1· I 89160 I I I i WORLD BANK HISTORY PROJECT Brookings Institution Transcript of interview with NICHOLAS C. HOPE, JAMES Q. HARRISON, ALI SABETI I I Date: November 24, 1991 Jakarta, Indonesia By: John Lewis, Richard Webb, and Devesh Kapur 1 FOREWORD The following-is a transcript of an oral interview conducted by the authors of the World Bank's fiftieth anniversary history: _John P. Lewis, Richard Webb and Devesh Kapur, The World Bank: Its First Half Century, Washington, DC: Brookings Institution Press, 1997, It is not a formal oral history, and it is not a systematic · overview of the work of " the person interviewed., At times the authors discussed the planned publication itself and the sourc~s that should be consulted; at other times they talked about persons and publications extrane.ous to the Bank. Some interview tapes and transcripts begin and end abruptly. Nevertheless, the World Bank Group Archives believes that this transcript may be of interest to researchers and makes it available for public use. Nicholas Hope, James Harrison, Ali Sabeti . November 24, 1991-Final Edited · 2 [Begin Tape 1, Side Aj1 HOPE: I think in that period-I mean, Dave Gordon's arrival coincided with Pertamina's heyday, and at that point the Bank program.was pretty small, and I don't think we had a whole heap of influence there at all, '73-4, until the French came. I guess he came in '72, Dave Gordon, and left in '74. Two years, something like that. LEWIS: Well; then, Devesh was right the other day. We were told that Bernie [Bernard R. Bell] was here for seven years. HOPE: No, he was here for four years, Bernie. HARRISON:· He was here in '72, Bernie was. 1 0riginal transcript by the Brooking Institution World Bank history project; original insertions are in [ ]. Insertions added by the World Bank Group Archives are in italics in []. Nicholas Hope, James Harrison, Ali Sabeti November 24, 1991-Final Edited 3 HOPE: Yeah, yeah, Bernie left in '72, and Gordon came in '72 and went in '74, I think. Baneth was the one who was here much longer than I realized. They ~aid he was called back, but he was here from '74 to '78. WEBB: Baneth? HOPE: Yeah. And then Ping Loh sort of served in this acting capacity for a long time, and the Bank kept trying--Shahid Husain--kept trying to confirm him, and the Indonesians kept not sending a note back. He's a Chinese; they didn't-want a Chinese in the office, and they didn't want to say no to the Bank. So finally somebody realized that they were saying no, and then Stanley Please was appointed, anq he came for all of six months and ])ad a nervous breakdown and left. And then Russ Cheetham came down here in 1,980, and he was here for four xears'. LEWIS: And then D.C. Rao .. HOPE: Then D.C. Rao and then Attila Sonmez for three years each. iEWIS: They spoke highly of Rao. HOPE: Yes, he did extremely well, which isn't terribly surj>rising to any of us. He's pretty good! LEWIS: Well, we didn't get many sour notes about personnel from, certainly, Widjojo. We didn't get any. WEBB: No, no. HOPE: Have you seen Sal~h Afiff yet? LEWIS: No, we're seeing him at the end of this sequence. HOPE: Yeah, I can't imagine Widjojo saying anything bad about anybody. It's a problem. YOU know, if you want to get Somebody to give that SO rt Of thing, YOU do need somebody like Saleh Afiff, and even he might not [inaudible] KAPUR: I guess in sort of seeing the story there were two things which sort of--I'm ·not sure how true they are. One is the fact that people say Indonesia has done very well for the past 20 years, the Bank has been closely associated with Indonesia, and . therefore pedple try to draw a conclusion that the Bank has been helpful in this process. And second is, if one goes through the OED [Operations Evaluation Department] reports on Bank projects in Indonesia, they really don't seem to stand out any better or worse than, say, South Asia. HOPE: I might agree with that. I think the projects have had beans to do with it. WEBB: Have had what? · HOPE: Didn't have anything to do with it. Nicholas Hope, James Harrison, Ali Sabeti November 24, 1991-Final Edited: 4 LEWIS: Right. HOPE: I mean, a projects a project. It's dialogue that's been the main thing. SABETI: Do you that's the problem with the OED reports [all speaking at once] HOPE: The OED reports o~ the structural adjustment loans . LEWIS: What do you say it is now? [all speaking at once] HOPE: It's the dialogue. LEWIS: Yes, yes. HOPE: [all speaking at once] I think the line ministries and the projects have-I mean, they are very much like projects all over the place, and we've had spectacular lack of success in some areas. In the irrigation projects we've done project after project, and their implementation capacity is still exceedingly weak. In transmigration and tree crops, I think you could argue that we've really not done . particularly well. I think it's been a very successful population program and education program. Heal~h program is probably less successful overall because it is ... HARRISON: Yes, but I