Indonesia's Challenges: How Australia Can Help

Speech by the Hon Alexander Downer, MP, Minister for Foreign Affairs, at the International Conference on Indonesian Economic Stabilisation and Recovery
Australian National University, Canberra, 23 November 1998

(Check Against Delivery)


Introduction - our enduring ties

Professors Ross Garnaut and Mohammed Sadli, Anwar Nasution and Hal Hill; ladies and gentlemen.

I'm very pleased to have the opportunity to speak here today.

The subject you will consider over the next three days is one of vital importance to the future of Indonesia and its people, but inevitably is also a matter of the greatest interest to Australia and its people.

I very much look forward, therefore, to reading your conclusions when in due course they are released by Professor Nasution.

For Australia, there is nothing more natural than the proposition that we should be working closely together with Indonesia on approaches to solving economic problems.

The metaphor of neighbours who help each other out when they run into difficulties is so often used that it risks becoming a cliche, but it is nevertheless very true.

Indonesia - our largest and most populous neighbour - is of fundamental and enduring importance to Australia.

Our prosperity, stability and security will always be influenced by Indonesia's and it is logical, therefore, for Australia to stand by Indonesia in troubled times.

What I want to do today is to set the scene, as it were, for your deliberations, by describing some of the challenges we see on Indonesia's horizon.

I'd like then briefly to outline the kinds of steps Australia has taken to assist our neighbour in these extraordinary times.

And I'd also like to take advantage of this opportunity to launch a new study on the Australia Indonesia Development Area, which deals with some of the issues confronting Indonesia and Australia as we respond to the challenges of the regional economic crisis.

Indonesia's major challenges

Policy makers still face some formidable challenges in putting Indonesia on a sustainable and long-term path of economic growth that will allow it to gain the maximum benefit from its huge potential.

And that potential is indeed enormous: Indonesia has substantial natural resources, a large pool of labour and skills, and a big domestic market.

All these factors had helped sustain rapid growth for many years.

Our hope is that the growth path will resume once the current difficulties are over.

But it should certainly not be a matter of returning to old ways.

Basic reform of the way business and government go about their work will be needed.

In particular the mechanisms of economic and corporate governance will have to be substantially strengthened.

It is well recognised that the return of capital is essential for a full recovery in Indonesia.

For this to occur, confidence - both internationally and domestically - must be restored.

Restructuring of the banking sector restructuring and debt settlements are crucial.

At the same time, the poor must be protected, and domestic demand supported, by keeping prices down (especially for food and essential items) and by putting in place social safety nets and employment creation programs.

Australia's view has always been that during the process of recovery social disruption must be kept to a minimum, with the poor protected as much as possible.

Indeed, sustained growth cannot occur in a climate of substantial deprivation and civil unrest.

So we are heartened to see the emphasis now being placed on food security, careful targetting of pockets of poverty and hardship, and the development more generally of the social safety net.

In the early stages of the development of a recovery package for Indonesia, the IMF had a number of criticisms levelled against it.

In March this year, I visited Washington to encourage greater sensitivity by the international community to what were legitimate Indonesian concerns about the social impact of its economic reform program.

The IMF's approach has evolved considerably since that time and in line with developments in the Indonesian situation.

In this regard, the successively refined agreements between the Indonesian Government and the IMF have been very helpful.

Relations between the IMF and the Indonesian Government are now very cooperative.

Indonesia's commitment to implementation has meant it is now broadly on target in terms of meeting its Letters of Intent with the IMF.

This has gone a long way towards galvanising the attention of the international community - including at the World Bank's Consultative Group meeting in July this year, which saw a significant increase in levels of pledged assistance to around USD6 billion over this financial year.

It has also been a linchpin in stabilising Indonesia's economic situation, which is now seen in better inflation results (including in relation to food prices), a firmer exchange rate, and in the prospects of a return to positive growth - possibly by the second half of next year.

The ownership and distribution of assets, and assistance to small and medium enterprises and cooperatives, have attracted a lot of interest recently.

There is, of course, a connection to the vexed issue of the place of the ethnic-Chinese in the economy.

Of course, a case can be made in principle for special measures to assist small and medium size enterprises.

In developing policy, however, it will be important that the Indonesian government be as transparent and open as possible and that any such policies take into account the possible loss of economic efficiency.

