Asia Inc May 1994

POLITICAL ECONOMY: Indonesia in the Next Century

May 1994

The Anxious Archipelago

Indonesia could become one of Asia's fastest-growing economies - "a superpower in the Asian context." But the road to prosperity won't be smooth.

From the observation deck of the 137-meter Monas obelisk, the national monument in central Jakarta, Indonesia's past, present and future unfold as far as the eye can see. These days, beneath the obelisk's 14-meter flame encrusted with 33 kilograms of gold leaf, this metropolis formed from a 16th century pepper port presents an awesome view.

To the north lies the Java Sea and the last traces of the old Dutch port of Batavia, where pinisi, traditional Buginese wooden sailing vessels, carry timber from Kalimantan to the Sunda Kelapa wharf. To the west a seemingly endless march of single-story, clay-roof houses threatens to envelop the city. To the south, gleaming skyscrapers along Jalan Sudirman, Rasuna Said and Gatot Subroto form the city's golden triangle business district. Exhaust-spewing cars clog the highways; the glass towers reflect the increasingly gray Jakarta sky.

In Serpong, 25 kilometers (km) to the south, a Southeast Asian Silicon Valley is coming to life. Here, on an old, disused rubber plantation, is a new city where 600,000 Indonesians, many in their 20s and 30s, will someday live and work. Ten Indonesian business groups have formed PT Bumi Serpong Damai to develop this community with its own central business district designed to attract tomorrow's industries. Says Ken D'Angelo, adviser to the directors: "Our project is not a bedroom for people working in Jakarta; this is a self-sustaining city dependent on its own synergy with institutions nearby."

Key to that vision is the neighboring Puspiptek Science Based City. Its aim is to link educational institutes with its own research and development labs and spin off the results to high-tech, high-growth, clean industries in the associated industrial park. A monorail will connect the complex and feed into the Jakarta rail system, while an expressway will connect it with Jakarta's outer ring road, to be built by 1996. The entire project, expected to cost $ 196 million, is to unfold in three phases over a 15-year period.

As Serpong's yuppies build new lives for a new century, Indonesia as a whole is rapidly trying to evolve into a new and very different nation. Much of the archipelago beyond Java will be transformed. Already northern Sumatra is joining with southern Thailand and Malaysian states to form a northern "growth triangle." (See "The Straits Circle," Asia, Inc., April '94.) On Java's northeast coast, a five-km bridge will by 1999 link Surabaya, Indonesia's busiest port, with the island of Madura. There, a new $ 537 million industrial park will attempt to replicate the success of Batam island, which Singapore and Indonesia are transforming into a thriving manufacturing center. By focusing on high-value-added industries in developments such as these, Indonesia hopes by the year 2019 to nearly quadruple its per capita income, from today's $ 676 to $ 2,631 (in 1989 dollars).

By then it plans to have moved tens of thousands more people off densely packed Java to outer islands. Indonesian officials hope this "transmigration" policy, which already has relocated some 3 million people since the early 1980s, will help integrate the 300 ethnic groups who make Indonesia an anthropologist's dream but a politician's nightmare.

Some of this activity would have made sense to Charles Walter Kinloch, who, under the pseudonym "Bengal Civilian," wrote the 19th-century travel book Rambles in Java and the Straits. Then, as now, the economy was mainly agrarian, and controlled by government and business monopolies.

Education was given in native languages then -- as now -- and Kinloch was prescient in observing that European languages "might possibly prove too dangerous a weapon in the hands of the natives." Those empowered with foreign education were beginning to articulate strong views, like Raden Ajeng Kartini, who wrote a series of letters in Dutch (later published as Letters of a Javanese Princess) advocating women's emancipation.

While in the late 19th century Indonesians were just beginning to think freely, in the late 20th they have long since thrown off the yoke of colonialism and their hopes for national prosperity are accompanied by demands for greater political transparency, pluralism and participation.

