Is International Financial Organization Rescue Indonesia from Economics Problems?

“The IMF is one of the most powerful institutions on Earth – yet few know how it works” (http://www.globalexchange.org)

Every country and every community in the world are not immune from globalization processes. New forms of economic and political integration on a world scale and the accelerated flows of goods, capital, people and information across the globe all create new opportunities and challenges for people in the region. Some scholars argue that international capital such as aids are inevitable and needed by developing countries to support their economic growth and reduce number of poverty. In Indonesia; however, the fact shows that international financial organization that give loans do not help Indonesia to overcome their social and economic problems. IMF, the biggest donor in Indonesia, has created a lot of social and economic problems and also increased numbers of people who live below poverty-line. IMF inspired Indonesian policy in politics, economics, and social that created problems more complicated. This essay describes how international organization such as IMF influence Indonesian policy and give some alternatives that should be taken by Indonesian Government to overcome its economics problems.

The IMF was established more than 50 years ago to assist developing countries, especially in times of economic difficulty. Member countries in crisis can ask the IMF for emergency assistance, and the IMF works with them to solve their economic difficulties. (IMF Evaluation Report : 2003) The IMF took charge of economic policy in Indonesia early in 1998, but was unable to stop the worsening crisis. As a result, poverty in urban and rural areas rapidly rose due to thousands of factory closures and sharp increases in the price of basic necessities. (Ananta: 2003)

Even though international aids were not help Indonesia to develop its country, Indonesian government still ask IMF and other donors to give Indonesia loans. It is difficult for Indonesia to ignore international organization influence, because global world creates interdependence among nations and between nations and international organization. Paul Hirst and Grahame Thomson argue that international institution such as IMF and transnationals corporations has a significant impact on national and regional economies. (Hirst and Thomson : ---) Leslie Sklair on the book Globalization: Capitalism and its Alternatives believes that global world and global economics were created to support capitalism. International organization that gives developing countries financial support, in fact is not help recipients countries. International Financial Organizations were created by capitalism as a tool supporting global economy. It also creates economic dependency between developing countries to international financial organization. The more developing countries dependent to International Financial Organization the more capitalism and developed countries received benefits. (Sklair : 2002) John Wiseman argues that global organization like WTO and IMF not only influence developing countries in economics but also social policies. He gave example where the International Monetary Fund forced the Indonesia Government to implement harsh social policies to rescue Indonesia from financial meltdown (Wiseman:---).

Most of countries that received loans from international organization such as IMF faced more economic problems, and the aids can not help them get out from economic crisis. Brazil is a good example to explain how international aids were not helping its country get out from economic crisis. During 1960 – 1970 Brazil is one of the fifteen biggest countries who received international aids. But the economic condition in Brazil during this period was bad. Brazil decided to cut its international debt and develop its country by own money. (Barret and Maxwell : 2006)

Indonesia is another example. However, Indonesia’s case is little bit different to Brazil. Brazil has strong power to say no to international aids, but Indonesia has not. Barret and Maxwell on his book Food Aid After Fifty Years : Recasting its Role describe how international financial organization such as IMF and WTO received some benefits from international debt. On the other hand the economical problem in recipients countries are more complicated. (Barret and Maxwell) It is clear from table below that Indonesia is a big international aids recipient country during 1960 to 1970. In 1960, Indonesia was in the 12^th level, but Indonesia borrowed more money from international donors in 1970, therefore it put Indonesia in 3^rd level after India and South Korea. Indonesian government reduce its debt from international aids during 1980 – 1990, this condition put Indonesia out from fifteen leading global food aid recipients. However, Indonesia has face difficulties to be independent from international aids, and start borrow money again that put Indonesia come back to the list of fifteen big recipients countries in 2000.

Table 1

Source: Barret (2006)

By 2002, however, the Indonesian government was forced to terminate its IMF-inspired economic austerity program. Opposition from both legislators and the public regarding the impact of the IMF economic measures proved too much. The IMF had demanded changes in economic policies in order to secure the confidence of ‘the international market’. This involved trade liberalisation policies (zero percent tariff for international goods), the privatisation of state-owned industries and deregulation of most economic activity. These policies were welcomed by international financiers, but they exacerbated the plight of the poor, who were already suffering from the crisis that had precipitated the IMF’s intervention. (Bahagijo : 2005)

It is true that since the IMF’s intervention some major economic indicators have improved. Economic growth is now more than 6 per cent – double that of Australia. Government debt is declining, the inflation rate is under control and domestic and foreign investment has returned (IMF Evaluation Report: 2003). Yet despite the good picture painted by economists, at least 110 million Indonesians – equivalent to the total population of Malaysia, Vietnam and Cambodia – still live on less than two dollars a day. Thousands of children and their families remain undernourished, especially in Eastern Indonesia. (Straus : 2004)

