Top Stories from the Editorial/Opinion pages of the International Herald Tribune,
Thursday, March 26, 1998

The West May Have to Let Indonesia Learn by Failure


By Gerald Segal International Herald Tribune
LONDON - As East Asia's economic crisis drags on, it becomes clear that there is not so much one crisis as several increasingly distinct crises.

 In the first few months there was an Asian contagion - a single process in which neighbors caught the financial flu in part because confidence was lost in another country. But as aid packages have been organized and domestic reforms have begun, the communicability of disease has lessened. 

In one important respect there is a serious risk of continuing Asian contagion - the moral hazard of bailing out a recalcitrant Indonesia and thereby undermining the rigor of other aid and reform packages.

 Thailand and South Korea have only begun their reforms, and tougher times lie ahead. Now is not the moment to begin thinking that there are easy ways out of these crises.

 In continuing to assist an Indonesia which feels that it can avoid real reform, the risk is that other Asians will demand similarly lax terms, and international capital may drift back to an unstable Indonesia.

 The time may not be far off when Indonesia should be left to go its own way and have to contemplate the dire consequences of economic failure.

 There are good reasons to try hard to help Indonesia down the road of economic and political reform. This dominant power in Southeast Asia can make a serious mess of its region if it collapses. Worries about mass migration in the millions may be overstated, at least for the time being, but all of Indonesia's neighbors have real reason to worry about an uncontrolled flow of refugees. 

There is good reason to worry that serious economic failure would lead to anti-Chinese riots. 

Leaving Indonesia to stew in its own juices also risks breaking a tacit compact between the pluralist capitalist states of the West and the emerging middle classes of Indonesia. The West has a duty to stand by these forces, which in the end offer the best prospect for creating a more open and prosperous Indonesia and Southeast Asia.

 For these good reasons, there has been a remarkable diplomatic effort to persuade President Suharto to take his IMF medicine and engage in serious reforms. The constant and correct message has been that there is no gain without pain.

 But such diplomacy may be having the opposite effect. Mr. Suharto seems to read such solicitous attention as permission to avoid the tough IMF conditions intended to bring about economic and political reform.

 He has assumed that the West will not let him fall, and so he can get what he wants. Hence the flirtation with a currency board, the appointment of an enemy of reform as vice president, and the selection of a cabinet designed to run reform into the sand.

 The point is rapidly approaching when the IMF and the West will have to withdraw assistance - a tactic that is being gingerly explored as the IMF continues to negotiate possible changes in terms and withholds a tranche of aid.

 Prolonged failure to ensure Indonesia's compliance with tough reforms would raise serious risks. Other Asians will demand less conditionality for their aid. Western banks will in effect be bailed out for ill-considered decisions about lending to Indonesia, and thus be encouraged to be foolish in the future.

 The day may be coming when the West will need to be tough on Indonesia in order to be kind to the rest of East Asia.

 The writer is director of studies at the International Institute for Strategic Studies and director of Britain's Pacific Asia Programme. He contributed this comment to the International Herald Tribune.