Indonesia's Nouveau Poor Tense as Suharto Digs In

Mondale's visit on March 3 was latest warning that economic reform is needed fast.

Indonesia's President Suharto gets a lot of attention from the US government. He and President Clinton have spoken three times in recent weeks, and on March 3 former Vice President Walter Mondale dropped by his Jakarta villa for a visit.

The house is in a verdant, expensive part of town, but for a man who has accumulated a fortune during his three decades in power, it's ostentatiously humble.

Many of Mr. Suharto's callers these days carry the same message: To rebuild his country's crumbling economy he must implement reforms spelled out by the International Monetary Fund (IMF).

These measures are designed to remove some of the corruption and collusion that characterize Indonesia's economy and restore the confidence of international markets and investors.

Without that confidence, Indonesia's crisis seems likely to worsen, putting a drag on the recovery in other parts of Asia, and ultimately affecting the economies of Japan, Europe, and the US.

More riots expected

It seems obvious to most observers that Indonesia's economic crisis will generate more outbursts of rioting and repression in the world's fourth-most-populous nation.

Jakarta these days is a tense city. The government has banned public gatherings during an ongoing 11-day assembly that will choose Suharto for a seventh five-year term as president. To protect the assembly's 1,000 delegates, more than 30,000 police and troops have been mobilized.

The political system is effectively closed to challengers, but yesterday an opposition politician criticized Suharto's handling of the economy (see story below).

The situation is dire. Indonesia's poor worry more and more about putting food on the table.

The rich, meanwhile, are beginning to worry about the poor. The other day a Jakarta businessman gestured at his BMW sedan and said he really ought to leave it in the garage. It's OK to drive it in the city, he added, but small fires of envy and despair are burning in the countryside. "They'll just stone your car."

Despite the advice from Washington and other capitals, Suharto is in a bind. In South Korea and Thailand, two other Asian economies in crisis, new governments have come to power in the past four months, providing the clean break and new policies that encourage investors to take a second look.

Indonesia's leader, however, has ruled this country for 32 years and has no intention of stepping down - crisis or no crisis. And while an IMF rescue package, which in Indonesia's case will bring as much as $43 billion in emergency loans, can often turn around a loss of confidence, so far the world remains wary.

Fixing the currency

An IMF package that does not produce results - partly because critics say Suharto is moving too slowly on reforms - has brought Indonesia's president to consider what else he can do. One option he has mulled for weeks is to fix the value of the Indonesian rupiah to the American dollar or some other strong currency.

Adopting a currency board system is designed to correct one of the country's most pressing economic problems: a rupiah that buys 70 percent less than it did in July. During the past few months just about everything Indonesians purchase overseas has become three or four times more expensive.

Take tempeh, a product made from milled soy beans that is a key source of protein for Indonesians who can't afford more expensive foods like meat or eggs. A block of tempeh that cost 1,000 rupiah several weeks ago now costs 4,000 rupiah. Spurred by the high cost of imports, other prices are rising as well.

On a broader level, the weakened currency means Indonesian companies can't afford to import the materials they need. They are going bankrupt and laying off their employees.

Everyone agrees that Indonesia needs a stable and ideally a stronger currency, but pegging the rupiah may not be the way to go about it. The IMF and many of the governments that bankroll the fund, including the US, have argued against the currency board, saying the country does not have the fiscal strength and financial reserves to back up such a system.

Suharto's advisers, including American economist Steve Hanke, have spoken of fixing the rupiah to dollar rate at around 5,500, making the Indonesian currency worth twice as many dollars as it is now. Many people might be tempted to exchange their rupiah for dollars at this new, fixed rate, on the theory that the government could not sustain the system. If and when the system broke down, the dollars would be worth many more rupiah.

But in a speech March 1, despite calls from governments to abandon the currency board, Suharto acknowledged the idea was still on the table. As he noted, what the IMF has required of him so far is not working.

There is no plan in place to pay off foreign loans that have quadrupled in value in rupiah terms, and the country is on the verge of hyperinflation. Trade is collapsing, which is especially hard on a country that finishes goods - assembling clothes and electronic goods whose parts are made elsewhere, for export to markets in third countries.

Backsliding on reforms

Economists complain that Suharto has not done enough to rid the country of nepotism and collusion. The president and his family have grown wealthy over the decades of his rule and some of his children and associates are protected from competition through cartels and monopolies.

Says one European diplomat in Jakarta: "Confidence in this country's economy is never going to be fully restored with Suharto [remaining in power]. We've seen his backsliding" on reforms.

At the same time, he adds, "I don't think it's in the interest of foreign governments or of Indonesia for him to step down tomorrow." That, he says, could bring chaos.