Indonesia gave its clearest vision of the next century's economy when the planning authority Bappenas set this year -- for the first time -- long-term numerical targets. One goal is to raise Indonesia's long-term sustainable growth rate to an annual 8.7 percent by 2019, from the present 6.8 percent. By then, the population is expected to hit 258 million, with 39 percent living in cities (vs. today's 34 percent). The workforce is expected to swell from 79 million to 148 million. President Suharto recently predicted that by 2019, Indonesia's per capita income will reach the level of newly industrialized countries and the country will emerge as "a strong industrial and commercial nation."

To achieve that goal, Indonesia is relying heavily on efforts like Puspiptek , a pet project of the controversial, visionary minister of technology, B.J. Habibie. The World Bank has criticized many of Habibie's development plans as costly attempts at "dangerous leapfrogging" to new technology. Nonetheless, he and his supporters expect Serpong's Science Based City to spearhead Indonesia's drive to develop a strong technology industry.

Much of Indonesia's quest for the next century is managed by Badan Pengelola Industri Strategis (the Strategic Industries Management Board), where bureaucrats oversee 10 companies involved in making aircraft, ships, ammunition, generators, milling machinery, steel, digital networks, explosives and diesel engines. It hopes to reduce Indonesia's dependence on manufacturing low-value products like jeans and sports shoes, and pole-vault to higher-value, capital-intensive industries.

Some economists dismiss these state-run industries as expensive indulgences, but already, the Bandung-based state company Industri Pesawat Terbang Nusantara (IPTN) has proudly displayed its 64-seat N-250 turboprop aircraft at the Singapore Aerospace '94 airshow, and plans to produce parts of it in the U.S.

Many Indonesians remain skeptical of the government's industrial role and its economic targets. "It reflects the continued strong interventionist sentiment of the bureaucracy," says prominent economist Sjahrir, managing director of the Institute for Economic and Financial Research in Jakarta. Bureaucrats, though, take these plans quite seriously. And to smooth the way, they hope to attract international aid totaling $ 6.8 billion annually by 1999. This, however, adds to mounting concern about foreign debt, which today stands at $ 83 billion. About 32 percent of Indonesia's export earnings now go to debt payments. By 1999 the debt is expected to hit $ 95 billion, but Indonesia hopes the economy will have grown fast enough by then to offset the additional debt.

Industrialization will further reduce Indonesia's dependence on oil and gas revenues. They made up only 40 percent of the country's revenue last year, compared with 80 percent in 1991. It should also mean higher-value jobs. Indonesia needs that: In Malaysia, Sony buys 80 percent of its manufacturing plants' components locally, creating ancillary industries. It buys barely 25 percent in Indonesia.

Once viewed as the country least likely to succeed with a 1969 per capita income of $ 70 (half of Bangladesh's) and 60 percent of its population below the poverty line, Indonesia now boasts a per capita income of nearly $ 700 and claims that only 15 percent of its population can be defined as "poor." The World Bank acknowledged this success in last year's well-documented study, The East Asian Economic Miracle. Said the bank: "If the momentum of development can be maintained, Indonesia can realistically expect to be a solid, middle-income country with a per capita income of $ 1,000" by the turn of the century. Adds Nicholas Hope, director of the World Bank's Jakarta mission: "In terms of macro-economic management, Indonesia is a role model for the developing world."

Indonesia has begun to create an increasingly visible and affluent middle class. Some 40 million Indonesians already earn more than $ 1,630 a year, according to the Economist Intelligence Unit. By the year 2000, Business Advisory Indonesia estimates that 10.5 percent of Indonesians, up from the present 3 percent, will earn more than $ 3,600 per year. Tax collection is rising, indicating increased wealth.

Some 533,360 square meters of office space is under construction in Jakarta to accommodate new businesses. In the city's downtown, PT Danayasa Arthatama is building Asia's largest office development project, the Sudirman Central Business District, which will house a new stock exchange building. Not far away, the Japanese department store Sogo has made it possible for Indonesians to buy once-forbidden goodies at home, instead of making shopping expeditions to Singapore. New malls are being set up in areas of affluence. Matahari Group, the local garment giant, continues to expand its chain of stores rapidly: To its current 45 stores it plans to add 32 by 1996 and up to 25 more by the year 2000.

