Bloomberg's William Pesek: The Year to Fight Corruption in Indonesia

The Year to Fight Corruption in Indonesia
by William Pesek Jr.

Jan. 19 (Bloomberg) -- ``Our reputation and credibility as a nation is at stake.''

Rarely have truer words been written about Indonesia than those recently by Jakarta Post editor Endy Bayuni. They have great resonance for foreign investors wondering how one of the world's least trusted economies will handle a sudden rush of billions of dollars of aid following last month's tsunami.

The government is worried, too.

``One of the most persistent challenges Indonesia is facing is widespread corruption,'' Coordinating Minister for Economic Affairs Aburizal Bakrie said in Jakarta on Monday.

Even Bakrie harbors doubts that anti-corruption efforts will be enough to eliminate the siphoning of cash that routinely dogs Southeast Asia's biggest economy. That's a big problem for a nation badly in need of more international investment. Corruption is partly behind the slump in overseas investment to $10.3 billion in 2004, a quarter of the amount in 1995.

What's so breathtaking about Indonesia's dodgy dealings is that they aren't a matter or debate, but fact. U.S. Ambassador Lynn Pascoe seemed to speak for many foreigners last week when he said the ``high level of corruption'' in Indonesia is a ``very significant problem.''

Even President Susilo Bambang Yudhoyono lacks trust in his government. Rather than having Indonesian agencies monitor corruption in the tsunami-ravaged Aceh province, he turned to Berlin-based Transparency International for help. The watchdog group ranks Indonesia as one of the 10 most corrupt economies.

Tsunami Funds

The stakes are high. Indonesia's failure to force companies to pay back billions of dollars in debts from the Asian financial crisis continues to taint its standing among investors. It's home to Asia Pulp & Paper Co., for example, which in 2001 reneged on almost $14 billion of debt to become one of Asia's biggest defaulters. It's still wrangling with creditors.

Now, Indonesia is experiencing a huge windfall of foreign money. Of the billions of dollars of aid pledged for tsunami relief, Indonesia is sure to get a sizeable chunk. It was the worst affected by the Dec. 26 tragedy; so far, more than 110,000 died in Indonesia. How it handles the funds will demonstrate to investors how serious President Yudhoyono is about tackling Indonesia's legacy of graft.

President Suharto is gone, ousted by public uprisings in 1998 at the height of the Asian crisis. Yet the political system, and, by extension, the financial one, Suharto created in his 32 years in power lingers. Its vestiges mean few of this nation's 235 million people benefit directly from its 5 percent growth.

`Kleptocracy'

All this hampers the quality of public investment and, ultimately, economic growth. ``Corruption in Indonesia is widespread and costly,'' economists Vernon Henderson of Brown University and Avi Kuncoro of the University of Indonesia concluded in a paper published in July. ``Bribing is a time- intensive activity.''

The nation's ``kleptocracy,'' as observers used to call it, took corruption to highly refined levels -- so much so that it may even involve the evaporation of corporate debt.

Corruption isn't the only reason more investors aren't flocking to Indonesia. Another one: High poverty rates. More than 40 million Indonesians -- more than the population of Argentina -- are unemployed, while more than half of the world's largest Muslim population live on wages of $2 a day.

Some Optimism

Still, it's corruption that most often scares investors away. For one thing, bribes and other hidden costs employers pay to do business lead to paltry wages, perpetuating poverty. For another, the combination of corruption, a weak legal system and a lack of corporate transparency mean debt investors can have a very hard time getting repaid.

The good news is that some local business people are optimistic. ``The political will is there'' to fight corruption, says James Riady, who heads the Lippo group of companies. ``He (Yudhoyono) set very good values.''

Ditto for some foreign observers. ``Indonesia already is a powerhouse for the region,'' says John Merante, a vice president for Lehman Brothers Holdings Ltd. in New York. ``It's just a question of now taking the next steps to get it back into the level you were seeing before the crisis (of 1997/98).''

A Major Test

Yet the sudden rush of tsunami aid is a major test for Yudhoyono. When he took office in October, the world thought he would have time to prove his anti-corruption mettle. That was not to be. Now, Yudhoyono must see to it that aid is delivered to those who need it with a minimum of corruption. If reports of aid siphoning become widespread -- some have already surfaced -- much of the pledged aid may not come.

That's a problem, considering Indonesia needs as much as $150 billion of projects over the next five years, plus an additional $4 billion to rebuild tsunami-ravaged areas.

Here's the bottom line: If lots of money is lost to dodgy dealings, nations offering moratoriums on Indonesia's debt payments may regret it and reverse course. The same goes for investors wondering whether to trust the nation's new leader. For Indonesians, this isn't just the year of living dangerously, it's also the year of fighting corruption.

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Prudent Investor says

Corruption, corruption, aaaah it is in the headlines again. Isn't this the chic word to go on government bashing? Corruption hither and thither. Well quite bizarrely and contrary to the common perception, the financial markets for these two (which means including us!) most corrupt countries have been the best performers in the region for the year 2004. Does this indicate that the more the corrupt the better it is for the markets? Hardly. It just reveals that corruption is not the sole determinant for capital flows. For the jackasses who unwaveringly thinks the country would fester mainly due to perceptions is bound to shoot himself/herself in the foot.