The wrong policies could impact adversely on recovery.

The challenge for Indonesia is how to develop policies that enhance rather than detract from business confidence.

Ultimately, the recovery of confidence cannot be separated from the achievement of a successful transition to a more open and democratic political system which has the broad support of the populace.

The general election in May will be a key landmark in this transition, and promises to be the most free and fair election since 1955.

In fact, it must be, if the surge of popular opinion that we have seen in the last few weeks in Jakarta is any indication of the importance that the Indonesian people, as a whole, attach to this event.

But while the election will be a vital step, it is not the sole precondition for the development of a system where governance is more effective and transparent.

The strengthening of other institutions of state are also important.

Many commentators have, over the years, noted that the judicial system is badly in need of reform.

The development of new commercial laws and training of judges in areas of bankruptcy and competition law and intellectual property rights are positive steps, to which Australia has contributed.

We are keen to see further cooperation in the area of judicial training and programs in this area are being developed by the Centre for Democratic Institutions and other Australian service providers.

A strong and accountable parliament and strong governmental institutions must, in the long run, rest on a robust civil society.

Since May there have been a number of positive developments in this area, particularly with the proliferation of new political parties, far greater press freedom, and greater commitment by the Indonesian government in the area of human rights.

The Human Rights Action Plan was a significant step forward, setting out Indonesian objectives and some practical measures that would be implemented.

The National Human Rights Commission - the Komnas Ham - has continued to prove effective as an investigatory body, and has in recent times been more involved in joint investigations with NGOs.

The Joint Fact Finding Team that investigated the May riots was one example of such cooperative work.

Despite these positive developments, it remains the case that there still is a lot of work to be done to secure human rights in Indonesia.

Recent revelations of past military excesses in Aceh, and Irian Jaya are disturbing and add weight to the arguments of those in Indonesia who are championing reform.

Ultimately, of course, these issues are for the people of Indonesia themselves with which to grapple.

But Australia is a firm supporter of the reform process.

In relation to East Timor, Australia supports the UN sponsored tripartite talks and is encouraged by signs that Indonesia and Portugal in recent talks have been showing greater flexibility.

We believe, however, that any workable solution has to have the involvement of the East Timorese themselves, and for that reason have been encouraging Indonesia to engage in a meaningful dialogue with East Timorese leaders - in particular the two Bishops, but also Xanana Gusmao.

In the end Australia cannot be prescriptive about solutions; we will seek to be as helpful as possible, but it is the parties principal that will themselves have to find a mutually acceptable resolution to the problem.

Australian assistance in the crisis

Indonesia's economic difficulties are of course related to the broader regional crisis, and part of the solution must therefore lie in a coordinated regional and international response.

That is why Australia has been at the forefront of activity in groups like the G22 and APEC, as they explore the questions of how factors external to individual economies have contributed to the making of the crisis.

Those bodies recognised the need, inter alia, for intensified efforts to stimulate economic growth and restore confidence, and for capacity building initiatives and further work to strengthen corporate governance.

The Prime Minister has established a task force to advise the Government on how Australia should contribute to an effective international response to global financial volatility.

Bilaterally, helping Indonesia chart its course of reform is now a key focus of the Australian aid program.

If successful, it will help put Indonesian economic development on a much more sustained path.

At the same time, we have been active in addressing other factors, such as environmental problems caused by forest fires and El Nino related food shortages, that are having a serious impact on the lives of the poorest sectors of the Indonesian community.

Our package of assistance measures includes food aid, emergency medical supplies, targeted drought relief efforts, supplementary feeding programs for vulnerable groups (such as infants), agricultural rehabilitation and employment generation activities.

Australia has now committed around AUD60 million to help Indonesians disadvantaged by drought and the financial crisis.

This is in addition to our USD1 billion commitment to Indonesia's IMF package, and the provision of export credit insurance under the Export Finance Insurance Corporation's (EFIC) National Interest account facility to assist trade.

Our total budgeted aid flows to Indonesia will rise from AUD89 million in 1997-1998 to AUD127 million in 1998-99, over a 30% increase.

When I visited Jakarta in July this year I announced a program of activities designed to promote economic management capacity and reform.

