Thu, Nov 29, 2001 page19

• The world's stake in Indonesia

  The world's most populous Muslim nation isat the epicenter of the debate over whether presentglobal trends can work for developing countries

  • By William Pesek Jr. / BLOOMBERG
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  When Megawati Sukarnoputri became president of Indonesia in July, no one doubted her tenure would be a pivotal one for the fourth-most-populous nation. Few appreciated how important it would be for globalization.

  Globalization is being rethought as rarely before. No longer is it just banner-toting twentysomethings and the occasional head of state railing against the corporate chieftains they think exploit developing nations for profit. Following the events of Sept. 11, it's proponents fear that lower trade barriers are breeding new vulnerabilities that terrorists can exploit.

  

  Indonesian President Megawati Sukarnoputri, right, steps out of her car as she arrives at the offices of her party, the Indonesian Democratic Party for Struggle, in Jakarta on Tuesday.

  PHOTO: AP

  Anyone wondering if globalization is alive or dead might want to keep an eye on Indonesia. In many ways, Megawati's country of 210 million is at the epicenter of the debate.

  "Most anti-globalization activists argue that economic crises have extensive social and political consequences and they consider Indonesia their best case in point," argues Muqtedar Khan, an analyst at TheGlobalist.com, a Washington DC-based think-tank.

  "That connection, of course, is also why the fate of the Megawati presidency is so pivotal for the entire global economy." Indonesia, like many Southeast Asian nations, aggressively opened its economy in recent decades. Foreign capital rushed in as profit-hungry investors and companies scrambled to get a leg up in one of Asia's budding tigers. The money helped Jakarta build vital infrastructure and educational facilities. It also provided working capital for businesses and asset markets. Living standards soared.

  That all changed in 1997 and 1998, when Asia's financial crisis reduced Indonesia's economy by one-third of what it was in 1996.

  Waves of capital left the country faster than they came in. Not only did the so-called "hot money" of market speculators leave, but also that of long-term foreign direct investments. The stock market cratered and the currency, the rupiah, went into freefall.

  Making matters worse was Indonesia's less-than-successful recovery from the crisis. While much of Southeast Asia continues to grapple with the weak banking systems and investor confidence issues at the heart of the 1997-1998 turmoil, Indonesia's woes are the most severe. Even though its economy grew 3.5 percent in the third quarter from a year ago, mounting problems are spooking investors.

  Indonesia's efforts to regroup have been complicated by political instability; the nation has had four governments in four years. Surging inflation hasn't helped things. Nor has the fact that the rupiah is still worth far less than it was before it was devalued in August 1997.

  Slowing global growth, weak foreign investment and sluggish government asset sales are making it difficult for Jakarta to control its budget deficit and repay US$76 billion of foreign debt. The Sept. 11 terrorist attacks on the US added to the pressure on developing economies. Indonesia -- the world's most-populous Muslim nation -- has been hit even harder thanks to violent protests against the US-led bombing of Afghanistan.

  With the economy in trouble again, Jakarta is firmly in the hot seat. Megawati and her Cabinet recently asked the International Monetary Fund to extend its five-year, US$5 billion loan program by a year to 2003. Their hope is to buy time to rebuild the economy.

  There's much to be done. Megawati has done little to quell political unrest or soothe markets since she replaced ousted leader Abdurrahman Wahid.

  The global economy also has much riding on Megawati's success or failure. That's because many observers see Indonesia as one of the best examples of what can go wrong -- and right -- when a developing economy copes with the forces of globalization. Until 1997, much was going right in Indonesia. Since then, most things that could go wrong, did.

  If Indonesia stabilizes its economy and living standards begin rising again, then pro-globalization forces will have their argument to keep markets open. Meeting in Shanghai last month, Asia-Pacific leaders pledged to stay that course. They said freer trade is "more important than ever" as concerns about terrorism deepen a global economic slump, especially hurting developing nations such as Indonesia and Mexico.

  But if Jakarta fails in shoring up the economy, the trends toward market opening may stop. Not because protesters and activists want it to, but because leaders of key nations may be forced to close their economies, making them less vulnerable to the whims of markets.

  It would be a shame if the latter happened. If the last decade has proven anything, it's that the problem isn't too much globalization, but too little in places that need it most. It's no coincidence that the most pro-trade nations and those most intertwined with the global economy are the freest and richest.

  That's why you so rarely see people from the developing nations -- who the anti-globalists claim to be speaking for -- marching hand-in-hand with them.

  The world has a huge stake in Indonesia, thanks to its massive population and its role in Asia's economy. As we saw in 1997 and 1998, Asia can hardly move forward with Indonesia's economy and political system in disarray. The same is true with the process of globalization. Its fate, like that of Southeast Asia's, may hang in balance with Megawati's.
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