Asia Inc May 1994
POLITICAL ECONOMY: Indonesia in the Next Century
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
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
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
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
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
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
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:
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
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
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
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.
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
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
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
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
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
Indonesia assumes chairmanship of the Non-Aligned Movement
President Suharto is "re-elected" for his sixth term, promises more liberal