But despite all this new wealth, the challenge is enormous: Indonesia, which now has 35 percent unemployment, must create 2.3 million jobs each year in an increasingly competitive environment for attracting foreign investment. "Each year they must find (enough new) jobs for the whole of Singapore," says Lim Say Boon, research manager at PT Standard Chartered Indonesia. Other challenges the country faces:

Reduce Disparities
Decentralization could bring a much-needed boost. Today some 70 percent of Indonesia's money circulates in Jakarta. Should the drive to relieve pressure on Java, and in turn on Jakarta, succeed, Indonesia's smaller cities will be able to assert themselves. "Today people have to come to Jakarta for a job," says James Castle, director of the consultancy Business Advisory Indonesia. "But in 20 years people will think twice before moving to Jakarta. There will be good jobs and lower living costs elsewhere. Surabaya will be your light manufacturing center, Bandung will be the electronics center, and the professionalism and sophistication of big cities will reach subregional centers like Medan."

Indonesia can do it, says the World Bank, but its prescription is stiff: reduced foreign debt (which Indonesia is unlikely to accept), an improved deregulation program (toward which some moves have been made), increased national savings, higher utility charges, more tax collection and environmental protection.

Says Mari Pangestu, head of the economics department at the Center for Strategic and International Studies in Jakarta: "Indonesia will have to continue deregulation and extend it to agriculture, reduce restrictions on exports, encourage competition instead of picking winners and reassess the privatization drive. The tendering process will have to be more open, and it should not just create a private monopoly instead of a public one. Indonesia must continue its current direction and not step back."

To accomplish all that, however, Indonesia may have to rely less on one Dutch legacy that has made many businessmen rich: monopolies. Says Salim Said, chairman of Dewan Kesenian Jakarta (the Jakarta Arts Council): "After 26 years of Suharto we haven't really produced a real middle class; we have produced conglomerates. The government has produced a small amount of rich who have good links with the government."

Still, if these challenges can be met, says Merrill Lynch in a recent study on Indonesia, "The Indonesian economy could well be one of the fastest-growing countries in Asia during the remainder of the 1990s," with up to 7.5 percent annual growth.

Increase Competition
The problem with this, some say, is that Vietnam, China and now India are wooing the same foreign capital. According to a confidential report by the Asian Development Bank, "There is concern among economic managers about the weakening investment trend and what it foretells about future growth." But a Jakarta-based business consultant scoffs: "How can Vietnam be a threat? It is Indonesia -- 25 years ago. The threat is overblown. The money going into China is short-term. Have you heard of any long-term projects there? India has fewer risks than China , but certainly more than Indonesia."

What's more, Indonesia's competitive advantage remains. Its wages in some industries are lower than China's, and the World Bank estimates that its productivity is higher. Indonesian wages -- at 30 cents an hour -- are one-third of Thai or Malaysian wages and one-tenth of those in Korea. But low wages hide the problems of disguised unemployment and political pressure (see box, page 65 ). Author Mochtar Lubis warns that the next president is likely to be more nationalistic and seek greater wealth sharing.

Professionalize Companies
In the next century more Indonesian companies will emerge from the clutches of families and become publicly listed, once enough middle-class investors emerge. Frank Taira Supit, president director of the brokerage firm PT Sigma Batara, expects the stock exchange to expand rapidly. By the year 2000, he predicts market capitalization will be around $ 75 billion (up from $ 30 billion today), with nearly 300 companies (up from 157) listed on the main board. Supit says Indonesia will have more high-tech companies by then. The stock exchange will be computerized, allowing on-screen information and trading. There will be an over-the-counter market, a hot bond market, a competent bond-rating agency and new laws for the capital market.

With 7,000 domestic companies, 3,000 foreign joint ventures and 200 state-owned companies, most of them unlisted, Jakarta has the potential to become the largest stock market in Southeast Asia. There also should be more cross-border listings with ASEAN stock exchanges.

