Indonesia’s ‘Berkeley Mafia’ Now Has $514 Billion at Stake

It’s quite troubling that Sri Mulyani Indrawati has been roped into a corruption scandal.

Indonesia’s finance minister isn’t necessarily shady. If she were, my confidence in Southeast Asia’s biggest economy would be shaken. Many are wisely giving Sri Mulyani the benefit of the doubt after parliament voted for a criminal probe of a bank bailout that she helped engineer.

This is probably dodgy politics aimed at robbing President Susilo Bambang Yudhoyono of his most competent staffers, including Vice President Boediono. What is clear is that politics have taken an erratic turn that will distract policy makers from the economy and that’s bad news for investors. Those looking to score political points are missing the big picture: Indonesia’s $514 billion economy hangs in the balance.

There is much riding on how Yudhoyono handles a crisis that threatens one of the
world’s most promising nations. Handle it well, and investors’ esteem for Indonesia will increase. Bungle the crisis and skepticism will grow. The common view that Indonesia is an obvious buy must now be in question.

Indonesia’s economy is famously corrupt. Transparency International ranks it behind Egypt, Djibouti and Algeria in its latest Corruption Perceptions Index. It’s moving in the right direction, though, and investors are noticing. The Jakarta Composite Index surged 87 percent in 2009. The rupiah gained 16 percent against the dollar.

Sri Mulyani deserves considerable credit for the macroeconomic stability that is impressing markets. A decade ago, the economy was dusting itself off from the Asian crisis and 32 years of corrupt leadership under dictator Suharto. Back then, Indonesia risked going the way of the Soviet Union. Today, it’s among the most stable economies in Asia.

‘Berkeley Mafia’

The “Berkeley Mafia” is having the last laugh. That’s the colorful band of economists sent to study at the California university in the mid-1960s. They returned home championing low inflation, balanced budgets and deregulation. They had much to do. The economy Suharto inherited was a mess, with four-digit inflation and a mountain of debt. His predecessor, Sukarno, spent 20 years lavishing money on expensive monuments, nationalizing industry and funding budget deficits with excessive borrowings from abroad.

The Berkeley Mafia helped turn things around. Growth averaged 6.5 percent a year from 1965 to 1997, when Southeast Asia crashed. Over time, though, Suharto did his part to foul things up anew.

Suharto’s rule was dominated by family, friends and a military of unchecked influence. In 2007, a few months before Suharto’s death, the United Nations Office on Drugs and Crime alleged he stole as much as $35 billion, 1.3 percent a year on average of gross domestic product. Suharto’s lawyer dismissed the claim as fiction.

Suharto Inc.

Indonesia is still trying to dismantle Suharto Inc. Many of the policies Yudhoyono has used since 2004 to do that are Berkeley Mafia-esque. That success helps explain why the president is standing by his finance minister and not showing her the door. At least not yet.

Sri Mulyani is part of the new, improved Indonesian mystique. Asia’s most high-profile female economic official is also one of the most respected. Sri Mulyani has been a competent, calming presence, one of the adults in the room as her young democracy prepares itself to join the ranks of the “BRIC” economies -- Brazil, Russia, India and China. When Sri Mulyani travels to Davos, Switzerland, for the annual meeting of the World Economic Forum or visits Tokyo, New York and London, people listen. When she explains what’s afoot in Jakarta in her matter-of-fact way, she instills trust and reflects well on her boss, Yudhoyono.

Dangerous Game

So, if you are an ambitious politician who wants to wound the president, who better to go after than his star finance minister? Let’s go one better and go after Yudhoyono’s right hand, Boediono. What makes sense politically is a dangerous game to play with the nation’s 235 million people.

The investigation that parliament approved involves the 6.7 trillion rupiah ($721 million) rescue of PT Bank Century in 2008. While everyone agrees there were abuses during the process, lawmakers are split on whether Boediono, who was central-bank governor at the time, and Sri Mulyani should be legally responsible. Boediono and Sri Mulyani argue that the bailout helped the country weather the global credit crisis. It occurred amid the market chaos that followed the collapse of Lehman Brothers Holdings Inc. Just as many Americans cringed at their government propping up Wall Street, many Indonesians looked askance at saving PT Bank Century.

Systemic Failure

Here is how Yudhoyono put it in a March 4 speech: “Why should we save a bank that has been clumsily managed and led by people who ran away with their customers’ money? No matter how disturbed we were with that, the government had to rescue the Indonesian economy from a systemic failure.”

Legitimate questions should be raised, yet it’s hard not to conclude the campaign against Sri Mulyani is personal. Some well-heeled politicians saw their net worth dwindle when Sri Mulyani opposed closing the bourse as shares plunged in 2008.

Corruption and bad infrastructure slow the process of spreading the benefits of growth and reducing poverty. Risks of terrorism in the nation with the largest Muslim population make it harder to attract the investment needed to maintain last year’s 4.5 percent growth rate.

This is as big a test as Yudhoyono will ever face.

Commentary by William Pesek for Bloomberg