Sunday, May 16, 2010

Where the Power Lies in Indonesia

Aburizal Bakrie's triumph over Sri Mulyani Indrawati sends a signal to the reformers.

The resignation of Sri Mulyani Indrawati as Indonesia's finance minister is not only bad news. It also tells us a lot about where real power lies in the country.

The past 12 months has been good for Indonesia. Susilo Bambang Yudhoyono decisively won a second term as president, together with his able technocrat running partner, Boediono. In November he appointed a dream team of economics ministers, mostly able
women technocrats. The economy was also performing well. Last year it was the third fastest growing in the G20, behind only China and India. And it came through the global crisis almost completely unscathed.

But trouble was brewing behind the scenes, and in particular among the key troika of the president, the finance minister, and Aburizal Bakrie. A former coordinating minister, chairman of the Suharto-era Golkar Party and confidant of the president, Mr. Bakrie is Indonesia's pre-eminent pribumi, or indigenous, businessman. As such, he is arguably the second most powerful person in the country.

Ms. Sri Mulyani and Mr. Bakrie had been colleagues in the first Yudhoyono cabinet, 2004-09. But tension between them escalated in the last quarter of 2008 as the global financial crisis hit. In particular, the price of shares in a company owned by Mr. Bakrie, Bumi Resources, went into free-fall. Under its normal provisions, the Jakarta Stock Exchange was closed for three days. But much to Mr. Bakrie's chagrin, Ms. Sri Mulyani refused to extend the closure, and the price carnage continued.

There were other disputes between the two, principally concerning tax liabilities. In December of that year, Ms. Sri Mulyani also let it be known that, if President Yudhoyono acceded to Mr. Bakrie's demands on the exchange closure and taxes, she would resign. This would have been untenable, at the height of the financial crisis, and given also Ms. Sri Mulyani's widespread public popularity as a crusading anti-corruption reformer. Mr. Bakrie vehemently opposed Ms. Sri Mulyani's reappointment to the second Yudhoyono cabinet unveiled last November, but he was overruled. Consequently, his supporters took to the streets, with a trumped-up pretext.

At the height of the global crisis, in October 2008, a small bank, Bank Century, looked shaky. Fearing a ripple effect, the government moved swiftly to bail it out. As in all these operations, the principle was clear: act swiftly, even if the precise operational details of the bank are unclear. Ms. Sri Mulyani was a signatory to the rescue, as was then central bank Governor Boediono. It was later revealed that the cost of the rescue operation was much higher—about 10 times—than initially estimated. Allegations by Mr. Bakrie's Golkar supporters in the legislature that either of these two officials acted improperly are absurd. But 12 months after the event, this provided the pretext for a virulent public campaign of personal abuse in the legislature and on the streets aimed at Ms. Sri Mulyani.

Caught between a close ally and his finance minister, the president remained silent. Evidently the resignation threat of a year ago still rankled. It was not until mid-February, three months on, that he issued a rather lukewarm statement supporting his minister. But the damage had been done. Parliament had been whipped up into a frenzy, and there was a virtual logjam between the executive and legislative branches of government. Something had to give. The impasse was broken when, with the president's active blessing, Ms. Sri Mulyani accepted a longstanding offer to become managing director at the World Bank. The immediate effect of the minister's resignation was a 4% decline in the Jakarta stock exchange. But the affair raises three longer-term questions.

First, will Indonesia's well-deserved reputation for prudent macroeconomic management be jeopardized? This is unlikely. Since 2000, the country's finances have improved dramatically, with the public debt-to-GDP ratio falling to 26% from more than 100%. Fiscal conservatism is enshrined in Indonesia's fiscal law, which is modeled on Maastricht and which, unlike in the EU, has been closely followed.
Second, will Ms. Sri Mulyani's reform agenda be maintained? There have to be serious doubts. The country's civil service was to be her top priority this term. Already she had made major progress, removing her corrupt tax and customs directors general.

(In a supreme irony, one of them reappeared as head of the nation's audit agency last year!) Her 62,000-strong staff was being offered carrot-and-stick incentives to lift their standards of professional conduct and integrity. This was to serve as a much-needed model for the rest of the civil service. It is difficult to see anybody else picking up this baton with equal vigor.

Third, other reformers in cabinet may become more cautious. They may draw the conclusion: don't take on the most powerful in the land, especially where their business interests are at stake.

Tough, able reformers like Ms. Sri Mulyani are all too rare in the developing world. Inevitably they make enemies, and she notched up quite a few. But Indonesia will be so much the poorer for her absence. By Hal Hill is the H.W. Arndt professor of Southeast Asian economies at Australian National University. The Wall Street Journal Op-Ed

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