think the problem, too, is the OED reports really can't effectively track the dialogue because most of that doesn't really show up in the kind of documentation that OED examines. I think that's the problem. And also I think, perhaps also particularly because in Indonesia of this sort of parallel track approach that we've had for so long, that you know the projects don't show a lot in terms of policy content perhaps directly or explicitly .sometimes because of this approach that we've had of carrying it on in a kind of parallel way. So I think there's a problem . with using the OED ·reports in a ... HOPE: Jim's suggestion is a good one because Bill [William HJ Branson came down and did the review of the trade policy adjustment loans. He's due to come back again in January or February and review these private sector development operations. -' This is the policy line. Now, that's only in the past five years, essentially, but Bill did this review, and I think that speaks quite a lot about the policy dialogue and the way in which the government's responding. KAPUR: Well, it's interes'ting because, I mean, obviously the OED reports only look at projects per se, but it's interesting because, I mean projects are supposed to be the bread and butter of the Bank, hopefully, right? That's the view. So that-does this imply that as an institution it's done much better in aspects that are not [projects]? HOPE: Well, my view would be probably yes. r'mean, I haven't read all the OED reports. I read the education one recently; whiGh I thought was fairly complimentary. This was the. . . ' SABETI: Which one? Nicholas Hope, James Harrison, Ali Sabeti November 24, 1991-f'inal Edited 5 HOPE: The evaluation of education, twenty education [~ll speaking at once] and I think the most recent project audit report on the power program was pretty complimentary about the way in which the power program has been structured in Indonesia. And that's an example, I think, where there has been strategy and a policy dialogue and all projects have been incremental and bu~lt towards the objectives that they want to see emerging for the sector. But I haven't read a lot of the other ones. HARRISON: But I mean the OED, the recent OED report on the population program of the Bank here says that the Bank didn't make a significant intellectual contribution. HOPE: Which is ridiculous. HARRISON: And, you know, we, well, we fundamentally disagree with that, but the problem is that if you look at what the Bank finances, it lias nothing to do directly with whether we have an intellectual contribution or not. They said it was all hardware. Well, that's what? That's what was the residual ... HOPE: That's bloody silly. I mean, that's·exactly right. We finance what we package, and we finance what needs to be financed. This is what our power people would say. For example, as long as the thing, the dialogue is moving-in the right direction, we'll finance anything they want. We can package it any which way we · want and put the nuts and bolts together as long as things are moving in the right direction. SABET!: We started in 1968, okay, and the institutional capability here was much, much weaker than anywhere else in Asia, and especially South Asia. So in that s.hort period of time for the projects,. this massive number of projects that we have done here, to do as well as South Asia in itself should be considered as more successful than we were in South Asia. We have tremendous absorbative capacity, institutional infrastructure and so on . .WEBB: y OU know this is something that I find very hard to get at. I think it's fitting · because a big part of the story is how Indonesia got from there to now in terms of institutional capacity because all the time one hears things are pretty weak here still in. terms of institutional capacity and [inaudible] but at the same time there's a sense of~ considerable improvement. I don't know how correct that is. SABET!: They can both be true if you start from a low enough base. WEBB: Okay. And dialogue may have .something to do with that, but I suspect that it may be just as important or more important is the kind of daily contact by hundreds, ·thousands of man-days of technical people that have come, that have talked, have interacted, and all of this has contributed-it's helped little by little to--1 mean, they must.done an awful lot of it independently of the Bank. The Bank surely made some input at that level, but just how much? How on earth does one get at that? HARRISON[?]: One thing may be worth looking at and discus_sing. Russ's point is that when he came here, it was [inaudible}. He was the one who basically convinced the government to start putting a lot more money into education or things related to Nicholas Hope, James Harrison, Ali Sabeti November 24, 1991-Final Edited 6 the institutim:ial development programs and that, you know, they should use more of the Bank resources in that area. Now, again, I don't know how you document that. But it's quite clear if you 109k at the figures that the Bank was lending several multiples or more for education as a portion of its portfolio in Indonesia from the begi1:ming of the '80s onward than any other country. One of the disappointing things about the OED assessment was they didn'treally discuss that because it's only recently with the-.