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Wednesday, June 2, 1999 Published at 09:49 GMT 10:49 UK

The economic challenge for Indonesia

Protests: Since fall of Suharto economic crisis has deepened

By John Taylor

Since the onset of the East Asian currency crisis in August 1997, Indonesia's economy has declined dramatically.

Indonesia Flashpoints
GDP contracted 14% in 1998. The stock exchange has lost most of its value and unemployment has risen rapidly.

Investors have left the country, as have capital and many entrepreneurs.

Much of the country has experienced drought, poor harvest and serious food shortages. The international price of oil has fallen, so have the prices of most of Indonesia's export commodities.

Whatever government emerges from the elections will have to address these problems urgently, if political stability is to be maintained.

Key campaign issue

During the campaigning, a series of issues will be raised, related to these problems.

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Firstly - and most importantly - is the issue of living standards. The crisis has resulted in falling wages, declining employment and dramatic increases in the prices of food and basic essentials.

Although 1997 World Bank estimates of 48% of the population living below the poverty line are now seen as overly-pessimistic, poverty remains widespread within Java, notably in its urban areas.

Recent surveys indicate that spending in urban areas fell by 34% during 1998. According to official government data, 12.4m are unemployed.

In many areas, deteriorating economic conditions have resulted in worsening health conditions.

Throughout Java, the incidence of diseases associated with low incomes and poor living conditions - such as diarrhoea, typhoid, gastritis and tuberculosis - has increased since 1997.

Devaluation benefits

But it is important to note that some areas of the country have escaped the worst effects of the crisis.

For example, islands or regions exporting primary and agricultural commodities in demand regionally or internationally have benefited from the devaluation of the rupiah.

Since this has gone along with a weakening of economic control by the Jakarta government, the resultant increases in local revenues have fuelled increasing demands for greater regional control.

The push for autonomy and independence is strongest in areas such as Aceh, Irian Jaya and East Timor.

Addressing this problem will be vitally important for the main political parties.

International progress

Thirdly, there is the area of international negotiations with the IMF and other multilateral organisations.

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Although the Habibie government has made some progress in this area, most recently with a proposed 1bn loan from the IMF and the Japanese Government to support the rupiah, much remains to be done.

The problem of the massive $80bn corporate debt has yet to be fully addressed, and most of the country's banks are still not in a fit state to lend.

The programmes of deregulation, recapitalisation and reductions in public expenditure devised by the IMF will require dramatic economic adjustments in the post-election period.

Interest rates currently stand at 35%, and there is a fiscal deficit of at least $9bn projected for the next 12 months.

Corruption control

Finally, there remains the issue of corruption. Much of the demand for reformasi has focused upon the need for greater political openness and transparency.

The new government will have to deal with the ongoing issue of former President Suharto's wealth, but it will also have to tackle the corruption prevalent throughout the economy, against which much of the IMF's initial proposals have been directed.

This has direct electoral relevance. For example, Golkar has been criticised recently for using World Bank social safety net funds to gain electoral support.

Golkar is also using its organisational framework to channel billions of rupiah in low-interest loans from state-owned firms to voters across Indonesia, notably in areas of Java and West Sumatra that will hold most of the seats in the new parliament.

Election jitters

The pre-election situation has induced economic paralysis. Fears of violence are deterring investment, and exports fell by 22% in January-February from the previous year.

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Most expect economic policy drift until November at least. Beyond this, since none of the parties have detailed economic policies, most business interests seem to be hedging their bets by backing several of the 48 political parties.

This applies to indigenous (pribumi) companies, Chinese businesses, and multinational concerns.

Companies that were successful during the Suharto period continue to support Golkar.

Large pribumi groups are also supporting President Habibie's party, based largely upon his handling of the economic crisis thus far.

Business backing

Smaller businesses, however, are backing Islamic parties, on the basis of their support for locally-owned businesses.

And many ethnic Chinese have moved to supporting Megawati Sukarnoputri's PDI-Perjuangan party, arguing that Golkar has not protected them from local attacks.

Many foreign companies seem to be concerned that that a Golkar-dinated government would be unacceptable to most Indonesians, and now favour a coalition of Megawati and Amien Rais, leader of PAN.

Rais has travelled widely in the U.S. and Europe in recent months, meeting with top bankers and executives.

A combination of Rais' economic support and Megawati's populist appeal - particularly if they are also in coalition with Abdurrahman Wahid's Islamic PKB - has convinced many foreign investors that a PAN-PDI-PKB coalition might best benefit their interests.

Strong government needed

These points, however, are highly speculative. The main economic concern remains the creation of a government that has sufficient legitimacy to bring a period of political stability to the country.

Only then can Indonesia's serious economic problems begin to be addressed.

As yet, on the basis of the general notions put forward by the main electoral contenders, we have only the vaguest ideas of the policies to be offered to deal with these problems.

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Battle for Indonesia's Islamic vote