In return for IMF assistance, Indonesia was required to implement dozens of new policies – on inflation and interest rates, banking reform and privatisation, and the removal of tariffs on imports. Social subsidies for farmers and the poor, such as those on gasoline, were reduced or abandoned. The result was impressive, at least in the eyes of the IMF. The prices of basic necessities (sembako) such as rice, eggs, cooking oil, and gasoline, quickly rose and became ‘competitive’ by international standards. However, the minimum wage remained stagnant, and so the living standards of the average Indonesian declined greatly. The IMF also successfully demanded the closure of 16 insolvent banks, which further exacerbated the crisis for small business and ordinary people. (Nette : 2001)

The privatisation program demanded by the IMF resulted in ten major state-owned companies, covering banking and finance, telecommunications, housing, public works and infrastructure, being privatised by 2004. This then led to plans by local government to privatise public hospital services: in Jakarta, 16 public hospitals are currently awaiting privatisation. (Tempo : 12/03/2003) The national-level privatisation program is now being taken up by local government all over the country, as district level governments acquire more authority under a new decentralisation program. These plans will allow local governments to improve their financial base, but at the cost of making access to medical treatment much more difficult for the poor. (Kompas : 02/02/2005)

Another example is privatization of Perusahaan Listrik Negara (PLN) or Indonesian Company for Electricity. As a result of IMF and Indonesian government agreement, at least 50% of PLN’s ownership must be sold to the public. PLN is Indonesian Company for Electricity that is owned by Indonesian Government; more than 60% of its energy is used by household or private sector. The Government of Indonesia also have to withdraw the electricity subsidy for private customers. IMF argues that PLN privatization will create good impact on national economy and reduce government’s budget. (Kompas : 07/04/06) It is also an implementation of The Bogor Declaration on Asia-Pacific Trade Liberalization that was signed by the government of Indonesia. (Garnout : 1996) However, IMF’s policy is supported by some develop countries to ensure that they can takeover the biggest electricity company in Indonesia.

In September 2005, 51% of PLN’s share was owned by private sector. Most of them are International cooperation, such as Singapore and The United States. Both of them take control PLN and press the government to reduce subsidy. They argue that electricity subsidy is not efficient and also detain the economic growth. One month later, the government issued a policy to increase the price of electricity. The percentage of new price is vary depend on how much electricity consumed every month. In average, the price of electricity increased 15%. (Kompas : 07/04/06)

The government’s policy increasing the electrical price hit people in middle class and lower class, especially people who work in informal sectors that use electricity, such as dress maker, and car painter. They have to pay much for electricity, but they sell their products less because of purchasing power are very weak. (CES:2005)They can not compete with international products from big companies that come to Indonesia after Indonesia signed as member of WTO.

Centre of Economic Development and Social Movement, Jember University reported that 12.7 % of people in Jember district who work in informal sectors were closed their business after the government reduced electrical subsidy. Most of them worked in small industries such as traditional restaurant, printing industries, car reparation, and dress makers. (CES:2005)Indonesian Development of Economics and Finance (INDEF) reported that this policy increased number of people who seek a job in Indonesia. Numbers of unemployment is vary between regions, but in average the number of unemployment are increased 9.6% or equal with 23 million people. The biggest percentage of unemployment is located in some province in East Indonesia, such as Papua, Nusa Tenggara Timur (NTT) and Maluku. (INDEF : 2005)

IMF and Indonesian government argue that IMF support Indonesia to built infrastructure such as electricity in remote area. In 2005, PLN approved 1.5 millions new customers in remote area East-Indonesia. In Fact, international companies received more benefits from this project rather than local people. The electrical enlargement project is supporting international companies to extract natural resources easily. In Kalimantan Island, after this project, international wood companies built processing factories in remote area, because they got electricity to support their industries. By built factories in rural area, they cut the transportation cost from remote area to the port and also reduce the wage of workers. Before this project, they process woods in the city near port; therefore they pay much for transportation. But, as the impact of this policy, Indonesian rain forest were destroyed and create disaster, such as floods, land sliding, and forest fire. (Tempo : 17/08/05)

The Wahana Lingkungan Hidup (WALHI), Indonesian NGO that concern with environment reported that the Government of Indonesia received US$ 1-2 billions every year from plywood industries. However, Indonesian loses US$ 5-7 billions every year for environment disaster. It was counted from the impact of floods and land sliding that destroyed agricultural products and some cities in Kalimantan. It was also counted for replantation projects that have to be done by the government. (WALHI : 2006)

Another policy that is pressed by IMF to Indonesian government is pulling out oil subsidy. The government of Indonesia must withdraw at least 80% of oil subsidy by the end of 2004. IMF argues that the Indonesian poor people only consume less than 20 % of oil subsidy. Most of the subsidy is consumed by rich people. It means that Indonesian government gave subsidy to wrong people.

