Survey of recent developments

The year 2000 saw a divergence of economic and political trends. The real economy performed better than expected, with growth of 4.8% for the calendar year. Despite pressures of inflation, rising interest rates and a falling rupiah, there was strong economic recovery. The political trend, however, has been far worse than anyone expected. Indonesia no longer has either a credible or an effective government. President Abdurrahman Wahid, who after his first 100 days had begun 2000 amidst popular goodwill (Smith 2001), squandered his political capital and by February 2001 was under parliamentary censure and politically isolated. During 2000 the view gained credence that there was a 'decoupling' of economics and politics. The economy remained buoyant despite political turmoil and poor government. However, the economic costs showed up in exchange rate depreciation, rising inflation and higher interest rates. These will bite harder in 2001. Nevertheless, for all its problems, in the first half of 2001 the Indonesian economy still has its best chance in the foreseeable future to move beyond recovery into sustained growth. Achieving sustained growth is not fundamentally an economic problem. In the normal course of events, investment would accelerate in 2001 as capacity limits are reached in domestic and export industries. The problem of sustainability is political drag rather than lack of economic momentum. Poor government, worsening corruption and political turmoil in Jakarta, worsening insecurity in the regions, and the many unpredictabilities associated with decentralisation, are increasing risk and uncertainty and destroying investor confidence. Deterioration of the already poor business climate is also making it much harder to resolve the banking crisis, carry out corporate restructuring and service the massive public debt. If by mid year there is no better government, continuing slowdown in North America and Europe and further stagnation in Japan, the prospects for late 2001 are an economy slowing to a growth rate of less than 4% p.a., barely enough to maintain living standards. The elite faces a historic political choice between either a virtuous cycle of recovery and expansion which requires economic and political discipline, or a vicious circle of economic slowdown and political infighting. One path leads gradually to prosperity, the other more quickly to mass poverty.