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Business Commentary/Dilip Thakore

India may land in chaos if it ignores Indonesia's experience

One of the great and yet inadequately explained mysteries of our times is the amazing decline and fall of the island republic of Indonesia into economic chaos and confusion.

Less than a year ago, Indonesia was the showcase tiger nation of South-East Asia whose 7 to 8 per cent annual GDP growth in the decade preceding had drawn worldwide eulogies inducing many economists and journalists to hold it up as an example to other Third World nations. Barely a year later, its economy -- and politics -- is in a shambles.

The value of the Indonesia rupiah has nosedived from a stable Rs 8,000 to the US dollar to Rs 14,000 currently necessitating a massive $ 43 billion International Monetary Fund bailout loan; price indices are headed for a 100 per cent increase this year; economic growth has contracted by 16 per cent in the past six months; an estimated 20 million Indonesians are likely to lose their jobs during the next six months, and 50 million Indonesians are likely to slide below the poverty line by the end of the year.

Suddenly something -- indeed a lot of things -- has gone seriously wrong with this hitherto fast-track showcase economy of the Tiger nations.

Surprisingly very little attention has been given in India to the cause of that island nation's precipitous decline and descent into chaos and unprecedented public misery.

The lack of interest in Indonesia within India's loquacious community of political and economic pundits is particularly surprising because there are a great many lessons about the pitfalls of economic development which the power-that-be in New Delhi and the state capitals can learn from the calamitous Indonesian experience.

For a start one must right away anticipate and address the usual bleat that the Indonesian experience has no relevance to India. The argument that India is sui generis -- a nation with unprecedented problems which require unique solutions -- has been the dominant perception for over five decades.

A purblind refusal to learn from the mistakes and successes of other societies is to a great extent responsible for the low rates of economic growth and the widespread poverty which characterises contemporary India. Indonesia and India have more affinities than differences.

Both are populous nations characterised by large territories; both nations have heterogeneous populations; high rates of illiteracy and incorrigibly corrupt politicians and bureaucrats. Against this backdrop it is important from the Indian vantage point to identify the major cause of this multi-island nation's sudden fall from a seemingly self-sustaining high growth path into economic and social chaos.

In retrospect it should be quite obvious that Indonesia's greatest failure was the nation's inability to nurture democratic institutions, particularly a free press. The inherently brittle form of nepotistic crony capitalism which struck shallow roots in the 32-year reign of former president Suharto would never have flourished to deceive as it did (in the wake of an even more unsuccessful affair with socalism under Sukarno), if there had been a free press (or political opposition) in Indonesia.

Scotching of the press and political opposition resulted in the canalisation of people's savings -- large foreign borrowals -- into inefficient monopoly businesses managed by members of the Suharto family and other presidential cronies.

But the entry of foreign capital in a big way into Indonesia also necessitated business transparency and competition.

And at the first whiff of competition, Indonesia's patronage-built businesses tottered triggering a flight of capital. Indeed all the nations of south-east Asia -- perhaps even Japan -- which is experiencing serious economic troubles currently, are paying the price of weak democratic institutions which encourage inefficient crony capitalism.

Therefore the primary lesson that the Indian citizenry can derive from the Indonesian experience is that of nurturing and strengthening democratic institutions.

Though it is true that the democratic system of governance is exasperatingly slow and time consuming, it nonetheless offers the checks and balances which were conspicuously missing during former president Suharto's reign which drained Indonesia.

The second great mistake of the Indonesian development effort which devastated the economy of this once high-potential nation is related: It succumbed to the temptation of directed lending or credit canalisation.

With the banking and fiscal systems firmly under the control of Suharto and his cronies, bank credit and foreign borrowals were funnelled to friends and relations who have since been discovered to be inefficient users of capital. The consequence is the creation of large hopelessly uncompetitive companies and a $ 80 billion private sector debt which is a millstone around Indonesia's neck.

Even if a free press and Opposition rule out flagrant corruption and cronyism on the Indonesian scale back home in India, directed lending is an infirmity which is mirrored in the Indian economy.

Populist and crony-driven lending by India's nationalised banks which boast 95 per cent of the nation's bank deposits and advances, have left them sitting on a mountain of bad debts.

India's nationalised banks admit that about 10 per cent of their loans have gone sour, but this is widely believed to be a gross under-estimate. Though the Union government has begun the process of recapitalising the nationalised banks, there is no telling when an Indonesian or south-east Asian style loss of confidence in the banking system could fell the Indian economy.

The overriding lesson of the sudden and unprecedented Indonesian debacle is that in this new age of globalisation and electronic transfers of money, the rules of the national development game have changed.

National resources (and foreign funds) must flow to the most efficient users thereof through the market mechanism. The knell of licensing and crony capitalism has been rung. And secondly, national banking and fiscal systems must be transparent and seen to be clean, lest they store up more trouble for themselves. That's the lesson that needs to be drawn from troubled Indonesia's unfortunate experience.

Dilip Thakore