-under [Barber B.j Conable--that this kind of emphasis on human resource development has really, that you can really see that in some of these other countries. That seems to me to be one feature of the Bank's program in Indonesia that is a little bit {inaudib./e} HOPE: And another feature--I'm not sure whether it's unique, was this bringing down-I mean, a large amount of the projects in the early period were in agriculture. The government moved to attain rice self-sufficiency, and the Bank really supported it very heavily with i.nfrastructure and other investments. By the end of the '70s they've got to a point where they've got so much agricultural investment down here that they brought a unit down and. set it up and essentially did supervision out of RSI [Resident Mission Indonesia}, and that we've been busily unwinding in the past four years since the reorganization of the Bank. But, I mean, at that point I would have thought that would be an interesting area to look at because if there's any area where you should see success on the project side, you would thin_k it would be in the agricultural area becaase that's where we've really invested a hell of a lot of effort. Do you think we're being very successful, though, Ali? In irrigation we ... SABETI: In Java, yes. Off Java, no. KAPUR: That's what fraction of the projects? Is Java--projects [inaudible} the total of Indonesfa? SABETI: Oh, a majority is Java:. We started here and continued here, and then we started going to the offshore islands. LEWIS: I'd .like to, I think, talk some more about projects including the social sector, · but dialogue: let's talk a little more about th.at. I have an impression of what has happened here. I was trying to tell Richard yesterday since he was-it came to--our conversation got focused sort of on what the hell did Bernie Bell really do here. And it--1 think Richard was sort oflooking for particular policy thrusts that were planted by Bell, and it's sort of analogous to the kinds of thrusts that clearly you'try to get through a SAL [structural adjustment loan] these days. I mean, you have certain things you--in Senegal th~y had 32 conditions in their first one. ) HOPE: And then tlrey had 15 of those conditions in the second one ... LEWIS: That's right! But my notion is ... HOPE: ... and the other l 7 had been dropped. Nich.olas Hope, James Harrison, Ali Sabeti Nove..1.J1her 24, 1991-Final Edited 7 ' -LEWIS: -In the dialogue, as I understand it-:-andJ sort of was involved in one in India in the '60s-you have a kind of ongoing conversation with the government and you're talking about the whole damn development strategy~ and it's hard to identify which · . ideas are yours except that you've been sort of a sounding board for the other party. And if you're trusted, you actually have quite an effect on !he net outcome without hav'ing aqthorship of yery much in any very identifiable way. Is that a fair statement? HOPE: Yeah, I think that's exactly right. What was his name--Ali Wardhana or somebody when they did this RSI study called the Bank "a sparring partner." LEWIS: Yeah, yeah, yeah. HOPE: And I think that's probaply quite a good description of somebody that they like to fly things by, and they'd ask the Bank to write-I mean, they--of course, we do all this economic and sector work, and some of that even gets discussed with the government, but the thing that they really seem to appreciate most are these informal notes. LEWIS: Yeah, "non-papers." Everybody--you talked about that. , HOPE: ·Non-papers: "Send us two or three pages on this." And, I mean, they used, I think, Bernie in that way a great deal and Russ and ff C. like that a lot. I mean, I think Russ probably-the thing of these thrusts, I mean I wouldn't know any in the '70s. I think it's pretty clear that the-devaluation in 1983 that Russ had quite a bit to do with and I suspect D.C. in the '86 devaluation, but by then they knew what they. had to do anyway, and the [International Monetary] Fund and D.C. Rao were probably quite involved. But I can't think of any, any really big things. I mean, the ... HARRISON: One thing I thing that both Widjojo and also Bernie Bell have mentioned in the early days was setting up ju~t a process for evaluating projects [all speaking at once] · / · HOPE: P_lanning projects. Bernie did a lot of that.. 