"Economic Progress in a Democratic Indonesia"

May 22, 2002

The Honorable Dr. Dorodjatun Kuntjoro-Jakti
Coordinating Minister for Economic Affairs, Indonesia

Distinguished Guests,
Ladies and Gentlemen,

First, please allow me to express my sincere appreciation to Nihon Keizai Shimbun, Inc. for organizing such a prestigious Conference, and inviting me to represent the views of Indonesia on The Future of Asia within the changing regional framework.

The "REFORMASI" that has been taking place in Indonesia since 1998 is an effective indicator that the whole region has changed dramatically at the turn of this new century. Indonesia, which at one time was governed by the one of the longest and most severe authoritarian regimes in the world, is now being classified as being among the freest and most democratic in the region. And while this recognition is extremely gratifying, we recognize that here is still much work to be accomplished.

It is my belief that the success of open market democracy in Indonesia will be a major factor in determining the future political, economic and social landscape of Asia. There are many strategic questions that will be answered by the continuing progress of Indonesia. Questions such as: Will democracy work in a large diversified Asian population country? Will Islam and democracy go hand-in-hand, complimenting each other? Will the implementation of democracy cause a decline in the economy of a developing country, as it did in the former Warsaw Pact countries following the collapse of the Soviet Union?

I would like to make use of this opportunity to speak to you about how the REFORMASI has changed Indonesia and its economy, and how the country will not merely recover from its financial crisis in the late 1990s, but also establish a new platform for a sustainable development in the future. As it would be a tall order to discuss this detailed issue comprehensively in a single session, I will endeavor to keep my remarks short and look forward to the question and answer session at the end of this presentation.

Four REFORMASI, Simultaneously

The severe problems and crises overshadowing all aspects of life following the demise of the New Order regime were catastrophic for the average Indonesia, and this condition was exacerbated by the Asian monetary crisis which could not be overcome by merely implementing a trouble-shooting approach in solving them. This is not business as usually, requiring a little bit of this or that, it requires concrete reforms, or REFORMASI in Indonesian, across the board and in all sectors.

First, is political reform. A country as large and diversified as Indonesia should never be governed by authoritarian rule. With more than 300 ethnic groups and 600 languages, authoritarian rule is simply un-Indonesian!

Today, as a result of gains made during the REFORMASI, Indonesia is the most free and open society in Southeast Asia. The parliament, the press and non-governmental organizations are now an integrated part of Indonesian politics. I always remind my fellow officials that we are now living in the glass house and can no longer throw stones!

Second, is economic reform. As the largest archipelago, Indonesia has always been open to international trade and business. Most Indonesians are market people. It is very unusual that a country as large as Indonesia would have its export and import ratio to GNP at about 50%. This simply means that market distortions created during the last 20 years prior to the REFORMASI were once again un-Indonesian.

The Government has taken steps in liberalizing the economy. Many artificial trade and business restrictions have been rescinded, as well as indirect subsidies and price interference. The privatization of State Owned Assets is ongoing, as it banking reform.

Third, is decentralization or bureaucratic reform. The centralized system of the past, where every single issue in the entire country was decided by Jakarta has gone forever. The huge central bureaucratic system has been decentralized. Authority and decision making power has been delegated to provinces and districts.

Fourth, is the legal reform. All of the three reforms mentioned earlier have to be institutionalized to be effective and sustainable. This takes place in legal and judicial reforms, which will provide certainty and clear "rules of the game" for the new Indonesia. The Government will no longer implement policy in the absence of laws and regulations.

The Nexus?

I have always been asked what the nexus is of these reforms taking place in Indonesia. I would say it is the competitiveness of the country, as well as the provinces and districts under the new world determined by ASRAN Free Trade Area/AFTA, APEC or WTO rules and regulations. It is no longer relevant to question whether the globalization process is good or bad. It has become a reality and fact of life in the 21st century, like it nor not. We must learn to adapt and move forward, or risk being left behind.

The challenge facing us today is how every country will be able to compete in this new and changing environment. For myself, crisis is a clear sign that someone or something has to change. And in the case of Indonesia, the crisis that took place in the last decade was so severe that it requires total reform as a response. Indeed, these reforms will require much more than simple adjustment. However, in the rapidly changing global and regional environment, I personally believe that the most successful individuals as well as countries or districts are those who are willing to change the most. Indonesia, which was one of the earliest in adopting these reforms, will certainly be the best bet to succeed in the new global environment.

In the not too distant future, a province or even district in Indonesia will have to compete with a district in Vietnam to win a public contract in Thailand. Competition will be between districts and cities, no longer countries, especially one as large as Indonesia. It is in this context I have always encouraged provincial and local governments in Indonesia to embrace policies that are viewed as supporting healthy business environment. Credit and investment ratings will be applied upon cities and districts. And local governments or business environment that are viewed as pro-business will attract more investors than the others. It is no longer just a matter of national policy.

