Survey of recent developments

The previous Survey ended on a note of cautious optimism that the Indonesian economy might be on the path to a sustainable recovery. But events in August and September demonstrated how vulnerable the economic recovery still is. Revelations about payments made by Bank Ball to third parties brought into disrepute officials not just in the Indonesian Bank Restructuring Agency (IBRA),but also in Bank Indonesia and the Ministry of Finance; key advisers to President Habibie were also implicated. This and the post-ballot turmoil in East Timer inevitably affected both national and international confidence in the economic recovery. There is growing evidence that the recovery is demand constrained; fiscal policy in 1998/99 was much tighter than originally forecast, and it is far from clear that the predicted deficit in the 1999/ 2000 fiscal year (5.8% of GDP) will eventuate. Real interest rates remain high and there is little sign that investment expenditures are recovering. Although there is now a consensus that the effect of the crisis on poverty and unemployment was not as severe as was predicted in the latter part of 1998, the incidence of poverty increased, and there was a marked rise in the number of workers in agriculture and in the informal sector of the non-agricultural economy. Real wages fell sharply. The social safety net programs implemented in 1998/99 were successful in maintaining rice consumption among poorer families and in preventing large-scale dropouts in the school system. But continuing political uncertainty, combined with the far-reaching decentralisation measures incorporated in Laws 22 and 25 of 1999, led to declining morale among the civil service and a freeze on new policy initiatives. The economic and social policy reform agenda that awaits the new government, led by President Abdurrahman Wahid, is formidable.