'HARRISON: That's not a kind_ of a policy; it'.s more of a process, I guess, but it's important. LEWIS: No, it's process. As a matter of fact, but this guy who's now a radical, sustainable development fellow... · KAPUR: The environment minister [all speaking at once] HARRISON: Emil Salim. LEWIS: He talked, in the early days that's exactly what he did, was work on cost/benefit analysis/ and Bernie helped to sort of--almost ran a tutorial on that sort of thing. HARRISON: I think they talked a Jot about individual investments, sort of areas of investment all across the board, whether it--not Bank stuff as such. · · Nicholas Hope, James Harrison, Ali Sabeti · November 24, 1991-Final Edited 8 HOPE: The whole works. They talked to him a lot on planning--Arthur Lewis, that sort of stuff--the very simple-minded things like "you-can't-spend-what-you-don't- have" sort of thing! [Laughter] Well, that was quite important because they'd got through this stabilization crisis, and they were very keen not to lose it, and so I think Bernie did help them to establish quite a bit of rigor. LEWIS: This was tbe balanced budget rule? HOPE: Right. So-called balanc~d budget rule.. LEWIS: Which included foreign aid in it. HOPE: Yes. · WEBB: It's very hard to judge. I guess there's really no way one can really ever come out with a good judgment on just how important all that was. SABETI: No. You don't have the counterfactual., WEBB: No. HOPE: I think this crowd has done pretty well without us. WEBB: Would have done? HOPE: Oh, yeah, particularly when you allow for the fact that they did have Harvard [Harvard Institute for International Development] and they've had the IMF [International Monetary Fund] since before us. Kemal Siber will tell you something about that tomorrow. They've had their other advisers, AID [US. Agency for . International Development} and people have been here. I think this group would have done just fine without the Bank, but it was still nice to have the Bank around. WEBB: I would discount a little bit of their commendation of the Bank-they have this marvelous gratitude towards the Bank--because obviously they enjoy getting the money. [all speaking at once] HARRISON: There are a lot of other countries that get the money and they don't [inaudibleJ SABETI: They also use the Bank in many different ways, you know, sometimes in order not to do certain things that they don't feel is ... WEBB: As technicians. HOPE: They're very careful about that, though. I mean, they do use us, but they don't let it be seen that the Bank's pulling the strings. SABETI: No, what I'm saying when they agree to. a particular covenant on, lid for the investment for a particular sector, that's really ... Nicholas Hope, James Harrison, Ali Sabeti November 24, 1991-Final Edited 9 HARRISON: [inaudible] negative pledge {inaudible] HOPE: It's interesting. l mean, there are a lot of things that they don't know that they get from the Bank. I mean, these are things that they did know, I mean, the guys, the ministers, are obviously things they've learned that they forget about because they're so damned busy, and I thinkthat's where the Bank does help quite a bit. I mean,_ by having a group of good economists down here that when they get into one of these situations, they get analysis that allows them to then remember their economics, that this is the real--that this is the way it should work, and I think they're doing it quite a bit from that, straighten out their thinking. LEWIS: Let me ask you: the Bank has been what I would call the residual lender here, or donor, here for a long time. In a bilateral case where a country's in that role, as the U.S. was in India, say, in the '60s, you have this kind of dialogue going on. The residual donor also can have, do quite a lot of stuff ad hoc because it does deploy - resources. That is, if something comes up short, you can get a kind of quick fix, and bilaterals in some senses are, may have quicker reflexes than the Bank does in that kind of thing. I don't know how much'the Bank can really do that. Bave there been cases where Bernie Bell would discover that they were short on some kind of resource input.and could get a, I guess it would have to be a loan from the Bank--it would have to be, I suppose;· a project loan from the Bank--quickly? , HOPE: I can't remember. I can't remember. I know Bernie was saying once about that when they joined they-got this hundred million credit from Ex-Im Bank [U.S. / Export-Import Bank]. It was terribly important in the short term to allow them to do some [inaudible]. But I don't think during Bernie's period we gave them notable amounts of money that was fast disbursing. Did we have any programmatic assistance through IDA [International Development Association] in those days? I don't think we did? [several speaking at once] HARRISON: I don'tthink so. SABET!: I mean, that really is ... HOPE: The only case I can think is Russ, after the '86 operation--well, it was before Russ because the trade policy adjustment loan was when D.C. was still here. First of those-that's when the [several speaking at once] And that was clearly--D.C. Rao's must have initiated the bulk of that. But they--that was important because I think it did mobilize all the special assistance that they needed after the '86 crunch. HARRISON: I wonder ifbefore then--I mean, how long has our role been that of estimating what the aid requirement