From Asia Times http://www.atimes.com/atimes/Southeast_Asia/IH04Ae01.html

A fight for Indonesia's economic soul
By Bill Guerin

JAKARTA - After nearly a decade of economic restructuring and financial de-leveraging, Indonesia has finally returned to a position of fiscal strength from the 1997-98 Asian financial crisis. Much of the credit for the turnaround lies with Coordinating Minister for the Economy Boediono, who has held senior economic posts in two post-1997 administrations.

An economist trained at Wharton, the business school of the University of Pennsylvania, the former finance minister and now chief economic policymaker has in recent years had a free hand in steering economic and financial reforms, under both former president Megawati Sukarnoputri and current leader Susilo Bambang Yudhoyono. In managing the national finances, he has faced down vested political interest groups in Parliament and the bureaucracy and moved to restore foreign confidence in central bank independence.

Boediono's independent and apolitical control of Indonesia's economic levers to some analysts represents a sort of throwback to former dictator Suharto's New Order regime, whereby he insulated a group of US-trained economists, popularly known then as the Berkeley Mafia, from political interference so as to steer the economy's liberalization and export-oriented growth.

Yet while Suharto's economic mandarins hovered above the cut-and-thrust of daily politics, Boediono frequently finds himself at loggerheads with the country's powerful, pro-business vice president Yusuf Kalla over economic policymaking. Kalla serves as chairman to the powerful Golkar party and has an exceptionally powerful voice inside Yudhoyono's cabinet, particularly over government spending decisions.

Now some wonder whether Boediono's position could be in jeopardy as a new consensus builds around the notion that it's time for Indonesia to re-gear economic policy from pro-stability to pro-growth.

As a former head of the National Development Planning Agency (Bappenas) and deputy governor of Bank Indonesia, Boediono inherited control of a financially battered and stagnant economy under Megawati. Foreign investors had abandoned the country as a regional basket case where politics superseded the broad economic interest. In one of several controversial decisions, in June 2002 the Commercial Court declared that Canadian insurer Manulife was bankrupt. This ruling was instrumental in showing just how much the new administration was in the grip of powerful vested interests.

Megawati, a former leading figure of the political-reform movement that followed the 1998 downfall of Suharto, had no clear strategy to stop the rot and revive the economy when she assumed the presidency in July 2001. Then the country was still reeling from the Asian financial crisis. Government budgets still showed huge deficits and were sustained by expensive external funding.

The conditions attached to the International Monetary Fund's rescue package emphasized financial belt-tightening over fiscal stimulus and bank restructuring over issuing new loans. By 2001, the IMF-imposed belt-tightening was stirring nationalist complaints that were further spooking foreign investors. It was around then that Megawati handed the economic reins to Boediono and, in a politically risky maneuver, he shunned economic nationalists and moved to regain the IMF's confidence rather than challenge the agency's neo-liberal economic orthodoxy.

Steady technocratic hand
While many analysts agree that Megawati's government deserves credit for restoring a modicum of political stability, it was Boediono who played the largest role in steering the economy back on track. Following the IMF's prescriptions, belt-tightening policies in effect curbed inflation, reduced government debt to manageable levels, and restored depleted national coffers.

Fast-forward to the present, and Yudhoyono's weak representation in the House of Representatives has nationalistically thwarted many of his government's economic reform policies, including liberalization measures. With the legislators from his own small party and the few others who consistently support him, at best he holds consistent sway over only 100 votes in the 550-seat legislature.

Faced with stiff parliamentary resistance, Yudhoyono moved to empower Boediono's sway over economic policymaking. In December 2005, Yudhoyono tapped the tested technocrat to replace Aburazil Bakrie, an influential political operator inside the Golkar party whose family has big business interests that allegedly feed on government contracts, as chief economics minister. Significantly, Boediono said at the time that he would decline the new post if Bakrie were still part of the president's economic team.

Boediono's appointment restored foreign confidence in the government's technocratic credentials and provided Yudhoyono with an important political bulwark against his more business-minded deputy Kalla. The president told a press conference just before Boediono's appointment that he wanted the revamped cabinet to be more effective and cooperate better as a team.

The implication, albeit unspoken, was that Yudhoyono needed to rid his economic team of vested-interest groups that were starting to raise new international concerns over the quality of his government's macroeconomic management. When Boediono and his technocratic ally and finance minister Sri Mulyani Indrawati took the reins in 2005, they faced a faltering economy and alarmingly high inflation levels. Indrawati replaced Golkar heavy Jusuf Anwar, a Kalla ally who had control over development project budgets.

