The IMF and the economics of Jakarta tofu

Thousands of peddlers pad through Jakarta's smog-filled streets every day, hooting and clicking like a flock of exotic birds.

"Min-Yak! Min-Yak!" croaks a palm-oil merchant, prompting caged cockatoos to squawk in response. "Ta-hu, Ta-hu, Ta-hu," cries a vendor of deep-fried tofu. A chopstick, tapping on a wok like a rattlesnake, announces that fried rice is for sale.

The cacophony of this pushcart legion lures everyone from tycoons to their servants. But the carts - kaki lima or "five-legs," for the two legs of the peddler, the two wheels of the cart, and the post it rests on - are also a reminder of those living on the vulnerable edge of poverty in this capital city of 10 million.

The kaki lima are among the most visible of Indonesia's working poor, scratching out a small margin of survival in Jakarta's streets - a margin that, for many, is getting thinner. The ranks of the poor have surged in the past three years, to about 40 million, by government estimates.

Yet if Indonesia follows international prescriptions for fixing its languishing economy, the urban poor, increasingly restless and alienated, could bear the brunt.

The International Monetary Fund and the World Bank - which have extended billions in loans here - are urging Indonesia to do away with fuel and electricity subsidies to control a growing budget deficit. Economists say the step is necessary to head off an eventual collapse of the currency, the rupiah. But short-term, the moves will fuel inflation, increasing the pain felt by the urban poor.

In the past 30 years, a largely agrarian nation has become a highly urban one, with 40 percent of Indonesians now living in cities, without the land to fall back on in times of need.

Roughly half of the 210 million population are estimated to be "vulnerable" to poverty, according to the United Nations Development Program. "Vulnerable' means that any economic shock reduces their nutrition, sees their kids pulled out of school. It's frightening," says Satish Mishra, who runs a UNDP-sponsored poverty-alleviation program.

In 1998, the fall of long-time dictator Suharto coincided with a 15 percent contraction in the economy that destroyed millions of jobs. Although the economy is no longer shrinking, it continues to languish.

A ballooning budget deficit, and confusion in the government as President Abdurrahman Wahid has fought for survival against corruption allegations, has weakened the rupiah and increased prices for key commodities.

Jakarta's kaki lima are already feeling the pinch. If you stroll into the mazelike Tegal Parang slum, you can see why. The jumble of buildings and alleys leaves everything in perpetual twilight. A cloying combination of odors from the fermenting soybeans of small tofu factories and sewage from the river fills your nose.

The smell is almost enough to put you off this mainstay of Indonesian diets. Yet stuffed with fillings and deep-fried by the tahu vendors, it becomes hard to resist. Indonesians ate about 2.5 million metric tons of tofu products last year. With soy less expensive than meat, the poor rely on tofu for much of their protein.

But it is getting more expensive. "I've been here since 1972, and I'm on the brink of going out of business," says Tukino, a father of five, who owns a tofu factory here that caters to peddlers. "I don't care who runs this country, I just want the pain to stop."

Mr. Tukino sits in his two-room home attached to the factory. He runs through his expenses as he strips off his yellow knee socks and the gum boots he uses to tromp the factory's dirt floor, soggy with soy juice.

The biggest expense is soybeans, most of which are imported from the United States. American farmers sold 1.3 million metric tons of soybeans last year, and soybean prices have risen 50 percent in rupiah terms in the past six months. Mr. Tukino's suppliers have told him prices will increase again soon, to reflect the rupiah's 15 percent fall since January.

That's in addition to the currency's 25 percent decline in 2000. Though not at the record lows it touched in 1998, the currency has been steadily slipping on concerns about the country's political stability and its ability to service its debts. The rupiah is now near a 27-month low.

Tukino and his wife work alongside five employees, and his three youngest children help out after school. Although inflation topped 10 percent last year, he hasn't increased monthly wages of 300,000 rupiah ($27). "I can't," he says. Only about half his cost increases have been passed onto customers. Monthly profits have been squeezed down to about 1 million rupiah ($91), from 1.5 million. "I tried raising prices more, but business dried up," He currently charges about $2.50 for four kilograms of plain tofu.

Tukino also buys 100 liters of fuel a day to fire the ancient pressure cooker that turns the soybeans into a gummy slurry, and yards of cheesecloth for forming the tofu into cakes as it cools. Prices for both have risen about 15 percent in the past few months, he says.

Thanks to government subsidies, fuel oil and gasoline are at roughly a quarter of their world market price. Such subsidies cost the government $5.5 billion a year - roughly 30 percent of its operating budget - and are a key reason the deficit is widening, which in turn has been driving the rupiah lower. With $154 billion in public debt already, there is little room to maneuver.

The IMF says that if the deficit is controlled, and subsidies reduced, the negative effects will be short term, and be erased by faster economic growth as confidence returns. Growth would generate more tax revenue to pay off debt and eventually allow more spending on things like education and aiding the poor.

But though price increases would seem easy in theory, the reality is that most Indonesians are impatient after three years of economic gloom, and the end of subsidies could cast destabilizing political ripples. When Suharto tried to end subsidies in 1998, it sparked riots that caused the government to back off.

Mr. Wahid's government is well aware of that history. As he faces possible impeachment, political analysts say it's unlikely he will take such an unpopular step.

In a sign of the government's ambivalence, senior Economics Minister Rizal Ramli told reporters yesterday that fuel prices would be increased by October "for the middle and the higher classes." He promised that prices for the poor would be unchanged, though he didn't say how that could be accomplished.

Economists say it's a problem that will loom large for any Indonesian leader, whether Wahid's government survives or not. "I'll be under more pressure if oil prices rise," complains Tukino, spelling out the bind. "And I'll be under more pressure if the rupiah keeps falling."

At the bottom end of the economy, disposable incomes are so thin that even small price jumps can have dramatic effects on consumption. Almost the only category of consumer good that doesn't get hurt by price increases is tobacco.

At a Central Jakarta bus stop during rush hour, Made Suritno's business is bad. His boat-shaped cart is piled with freshly-fried tofu and tempeh, a fermented tofu cake. Like Tukino, he's been unable to pass costs onto his customers, who usually buy an assortment of 10 fried goodies for 20 cents.

"The little people like me are really suffering," he says as he fishes golden-brown tofu balls out of the hot oil. "I'm making less than I was, but my own costs are the same or rising." Mr. Suritno says he makes 500,000 rupiah ($46) in a good month. School fees for his three children take a 200,000 rupiah bite out of that.

Analysts say the weakness of the economy is compounded by the paralysis of a newly democratic government caught between populist demands and economic reality.

The central government is also giving back tax revenue to the provinces in an effort to assuage separatist sentiments. But economists warn that it's not decentralizing enough of the costs it has traditionally borne at the same time, which could make the government's budgetary hole even larger.

The World Bank warned last month that Indonesia's budget deficit could grow by two-thirds to 6 percent of the budget this year, if subsidies aren't reined in. That deficit drives the currency lower, as investors worry that the government will be tempted to print more currency to pay its bills - which in the worst case can lead to Latin America-style hyperinflation.

"Subsidies have to be reduced, but it requires a government with the political will to do what's right and risk the consequences," says an official at a multilateral lender. "It doesn't look like any of Indonesia's leaders are ready to make that choice."

(c) Copyright 2001. The Christian Science Monitor