Indonesian companies can be expected, in coming years, to increasingly assert their presence abroad. Already Setiawan Djody, a businessman few have heard of outside Jakarta, has astounded the Western business world with his purchase last year of exotic car maker Lamborghini from Chrysler Corp. His aim: to develop Indonesia's own automobile industry. On another front, an Indonesian company recently bought the remnants of Scotland's Ravenscraig steelyard.

Until 1989, President Suharto did not seek a high personal profile. But with the end of the Cold War, he has established diplomatic relations with China, while under Indonesia's leadership the Non-Aligned Movement is seeking new directions. By hosting the Asia Pacific Economic Cooperation (APEC) summit this year, Indonesia hopes to appear in a positive light on the U.S. State Department radar screen. Indonesia will continue to develop ASEAN as a regional force to counter-balance the power of Japan and China. Piter Korompis, managing director of the Sinar Mas Group, is confident: "In the next century Indonesia will be a superpower in the Asian context."

Casting a pall over many of its admirable ambitions, however, is the country's sorry human rights record. Indonesia also has advanced the least of any major Asian nation, with the possible exception of China, toward participatory democracy. Says former foreign minister Mochtar Kusumatmadja: "Democracy is inevitable in Indonesia. We have to learn to combine greater participation with consensus. The two are not mutually exclusive." Author Lubis says: "It is a stupid idea to say that democracy is a western idea. If our democracy really practiced pancasila (the state ideology) we would have been in paradise. Why aren't we?" Such voices are getting louder, and are coming from respected Indonesians.

Other factors are also working against Indonesia: The country's long, drawn-out, low-intensity war in East Timor hurts its international standing. Periodic separatist unrest in Aceh and among the Papuans of Irian Jaya, growing income disparities and a widening income gap between regions all point toward a turbulent era. Indonesia's notoriously low wages and lack of workers' freedom have given labor groups and protectionist U.S. lobbies ample ammunition. Even someone as much of an insider as Mochtar Kusumatmadja says, "It is good that there is outside pressure on Indonesia. There has been an abuse of government apparatus. . . . Without the outside world pointing out such practices, corrective measures may not be undertaken."

In a January speech Suharto said: "We are convinced that with hard work we will be able to overcome these future challenges." As Indonesia marches into the next century, however, the challenges will be different. As Indonesia prospers, it will have to deal with new views and problems as diverse as its ethnic mix.


Indonesia's Future: By The Numbers

Java's Majapahit empire arises, promoting unification of the surrounding islands

Portuguese conquer Malacca

Netherlands establishes monopoly of the Dutch East India Co.

Java occupied by English forces, Lord Stanford Raffles appointed governor

Diponegoro, Indonesia's first nationalist leader, launches a five-year war against Dutch colonists

Indonesian National Party established by Sukarno, a charismatic former engineer

Indonesia occupied by Japan

Sukarno and Mohammed Hatta proclaim independence and start revolution against Japanese, then British and later Dutch forces

Dutch transfer sovereignty to a free Indonesia, Sukarno elected president

Afro-Asian Conference in Bandung lays groundwork for the Non-Aligned Movement

Attempted coup against Sukarno's government touches off killings of some 750,000 alleged communists and ethnic Chinese

Suharto, a little-known army general, named acting president and starts New Order policies, joins the Association of Southeast Asian Nations and the United Nations

New foreign investment law provides a framework for private capital investment

Suharto appoints himself president
Indonesia invades and occupies East Timor, decolonized by Portugal in 1974

World recession hits Indonesia, government starts a series of deregulation policies

Oil price drop worsens the economy, government further deregulates, allowing 95 percent foreign ownership of export business

Relations with China are normalized, following a 23-year break

1991Military shoots protesters at Dili, East Timor's capital, drawing international criticism

Indonesia assumes chairmanship of the Non-Aligned Movement

President Suharto is "re-elected" for his sixth term, promises more liberal policies.