Together they moved to restore some market confidence in the country's reform direction, which to many foreign investors at the time were headed in the wrong direction. The massive reduction in fuel subsidies in 2005 triggered a political mini-crisis but, as the World Bank points out, the savings in subsidies left an extra US$15 billion to spend in 2006, $10 billion of which was earmarked for development programs.

To be sure, Boediono hasn't always had his way, nor has Yudhoyono. After last month's passage of a new negative investment list, which imposed new barriers to foreign investment across several local industries, Boediono did his best to neutralize widespread foreign-investor perceptions that the list was protectionist, saying it gave investors greater "clarity" about which areas of the economy they were welcome to participate in.

Notwithstanding such hiccups, Boediono is broadly viewed in international markets as a capable set of technocratic hands. In his recent prepared speeches abroad, he has said that political considerations should not be allowed to interfere with economic management. Yet he has faced consistent challenges from Kalla, who before Boediono's appointment as coordinating economic minister rammed through unopposed several spending measures in Yudhoyono's first cabinet.

Unwelcome oversight
Last September, Yudhoyono suddenly announced the creation of a new presidential advisory body that would evaluate and monitor the cabinet's performance and report directly to him. Significantly, coordination of the oversight unit was placed under Boediono.

After widespread reports of peeved Golkar legislators, Kalla and Yudhoyono met in private and, despite denials from the president's office that no changes would be made, it was soon announced that although the unit would remain in place, its tasks would be reconsidered. Most saw this as a victory for Kalla and a blow to the president's chances of uncovering where bureaucratic resistance and poor coordination were thwarting his economic policy and reform directives. The oversight unit still exists, though very little has been heard of it since.

Meanwhile, Kalla has won praise from the country's banks and business community for his aggressive approach to economic policymaking, and he has clashed openly with Boediono and Sri Mulyani over what he perceives to be their overcautious approach to managing the national finances. In particular, Kalla has objected to their joint reluctance to release funds allocated for fiscal stimulus. At the end of 2005, nearly 70% of funds earmarked for development projects had not been disbursed.

Boediono's approach was made clear during a 2006 keynote address he made in Bali. "Restoring stability and accelerating government spending are necessary but not sufficient to sustain higher growth in the longer term," he said. "The key to sustaining growth is to use increasing confidence in our macro and fiscal position to encourage private investment, especially in the context of reforms that reduce the obstacles."

Boediono has remained tight-lipped concerning media criticism of government contracts, particularly in the infrastructure sector, won by companies owned by or associated with Kalla's and Bakrie's families. Big-ticket state projects won by the Bakrie Brothers conglomerate include a $1.26 billion gas pipeline connecting East Kalimantan and Central Java as well as the $1.4 billion Tanjung Jati A power project.

The government's so-called "crash-start program" saw the award of $8 billion worth of coal-fired power projects, many without a tendering process. Not surprisingly the program, which was widely reported to be the brainchild of Yusuf Kalla's brother Achmad Kalla, owner of the Bukaka engineering company, sparked media allegations of conflicts of interest.

One winner was infrastructure specialist PT Bosowa Energi, part of the Bosowa Group, a diversified conglomerate with businesses that include a turnpike operator owned by Yusuf Kalla's brother-in-law, Aksa Mahmud. Mahmud, coincidentally, is also deputy Speaker of the People's Consultative Assembly (MPR), Indonesia's highest legislative body.

Still there are indications that Kalla's faster, looser approach to government spending is gaining political ground on Boediono's penchant for caution and probity. A World Bank report titled "Indonesia Public Expenditure Review 2007" released late last month commended the country's "bold reallocation of resources" and noted that there are now sufficient financial resources to address development needs better.

While the report did not attribute the successful turnaround to any particular individual, it did note that prudent macroeconomic policies, particularly maintaining extremely low budget deficits, have been instrumental in the recovery. However, some economic analysts also read the report as an implicit endorsement of Kalla's stance, including its mention that now is the time to build on past achievements and deploy more state resources on education, health care and infrastructure.

In March, Boediono signaled that he could be persuaded to slacken certain strictures on the economy and realign his pro-stability toward more pro-growth initiatives. For instance, he recently told reporters that stronger economic growth in 2008 would be achievable with "more relaxed monetary policies". Yet Boediono still faces an uphill task in building a political consensus around the need to speed up structural reforms and foreign participation in the economy ahead of what are expected to be hotly contested 2009 elections.

With an estimated 60% of Indonesians without access to piped water and more than 70 million with no electricity, the need to get allocated funds out of the bureaucracy and into the grassroots economy is politically urgent. An even bigger problem, as Boediono conceded in Washington in April, is the government's inability to ensure that policies and reforms are actually implemented as designed.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.
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