JAKARTA: If you want to know whether developing countries will keep the world out of deep recession or will drive it further into the hole, there are few better barometers than Indonesia. Now that Barack Obama, a former resident, has been elected president of the United States, this lower-middle income democracy with 250-million people, an open economy and high exposure to global financial storms may get the attention it merits.
If nothing major comes out of the meeting this weekend of the Group of 20 developing and developed economies in Washington that significantly helps the likes of Indonesia, expect the global situation to get worse. Questions will arise over whether open markets and the private sector will continue to be the norm in Asia, the region that has most benefited from them. Will this crisis be just a blip in the chart of prosperity, or will global recession push Indonesia back to authoritarianism and economic nationalism, with high tariffs, currency controls and state ownership?
Just a few weeks ago, Indonesia was sitting comfortably. Tree-crop and mineral-export prices were high, the rice harvest was excellent, badly needed spending on infrastructure was picking up, the banking system was liquid, the fiscal position strong, the current account in surplus, internal politics were stable and the government's technocratic economic ministers were winning international praise. Oil and food price inflation were abating and Indonesia was expecting to benefit from the shift of light industries out of southern China.
Now, not only has the external environment changed dramatically, but impeccably conservative economic management is proving little defense against global forces. Prices for exports such as palm oil, copper and coffee have fallen 60 percent, as much because of the bottlenecks in global trade finance as from a collapse in underlying demand. This may be temporary, but it has added to fears about the currency as other sources of foreign earnings - labor-intensive manufactures, high-end handicrafts, tourism and worker remittances - are also threatened.
In theory, this populous, resource-rich country with a relatively low ratio of foreign trade to GDP should be able to face the situation with more equanimity than most. Years of tight fiscal policy since the Asian crisis of the 1990s ought to give room now for large budget deficits to sustain domestic demand in the face of an export slump. Indonesia should be able to spend more without causing alarm about its long-term credit worthiness. But with no foreign exchange controls the country is subject to volatile, ill-informed markets. The government cannot appear to flinch from tight fiscal and monetary policies.
The global system is forcing Indonesia into policies that exaggerate rather than counter business cycles, restricting spending when stimulus is needed. While the United States and the European Union, with their reserve currency status, now have leeway to run even bigger budget deficits to try to stave off recession after years of consumption excess, developing countries, despite years of restraint and current account surpluses are constrained from spending.
It is not enough for the rich nations and China, with its $1.9 trillion in currency reserves - to stimulate their own economies, as Beijing is now promising to do. Unless the United States, Europe, Japan and China, either directly or through the IMF and World Bank, give assurances of support to well-run economies, the likes of Indonesia are destined for recession too.
The U.S. Federal Reserve has helped South Korea, Brazil, Singapore and Mexico with swap arrangements that stabilized their currencies. But swaps and longer-term lending commitments are badly needed by others. The World Bank alone says it could use $100 billion - still small by the standards of what the United States and Europe have been throwing at their financial systems.
The effects of global events on employment in Indonesia may not be felt until well into next year. But 2009 is an election year in this diverse democracy, so the timing of a slowdown may determine whether President Susilo Bambang Yudhoyono survives in office beyond July.
Most voters live on Java rather than the islands producing export commodities, so the trade impact on them will be delayed. But it will be a close race and victory for Yudhoyono's main opponent, Megawati Sukarnoputri, daughter of independence leader Sukarno, could lead to a shift in policies. Although her views are hazy, she tends to the economic nationalism of her father. Even Yudhoyono might find that irresistible if open markets fail to deliver.
Unless the nations meeting in Washington understand and act on the predicament of countries like Indonesia, there is little reason for optimism that the potential of developing countries can be harnessed to pull the global economy out of recession.