The program, which will involve assistance of up to AUD70 million over three years, will cover such issues as the reform of state-owned enterprises, bankruptcy and commercial law, foreign investment, trade policy and capital market development.

Launch of Opportunities in AIDA

At this point it is my happy duty to launch formally a new book of direct relevance to the issue of Indonesia's economic recovery.

It is Opportunities in AIDA: Building on Contrasts and Complementarities.

Its appropriate for me to do so here for several reasons.

The book is the output of an independent economic study commissioned by Australia's official overseas aid agency, AusAID, which is part-funding this Conference.

And the study was led by experts from the Australian National University, at which we meet today.

And most importantly, the book deals in a very practical way with many of the very issues that you will be discussing this week.

AIDA is, of course, the Australia Indonesia Development Area, a sub-regional economic cooperation area that covers all of Australia and the 13 eastern provinces of Indonesia, as well as Bali.

It is Indonesia's first and only sub-regional economic cooperation area involving a non-ASEAN partner.

Its objective is to deepen and intensify economic links between our two countries, by improving the enabling environment for growth in bilateral private sector trade and investment in the Area.

I launched the AIDA initiative in Ambon in April last year jointly with then Indonesian Coordinating Minister for Production and Distribution, Dr Hartarto.

Both countries continue to place considerable importance on the AIDA initiative, even in the context of Indonesia's current economic crisis.

The independent analysis reported in this book shows the sense of doing so.

The study conclusion is one of optimism about the prospects for trade and investment growth in the AIDA region, subject to identified constraints being adequately addressed.

The study found a valid basis for the AIDA concept in the strong complementarities that exist between Australian technologies, capital, management and marketing skills, and the Indonesian AIDA provinces' competitive inputs of land, labour and mineral, agricultural, marine and other natural resources.

The study identifies the many opportunities these complementarities present for joint ventures or strategic partnerships that can further increase export income for the AIDA region.

It concludes that our two countries must position themselves now to take advantage of longer-term opportunities likely to be created by the fundamental changes occurring in the Indonesian economy, including through deregulation and currency re-alignment.

The study found that development of AIDA trade and investment can contribute to - rather than have to wait for - Indonesian economic recovery.

Some AIDA provinces (for example, in Sulawesi) are not saddled with large US-dollar-denominated debts.

Their resource-based industries are performing well and earning foreign currency income based largely upon competitive rupiah input costs.

The report is clear however, in its message that realisation of opportunities for trade and investment growth in the AIDA region will require the Indonesian and Australian governments and business communities to work together closely.

Whereas development constraints like paucity of physical infrastructure and market information in Indonesia's AIDA provinces can only be addressed through concerted long-term effort, regulatory constraints can be addressed in the short term.

The Australian Government is encouraged by the fact that the Indonesian Government is already addressing many of these regulatory constraints in its response to Indonesia's economic and financial crisis.

The report identifies scope for official Indonesian investment-related procedures and support services to be improved, to make Indonesia's AIDA region more investor-friendly.

I commend this useful and insightful report to all those with an interest in the building of stronger, mutually beneficial economic relations between Australia and Indonesia.

Assistance in deeds, not just words

I have this morning described how Australia is assisting Indonesia in practical ways - be it with economic good-governance measures through our humanitarian assistance, or with human rights measures such as our AUD2 million assistance program for the Komnas Ham, or by trade under AIDA.

What characterises all these measures is the Australian Government's strong belief that Australia needs to give Indonesia concrete assistance in these troubling times, not simply shout instructions from the sidelines.

I have outlined the formidable challenges that confront Indonesia as it works to turn its economy, and its social and political institutions, around.

While lecturing or standing in judgement may give some of the nay-sayers in this country - including some in the media who should know better - a warm feeling of self-righteousness, it will not help the ordinary Indonesian one iota.

By working with the Government and other groups inside Indonesia on utilitarian programs of assistance to resolve real problems, Australia is doing its best to bring the economic troubles to a speedy end, and to build the foundation for sustainable and long-term economic growth.

We want also to assist where we can with the political and social reforms now under way, but recognising always that it is the Indonesian people themselves who will have to choose their desired paths.

Those paths may not be smooth - they very seldom are - but Indonesians can take comfort from this fact: that the Australian Government and people will do our utmost for our mates and neighbours in these tough times, just as we shared the benefits when times were better.


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