is and then following up on that, really trying to discuss with the donors how they could do that. I mean, that's been something .. HOPE: Since the beginning. Since the beginning. [both speaking at once] HARRISON: Well, then in a way that's been part of the role [inaudible] Nicho_}as Hope, James Harrison, Ali Sabeti November 24, 1991-Final Edited 10 LEWIS: Was it Widjaja who emphasized the importance of the ... HOPE: The IGGI [Inter-Governmental Group on Indonesia). LEWIS: Yeah, I think so. KAPUR: Although at least as far as operations sort of statistics classify instruments of Bank lending for Indonesia in the '70s, they do have what they have now gone and reclassified as adjustment loans as distinct from investment loans. I don't know if they're special Joans, but they do have a few of them. HARRISON: I don't remember. In the '70s? KAPUR: Yeah. HARRISON: Unless they were import credits ... HOPE: That'd be all I c;m 'think of. HARRISON: ... that's the only thing I can think of. HOPE: Because India was getting tons of that stuff. HARRISON: Maybe old style program Joans. SABET!: Is there a commodity loan? Do you remember? HARRISON:. I'm surprised that Indonesia would have one. Maybe during the . Pertamina problem. · HOPE: Well, I joined the Bank in, I guess, '77., I came in on that financial side, and then the loan portfolio analysis unit was giving Indonesia a pretty tough time, saying that they weren't creditworthy. And at that point [Robert S.] McNamara was trying to push more money into the country, and they were trying to graduate them from IDA, which they did in '78, I guess, because of all the oil money. I guess we weren't doing a whole lot. KAJ>UR: The one other thing that is str~king in the conversations with the Indonesians during these past days is that there was one person whose name which was never mentioned, and that's the president. I mean, was he absolutely shielded by the technocrats and the Bank never encountered him? HOPE: Bernie Bell rang him up all the time, as I understand. They saw a lot of each other, but I don't think that subsequently that any other director has had that sort of access to the president, not even Russ. LEWIS: Well, I agree. The .inverse of that, stand that point sort of on the head, was what Richard said as we drove away from--we wer.e all sort of oo-ing and ah-ing about Widjaja, that he was up to his billing. Richard said, ''We don't even talk about Nicholas Hope, James Harrison, Ali Sabeti. November 24, 1991 - Final Edited· 11 the person who is most important in this story," and it is the fact that the man on top lets this happen, obviously, that he's critical. , HOPE: No, he deserve~ an enormous amount of credit [inaudible]. He hasn't put many feet wrong. · ' HARRISON: He called in--1 mean, he had the sort of standard interactions when a sort of vice presidential level guy from the Bank comes out or the president of the Bank comes out, riormally they would meet with the president, and usually those meetings have some substantive message. They aren't just ceremonial. They usually are--on both sides there's an interesting exchange, at least the ones I've heard. HOPE: The last one was in January when Moeen Qureshi came out. The president said, "We want more fast-disbursing assist~nce." And Qureshi said, "You should take this windfall oil money and put it in a special fund and not spend it." · And this went past each other like that. I mean, they:--neither got what they wanted, but subsequently they did sterilize some of the money. But the president basically told him, "Look, we've got to develop. We can't afford to put our rµoney into a bank account." And Qureshi said, "You should declare victory and say that you don't need any more special assistance because you've stabilized. You've done a good job. That's the ' finish." But it was interesting to see. I said to Russ.afterwards, Russ said, "How long did he get there?" ' I said, "Forty minutes." He said, "That's fine.· Anything over 30 minutes is an important meeting." SABETI: They didn't have to be, you know, agr~eii:ig with each other 100 percent. HOPE: No, no, no, they didn't. .Arid Qureshi was very disappointed. WEBB: The big thing here has been stability, it seems to me, monetary and political stability. And the other thing that's a very clear-what everyone seems to say, at least, that it's very clear, big part of the success is the pro-active cultural component policy, but on the industrial and trade side it's been pretty poor most of the time. I mean, all the sins-and also on project implementation, population, education, are turning out to be rather good parts of the picture. It seems to me that this could easily have been a much poorer--one could easily have ended up with a much less favorable vi~w of what's happened. HOPE: Oh, yes. They haven't found as much oil as they thought. Nicholas Hope, James Harrison, Ali Sabeti November 24, 1991-Final Edited 12 Actually, it's interesting because when I first came down here I met Mochtar Riady, when I first came down