that will put people out on the streets. This is a volatile country. I think that the Indonesian government is afraid of the social consequences of the IMF package. In fact, even the World Bank has suggested that perhaps the IMF criteria are too strict. But it's certainly true that by announcing they're going to carry out a program and then not carrying it out--and part of this is due to self-dealing by the close business associates of the president, including his family--that causes a severe lack of confidence. Now, after the announcement of the president's call and the team going there soon, there was a sharp upturn in the currency; it did recover almost 20 percent in the short run.
MARGARET WARNER: Today.
ROBERT BARRY: Today.
MARGARET WARNER: Explain a little more, when you say it's a very volatile country.
A volatile country?
ROBERT BARRY: Well, your clip showed the year of living dangerously in 1965; the tensions there, ethnic tensions between the Chinese, who control most of the wealth, and the Muslim population.
MARGARET WARNER: Even though the Chinese, I gather, are a very small part of the population--
ROBERT BARRY: They're about 4 or 5 percent of the population, but they control about 60 percent of the wealth. A lot of the close business associates of the president are ethnic Chinese. In 1965, the revenge went out against the Chinese due to built-up social tensions. But it's also a question of a country with a rapidly growing population. They have 2 million people a year entering the work force. And it's a country where urbanization has taken place very rapidly, so you've got masses of people in the city, and you've seen riots, of course, earlier this last year--well, last year during the election process--so, that, I think, makes everybody concerned that if you push too hard on this, something's going to give.
MARGARET WARNER: What's your sense, Mr. Behravesh, of why the government has resisted taking the steps necessary?
NARIMAN BEHRAVESH: Well, I think some of what the ambassador is saying is true; that there are some real fears of social tensions. But some of it is that the vested interests who liked the system the way it was really don't want to change because some of the banks, for example, as I mentioned earlier, that were supposed to be closed belong to the Suharto family. Some of the nice arrangements that are there that are part of a budget are being pushed by the military, for example. And so I think there are a lot of vested interests that like things the way they are; they don't believe they have to change. And I think that's really what's upsetting a lot of people.
MARGARET WARNER: And what about, though, the other point the ambassador made that perhaps the IMF prescription is either too tough, or the wrong one? I noticed that Henry Kissinger said today he thought we could see a real wave in anti-American--a backlash in Asia because of these IMF strictures.
NARIMAN BEHRAVESH: Well, I guess I'd disagree with the point of view that says that the IMF is being too strict. These countries went hat and hand to the IMF. The IMF has imposed some legitimate policy changes. Credit, for example, is growing too fast in countries like Indonesia; they're borrowing like crazy. That's got to stop. They're adding capacity like crazy; that's got to stop. They're building infrastructure, or these very high visibility kinds of projects; that's got to stop. So I think a lot of what the IMF is asking for is reasonable. So I guess I take cause, or I have objections against people who would say that the IMF is being too strict.
MARGARET WARNER: Why does the U.S. have an interest here, Mr. Ambassador? Why, for instance, do you think the President was on the phone to President Suharto last night? He's also sending Larry Summers, the No. 2 man at the Treasury, over there.
Robert Barry: "It's an important country to us geopolitically, strategically because it commands so much space in that part of the world. It's an important country for us economically".
ROBERT BARRY: It's a very important country for a number of reasons. It's an important country to us geopolitically, strategically because it commands so much space in that part of the world. It's an important country for us economically. We are the second largest investor in Indonesia, after Japan. But it's also important to us for other reasons. It's, as you say, the fourth largest country in the world. We don't have an interest in seeing the kind of human rights catastrophe that would happen if the lid blew off in Indonesia. And we have a traditional strong relationship with the Indonesian government. They have a very sound economic team in place, I think, and they--the team's advice does not always end up being taken, but I think they have the capability and they have the right ideas. Everybody was praising them back in October when they first announced the steps they were going to take. The trouble was they didn't follow through on them.
MARGARET WARNER: And so what is your interpretation of the back and forth we've seen this week, with the President saying what he said, President Suharto, that the budget is lacking what everyone was looking for? I mean, what do you think is going to happen next? Do you think President Suharto is now going to say, okay--
ROBERT BARRY: Well, I suspect that we are carrying--and we and the other major trading partners in Indonesia are going to carry a dual message. One message is you have to do better on living up to the demands of the IMF. The other is that we want to support you; we are not here to wag our finger in your face, we are here to provide the kinds of support that you may need in order to get through what is a very difficult period. So--and I would also think things have changed since the original IMF program was put into place. The economic situation has gotten worse; the exchange rates have gotten worse. So there's probably room for readjustment of the program, as has been the case in the other Asian countries as well.
MARGARET WARNER: And what's your prognosis, Mr. Behravesh, and the potential impact on the rest of Asia, as well?
NARIMAN BEHRAVESH: Well, I think there are certainly good models even in Asia right now of what works, and that is finally after playing chicken with the IMF, the South Koreans bit the bullet and they have a meaningful reform program in place, and lo and behold, the South Korean situation has stabilized. I think if Indonesia can do the same thing, great. The same thing has happened in Thailand. Thailand has a meaningful program in place it's implementing it.
MARGARET WARNER: And if it doesn't--
NARIMAN BEHRAVESH: Well, if it doesn't, then I think the big risk that everybody's worried about--and that's really what's spooking the market--is the possibility that Indonesia will declare a moratorium on repaying its foreign debt. And that would be a terrible, terrible thing to happen. And that's what right now, I think, everybody's worried about.
MARGARET WARNER: All right. Well, Mr. Behravesh and Ambassador, thank you both very much.