The farther Indonesia's currency, the rupiah, plunges in value relative to the dollar, the more urgent becomes the question: austerity or liquidity? Which policy is more likely to rescue this country from its worst economic crisis in more than 30 years?
Championed by the International Monetary Fund (IMF) and most economists, the case for austerity rests on the belief that crony capitalism has badly misallocated credit, crippling the ability of markets to "get prices right." Austerity's proponents want to cut public subsidies, dismantle nepotism and other privileges, and keep interest rates high.
On Jan. 15 in Jakarta, in the presence of IMF managing director Michel Camdessus, President Suharto signed a letter pledging to implement such reforms. The next morning, a local newspaper ran a front-page photo of Mr. Camdessus standing with his arms crossed while Suharto signed on the dotted line - visual proof of the Indonesian government bowing to reform under foreign pressure.
The IMF package would reward austerity now with liquidity later by making injections of funds from abroad conditional on domestic changes. But a few economists and more than a few Indonesian businesspeople and politicians worry that the pursuit of austerity first could throttle an already gasping economy.
Their scenario: The vanishing dollar value of the rupiah dries up credit. For lack of credit, firms slash output and payrolls. Downwardly spiraling supply and demand plunge Indonesia into lengthy depression. The remedy to prevent such a calamity? Lower interest rates and more credit to stimulate production and increased public spending to revive demand.
Free-market logic and IMF funding have driven the policy pendulum toward austerity. Flushing the system with money, it is plausibly said, would only lift inflation above the government's already high target of 20 percent for 1998. Liquidity also would reward profligate borrowers and imprudent lenders who should suffer. Investors would shun the Jakarta Stock Exchange. Arbitragers would short the rupiah. The economy would sink.
But the IMF and its local allies in the campaign for austerity are racing against time. The longer it takes for the economy to bottom out and bounce back, the greater will be the risk of unrest and protest. And that could propel the regime away from reform.
No one I have spoken to anticipates an organized revolution from the bottom up. The opposition to Suharto is still too fragmented and conservative. But mounting disturbances could overwhelm the economic logic of austerity with the political need for security. Not even the IMF will object to a little laxity if it forestalls anarchy - more rupiahs, fewer riots.
Also, at some level, austerity wounds national pride. Relevant is the "love the rupiah" campaign recently launched by the president's eldest daughter, Tutut, whose extensive economic holdings, like those of her siblings, are threatened by reform. Cabinet ministers, business executives, and well-off Indonesians are being encouraged to exchange their dollars and sell their jewelry for rupiahs, as if that could restore value to the national currency. The "love the rupiah" movement is a political gambit by the partisans of liquidity to don the mantle of patriotic sacrifice and pride.
It hasn't fooled many Indonesians into feeling proud. News stories that this magnate or that politician has converted $1,000 or so into rupiahs raise mocking questions in the minds of many Indonesians: Why so little? Why only now?
A further instance of economics and politics intersecting is the recent report that Suharto may want research and technology minister B.J. Habibie to become his vice president - and thus potentially his successor as president. From the standpoint of the IMF and the international markets, Mr. Habibie would be a disastrous choice. It is hard to think of a prospective successor to Suharto who has been associated more with profligacy and less with austerity.
The plunging of the rupiah to record lows in the wake of rumors of Habibie's selection may have deflated his balloon. But if the president really does consider his big-budget minister a credible successor, the lessons for foreigners should be clear: First, do not underestimate the political power of economic nationalism in Indonesia. Second, expect conditions here to worsen before they improve. Already, riots against high prices and closed shops have broken out in towns around the archipelago.
The reimpoverishment of millions of innocent Indonesians underscores a third lesson for foreign policymakers: In this delicate and volatile situation, what you do not do may be as important as what you do. Help the economy recover. But try not to back Suharto personally against the growing number of Indonesians in whose eyes he lacks credibility. And avoid fueling violence and a nationalist backlash by insisting on economic austerities whatever their political cost.
* Donald K. Emmerson is a professor of political science at the University of Wisconsin-Madison and the editor of 'Indonesia Beyond Suharto' (forthcoming).
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Tuesday columnist Godfrey Sperling Jr. is on vacation.