as the chief, industry and energy. rmet Mochtar Riady, who was one of these old Chinese guys and I guess he runs Bank Central Asia._ I'm not sure he does run it anymore; he's been sort of moved upstairs now. I had a chat with him. We were talking, and at that point we were beginning to look at what they needed to do to get debt service back under control, and we were talking about a doubling of non-oil exports and a redoubling, and by 1995 we said we needed non-oil exports to be around 25 billion, which is what Russ had been talking about with the economists, and so we were mentioning this. And' Mochtar Riady was quite extraordinary. I saw him at 5 o'clock in the afternoon, ~ and he talked.to me until 6:30. I'd never met him. I didn't have to say very much, but he just talked and talked. And he said, "Of course, the worst thing that ever happened to this country was the oil, the· fact that we found oil. Before that we'd run very sensible policies. We had an open system, highly competitive. Of course, we didn't have any decent infrastructure, and we were very short in all the key human skills, but in the small areas we were starting to make quite considerable progress. And then we found oil, ana then they could.afford to do Krakatoa Steel and fertilizers and cement factories, and the government started to push all this money into productive industry. Of course, also built a lot of infrastructure and put a lot into agriculture, and built a , few schools and stuff. It wasn't all productive stuff, but," Mochtar Riady said, "that was a big mistake because they put all this money in and then had to protect it because it wasn'! efficient, and that caused us all sorts of trouble." And he said, "If you'd give me control of the policy-setting iq Indonesia, I would buy Indonesian exports for 25 billion now." He said, "All I'd do is I'd have the greater Jakarta area with a set of policies very much like Hong Kong." And he said, "By 1995 there's absolutely"-·this was '87-"there's absolutely no doubt in my mind that I'll make several billion dollars if you allow me tO buy the export value for)5 billion and you allow me to set the policies." LEWIS: The export value of what, the whole country's exports? HOPE: No, non-oil exports. Non-oil exports by '95. But I mean he--what I found very interesting was this perception from a Chinese who might well have been - thought of as somebody who had benefitted by close association with the group and perhaps worked, you know, the rent-seeking types of behavior that you-see in some of the other groups, but in fact he was quite convinced that, you know, if they had followed the policies that they had put in place immediately after the New Order that they lost track of in '73 when the oil boom was.[both speaking at once] that they _would have been much better off than they were in '86-7 after the crunch had come in oil prices and that if they went back fo those policies--and he wanted it set up immediately for Jakarta--then exports could just boom. LEWIS: And who is this guy again? HOPE: Mochtar Riady is the--I think he's now chairman of the board of Bank Central Asia, but he's associated with Liem Sioe Liang. HARRISON: The largest private bank in Indonesia, [both speaking at once] Nicholas Hope, James Harrison, Ali Sabeti _ November 24, 1991-Final Edited 13 HOPE: He's associated with Liem Sioe Liang. And his son is James Riady, who runs Bank Lippa, the bank. That was interesting. LEWIS: Indeed. WEBB: Yeah. Right on. Who was it that said when we asked him--oh, it was [Hadl} Soesastro.,.-we asked him what he thought was the best or the most important thing the Bank had done here, he said industrial restructuring. HARRISON: Really? LEWIS: Was it him? WEBB: Yeah, yeah, it was him who said it. [several speaking at once] HOPE: That's interesting because the process is embryonic. It's hardly even begun, the restructuring of enterprises. I mean, the public enterprises are very, very slow. moving loans. KAPUR: I guess he was referring to, I guess, the '82-3 report on industrial \ restructuring. · [several speaking at once] HOPE: Oh, okay. Well, the)ndustrial sector report, yeah, the [Armeane M] Choksi report. Well, that could be. I mean, that was a good, doctrinaire, neoclassical presentation of what they needed to do: · HARRISON: It summarizes pretty much what they have done since about the mid- ' 80s. HOPE: Exactly. It could almost be a b.lueprint. They did some of it after '83 when 'they deregulated the credit system. At least, they removed credit ceilings and they allowed the interest rates on deposits to go up, and then they set their own interest . rates and then shortly after that--and there was a tax reform. And then after that they began to deregulate in earnest on the trade sector and then the financial sector as well · and then investment regulation and everything else. But I mean that was forced on them. LEWIS: Who spoke about that? Was it Widjojo or ... KAPuR: No, it was Hadi Soesastro. LEWIS: Oh, Hadi. Yeah, yeah, yeah. [several