Data that was taken from Biro Pusat Statistik (BPS) or Indonesian Statistic Bureau, 81.6 % oil are used by upper class. The poor people, equal with 196 million from approximately 240 million of population in Indonesia, only consumed 18.4% of oil subsidy. (BPS : 2005) However, oil subsidy in Indonesia creates domino effect and reduces the prices of basic necessities (sembako) such as rice, eggs, rice flour, and cooking oil.

Centre of Economic Development and Social Movement (CES), Jember University conduct a research in 2005 about the impact of this policy on poverty in Jember district. The results were, the government policy to withdraw oil subsidy increased the prices of basic necessities price up to 46.7 %, on the other hand this policy reduce people purchasing power 20 – 25 % (CES : 2005). The number of people who live below poverty line rose from 251,469 (base on BPS Jember censused on 2004) to 734,384 from total population 2,673,159 it was rose from 9.4 % to 27.5 %. This condition was worsened by high inflation up to 18.7 % (government version) or 37.3 % (Indonesian Development of Economics and Finance (INDEF) version).

Number of student who quit from school also increased. In Jember district, 459 elementary students (year 1 to 6) quit from school. In secondary school, number of student who quit from school is 267 for SMP or Junior High School (year 7-9) and 153 for SMU or Senior High School (year 10-12). (CES : 2005)The government argues The Department of National Education received money from IMF and other International aids to develop new school building and to support teachers who work in remote area. The government also gave all of elementary students a scholarship, and free of school fee. 5000 new classes were built and 3500 classes were renovated by central government in 2005, using IMF loan. (Kompas : 17/02/06) In fact, even thought government gave scholarship to elementary students and school fee are free, the student still have to pay for books, school uniforms, and extra fees for laboratory and practicum.

The IMF motive behind its policy pressing Indonesia government pull out the oils subsidy become more clearly after Government of Indonesia issued new policy on December 2005. In 2006, Indonesia government allows International Corporation to build oil shop in Indonesia. Before this policy, all of oil shops were owned by government, operated by Pertamina, Indonesian oils industry. Two Multi National Corporations, Shell and Petronas build 500 new oil shops in Jakarta and West Java province. It reduced government’s income from Pertamina, because Pertamina can not compete with both of Sell and Petronas. In first quarter, January – April 2006, only 63 Sell and Petronas oils shops has been operated, but Pertamina’s income from oils shops decline 0,5%. Other international corporations such as TOTAL and British Petroleum propose to built oils shops in Central Java, East Java and Sumatra on 2007. (Jawapos : 27/05/06)

Alternatives

There are two alternatives that may be taken by Indonesian Government to overcome economics problem in Indonesia related with international aids. Firstly Indonesian Government has to stop privatize some of government’s companies, especially companies that produce something that is important and needed by the people such as electricity, water, telecommunication, fertilizers, mining industries, and transportation. There is no fact that support IMF’s thesis which privatization some government’s companies will reduce government’s budget and create efficiency. In fact, after privatization, government lose its income and pull the people out to the poverty.

Government can create efficiency in its companies by maintain law enforcement reducing corruption. Government may manage its companies by hire some professional workers as leaders to maximize the benefits. Bank National Indonesia or Indonesian National Bank (BNI) is good example how to manage government’s company. BNI is owned by Indonesian government, but the top leaders of BNI are not government’s officer. Government hired some professional in banking from other countries (most of them from Singapore and Malaysia) to operate this bank. The top leaders are controlled by both of independent accountant and government’s board. In 2000, BNI is the fifth biggest government’s company that supply government’s income.

The last alternative is provincial autonomy or decentralization in economics and politics. Central government should give provincial governments responsibility to process their resources and to develop their region by themselves. By giving provincial government autonomy, Indonesian government will receive a lot of benefits. For example, provincial governments will maximize their productivity, because they know what they need and what they want to do with their resources. Most of central government’s projects in provincial level or district level are not supported by the people in the region because the projects are not match with people’s need.

To sum up, even thought the question of whether International Financial Organization such as IMF good or bad is still debatable; however, most experts believe that inviting IMF to develop Indonesian economy is not good idea. In fact, IMF is not help developing countries develop their economics and reduce poverty. Indonesia is a good example where IMF’s programs are not working well. The number of poverty in Indonesia after MoU between Indonesia and IMF was signed increased dramatically. Privatization some government’s owned industries that was believed will create stability economy and efficiency government’s budget are not attest. Indeed, it creates other problems such as unemployment and poverty.

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