Economic Progress as the First Sign of Long Term Success

Recent economic indicators tell us that Indonesia is back in business. The economy grew by an average of 4% during the last two years, a significant rebound from a deep contraction of 13% in 1998. However, despite the positive impact of this growth level and the fact that Indonesia has the forth best growth rate in Asia after China, India and Vietnam, it is still insufficient to absorb unemployment and alleviate poverty. These are issues to which the Government is attaching the highest priority.

We had anticipated higher growth when President Megawati took office in July, but the slow down in the world economy following the events of September 11th damaged investor confidence worldwide, and restricted growth in exports.

In addition to modest economic growth, we enjoyed a US $21.5 billion trade surplus in 2001, the fiscal deficit was maintained according to the target of 3.7% of GDP, and gross international reserves were kept healthy at US $28.1 billion. Inflation was quite high as 12.5%, mainly due to the impact of the market liberalization policies mentioned above.

In the real sector, motorcycle demand grew by about 10% annually, electricity by 9%, cement and fertilizer were above the domestic production capacity, etc. At the international forum, Indonesia has been successful in rescheduling $5.4 billion of its official esternal debt undert the Paris Club arrangement, while the last three letters of intent with the IMF were successfully attained in a more businesslike manner, and the official creditors group of CGI approved a financing program of US$ 3.17 billion for FY 2002 through budget, and US $575 million technical assistance through non- budget.

Assets recovery sales by the Indonesian Banking Restructuring Agency (IBRA) last year surpassed its target of IRD 27 trillion in cash and IDR 10 trillion in bonds. Privatization proceeds for last year were IDR 3.5 trillion, slightly lower than target.

In 2002, the success stories continue. Fifty one percent of the Bank Central Asia BCA shares were divested through strategic sales. We are in the final stages of divesting Bank Niaga, the rights issues of BII, and merging five banks. This is prima fascia evidence that our reforms are working as expected.

Similar stories also take place with regard to infrastructure projects. The dominant mobile phone company PT Telekomunikasi Selular recently transacted Indonesia's largest Dollar bond issue since the crisis 1997-98, and in order to meet 3.5 times oversubscribed demand from domestic and overseas subsequently increased the size of its five-year bond issue to US$ 150 million from US$ 100 milllion. PT Telekom shares have climbed 32% in the first four months of his year, after its successful placement of US $300 million in Decemver 2001. Meanwhile, the equity value of Indosat on the local exchange this year has risen by more than 40% in US dollar terms.

In the electricity sector, out of 27 individual Power Purchasers (IPPs) that were put on hold due to the1997-1998 crisis, 10 have been renegociated, 2 have been finalized and 8 others are in the proves of renegotiation. Six others were closed out, and only one remains to go through court proceedings.

With regard to Japanese business interest, Tanjung Jati B, Paiton I and II electricity provjects in Java have been renegotiated; Chandra Asri petrochemical project in West Java have been agreed to while Tuban in East Java is in its final stages; Iskandar Muda and ASEAN Ache Fertilizer plants in Aces have been operating again for the last 6 months,; while the gas pipeline between South Sumatra and East Java is in the proves of negotiation.

This international and domestic confidence has produced a phenomenal 40% growth of the Jakarta Composite Index as well as a 15% appreciation of the Rupiah this year, arguably the highest in the world. It is therefore that I am speechless and mystified when people still speculate that the increase in the stock exchange or the strengthening of the Rupiah is simply a fluke or temporary coincidence. For me, it is clearly a glimpse of many more success to come as a result of the REFORMASI that the country undertook in the last 4 year!

You might ask is Indonesia trouble free? Off course not, but then again, is it possible to name one country in the world today that is trouble free, or has not trouble on its horizon? We have yet to formulate and deliver effective programs for unemployment and the alleviation of poverty. We still have to deal with the banking restructuring issue, as well as domestic and foreign debt management. Indonesia has to work harder to revitalize its industry, especially the small and medium businesses, and bring back direct investment capital. Last but certainly not least, we have to build good governance and good corporate governance that is free from corruption, collusion and nepotism.

And finally, looking back the achievements that we have made during the fist nine months of the Megawati-Hamzah government, I can state with great confidence that the REFORMASI has not only produced positive early results, it is the only way for the country to survive and compete in the ever-changing global business environment. The old days of half-measures and procrastination are over, giving way to the promise of the future where Indonesia can rightfully claim its place as one of the economic powerhouses of Southeast Asia. As history has shown us over and over again, Indonesia can and will prevail!

Thank you.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.