speaking at once] SABET!: I heard the story about this, that when they were·... HARRISON: It's really kind of almost a very difficult thing to do in a time when you're ... HOPE: They were forced in a sense that after '86 when they really were in terrible. trouble, a question of what will they do. They could have done a lot of things. I Nicholas Hope, James Harrison, Ali Sabeti November 24, 1991 - Final Edited 14 mean, they didn't have to be rational, but that was the time to dust off the blueprint, I would have thought. HARRISON: A whole lot of people I know would go for import controls. [several agreeing] HOPE: Oh, yes, quite right. SABETI: W~en they were debating this industrial restructuring, Widjojo was planning this-,.and I don't know who was trade or industry minister--they were debating in the cabinet, and they keep saying, "We need the controls because of these infant industries." They keep referring to the "infant industries." And Widjojo turns around and says, "My dear so and so, stop calling these 'infant industries' just because they're small and haven't grown. They are bonsai industries. They're never going to grow larger if you continue this. They will always be small. They're not infant, because ... " [laughter; all speaking at, once] .HARRISON: Was that Nasruddin [Sumintapura} who said t,hat? HOPE: Nasruddin, yes. SABETI: Was it Nasruddin said that or. ... HOPE: Nasruddin. SABETI: Yeah, okay, one of them. HOPE: It's brilliant. Perfect, perfect explanation! It's wonderful. I mean, he said these are very carefully nurtured infants that are never going to grow up. [all speaking at once] That's Nasruddin, the junior minister of finance. KAPUR: Sort of one of the things is--just sort of looking at other Bank reports, Cote d'Ivoire, as an example--you see at a certain period of time these huge economic studies that the Bank report says is a spectacular case of success. Three years later ... HOPE: Tube city. KAPUR: You know, there are a fair number of countries that, unfortunately with the benefit of hindsight, one sees this, that there is huge mission or six-volume report on the economy created and then three or four years--this sort of thing of the seeming fragility. Now, I don't know how far it, if at all, this is ... HOPE: Richard knows this very much at first hand. And I think one of the things, the messages, that we're being, we've giveri, this group, to the Indonesian government since we got down here is that the macro-management problem that they face is getting harder. They've deregulated the private sector. They're now managing with indirect controls, and the private sector is driving the show, so they've got to be much more responsive on.the public side. They can't afford to simply mindlessly run balanced budgets, and they don't want to get into deficit financing, but they've got to accommodate the private sector and that's a new game for them. Nicholas Hope, James Harrison, Ali Saheti November 24, 1991 - Final Edited 15 What Widjojo has said when we've b~en sitting there taiking to him is, "Every time we solve a problem, another one emerges. It's getting harder all the time." It's absolutely correct. And it is. It is getting harder for them. It's a more sophisticated economy. I mean, we've been arguing with then:i this year pecause Russ's perception, Russ Cheetham's perception--and I think this is one of the few areas where I disagree with Russ on Indonesia-but he, coming from the early '80s, he's seen that the· policy initiative stops a year before the elections and they don't do anything that to disturb things as they run up to the elections. And what we've been trying to say to them is, "You can't afford to do that. It might have been okay in a situation in which public expenditure and the public sector generally is driving the economy. It may then be all right to have a situation in which you wait for a year, you allow the subsidies to grnw a bit, you allow administered prices, inflation to erode them so that the financial situation of public enterprises gets eroded a bit, and then you have a correction. immediately after the election, and it's okay." But our argument has been, "Now that the private sector is running things, you've got to constantly fine-tune the economy. You can't just sit back and do one or two bold things, you know, a year and a half down the track. You've got to take preemptive action." And that's a hard lesson. WEBB: It's a different management problem', and with the change in the whole political sce~ario I think it multiplies the nature of the problem. LEWIS: What change do you mean in political? KAPUR: Potential change. ' . WEBB: Well, I'm just assuming that there's no way they can stop this opening-up process, loosening up and opening up. LEWIS: Right. But the leadership you don't see changing, you aren't assuming changes quickly. WEBB: Well, with either old guys or new guys, either way I think there's no way they can stop this now. · · KAPUR: Well, it's sort of striking because sort of seeing the '89 CSP [Country Strategy Paper} and then we sort of had a look at the OC [phonetic} minutes around operations [inaudible] You know, if it had and for that time, you know, obviously sort of reasonably confident thing on the debt service, suddenly six months back things look somewhat different. With the speed of change now, I go--particularly if this had been an election year it might have been... · HOPE: It is. KAPUR: ... much more difficult to actually scale back. HOPE: It is an election year. Nicholas Hope, James Harrison, Ali Sabeti _, November 24, 1991-Final Edited 16 HARRISON:· The election's in June. HOPE: I mean, we're within a year of the election; I mean, basically when we, at IGGI time this year, I mean, Jim was telling them since February, "You got to do something, fellows," and we've been pushing to get fiscal adjustment to complement ·monetary guidelines, and they've been very reluctant to do anything. I mean, what turned around was--it was extraordinary to .see the extent to which the current account I I. moved into substantial deficit, and the only thing that probably saved them from disaster with the windfall oil revenues. I mean, that in itself might have encouraged inappropriate policy for a short term, but that had already started, I guess. We had this inflow of liquidity into the banking system, I guess, when the SBis [Sertifikat r Bank Indonesia] matured in '89-Jim, it that right?--a:fter the '88 sterilization when they changed the reserve ratios and they had the,SBls flow back into the system, and that gave' an impetus to money creation and you got a blowout on money through, from around about October of '89 through May of '90 when the Fund and the Bank had said, "Look, this is much too rapid," and they then started to try and take things in hand again. But I mean that had happened, and then, of course, shortly thereafter you got the Gulf· crisis in August. We spent a lot of time analyzing how they were going to sterilize all this inflow of foreign exchange and what way they would spend all their money. There.was no perception of a debt crisis or even debt difficulties. What happened, of course, is that once they deregulated, the pent-up demand for investment in this country turned out to be absolutely enormous, not just from foreigners but · domestically as well. So once the incentive system changed and it became possible to get, you know, the three or four signatures you needed to get an investment done instead of having to get 33 or 34 signatures, everyone wanted to be in it, artd. with the balance of payments looking good because the oil was going to' be golden, and we were telling them that. To an extent we were talking about: How cart you sterilize this? What can you do with this money? How do you take it out of the economy in a way that's not gping to blow, you .know, all your aggregate set away and have a tremendous .non-traded goods inflation and all the other sorts of stuff, waste it through implementation difficulty? There was a very rapid turnaround. LEWIS: Is this what Moeen was saying when he was ... HOPE: Yes, Moeen did a good job for us. Moeen came down. He was-I mean, his initial reaction was h~ looked at the budget, last year's budget, and he said, "An 18 percent increase? That's much too great, much too, much." Our reaction was, "This is terrific!" It assumed a) 9 dollar oil prfoe. At the time they did it we were projecting 21, and there'd been reason you could have assumed 22 or 23, and they could have pumped a lot more revenue into the system. But they took the most conservative assumption they could get away with politically. They held the budget down.to the lowest increase we thought thatwas reasonable. But Moeen did reinforce the notion that with oil prices really not looking a~ if they were going to stay up forever, that they really needed to do something about it, and , subsequently they did. They did run a very substantial budget surplus. Nicholas Hope, James Harrison, Ali Saheti November 24, 1991-Final Edited 17 WEBB: You're doing all this in view of the Fund, really, all this dialogue on the ... ~ HQPE: Well, ~ith the Fund; with the Fund. I mean, the Fund has had a changeover, but the previous Fund rep was extremely active; the new one undoubtedly will be too when he finds his feet, but he's only been down here for three or four months and he's not as familiar with the economy as.his predecessor was. But no, we did talk to the Fund guy a lot. . HARRISON: We worked real closely on the Article IV consultation measures, the fullest kind of Bank involvement on an Article IV that I've seen. WEBB: But there's no bite in the Fund's dialogue with the government. , . I HOPE: In previous years [both speaking at once] HARRISON: Again they were also in IGGI, the RED [recent economic developments} part of the doc·umentation of the IGGI meeting, it's--we have local meetings with the IGGI embassies. The_ Fund was there. HOPE: You made the point, Jim, that irt the wrap-up in 1990 when this monetary expansion was taking place and Lind