POLITICS: Suharto's fall and Chinese businesses
Far Eastern Economic Review
May 28, 1998

Indonesia:
 Shattered Confidence:
 Ethnic-Chinese hold the key to economic revival
  * By Salil Tripathi in Jakarta with Ben Dolven in Singapore
    1920 Words
05/28/98
p20    

Surrounded by his wife, three children and four suitcases at
Singapore's Changi airport, an Indonesian financial executive sighs with
relief: He has managed to find hotel rooms for the family. Having left
Jakarta in a rush to escape the recent orgy of rioting, they had arrived
without reservations. Singapore isn't home, but for ethnic-Chinese
families like his at least it's safe.
   Thousands of other prosperous Indonesian-Chinese have also joined the
dash to safety, their confidence shattered by the racial overtones of
the recent unrest, in which rioters have often targeted shops and
offices owned by ethnic-Chinese businessmen.
 Many times their number don't have the opportunity of flight, but are
just as frightened. "Where will I go? Singapore? What will I do there?
It is so expensive," says a young Indonesian-Chinese stockbroker. "My
savings will run out in six months. I will stay, but I am scared." Adi
Heryanto, a tailor whose shop was destroyed in the violence, will also
stay -- he has no choice. "The big people can come back and pick up
their pieces. We are small; we have to start all over again," he says
despairingly.
   Just when the "big people" will return is something even they don't
know. "As long as this situation remains so bad, I cannot go back," says
the executive at Changi. "If it would get a little better maybe I could
go back, but not my children."
   For Indonesia Inc., however, the sooner he and others like him
return, the better it will be for the country's economic recovery. The
ethnic-Chinese form about 3.5% of Indonesia's 200 million population,
but hold the vast majority of the country's corporate wealth. Restoring
the confidence of ethnic-Chinese businessmen, whether they left or
stayed, will determine the speed of Indonesia's economic revival.
   Yet even if they muster the will -- and the capital -- to pick up the
pieces, it won't be business as usual. For a start, foreign investors,
particularly Chinese businessmen from Taiwan, Hong Kong and elsewhere in
Asia, may be less willing to do business in Indonesia in future. Within
the country, moreover, all groups may have to agree that a more
equitable distribution of wealth is crucial to keep Indonesian society
from unravelling. This would entail curtailing not only the economic
dominance of the First Family, which has become fabulously rich while
the average Indonesian has fallen behind, but also the business
supremacy of the ethnic-Chinese community.
   In the recent riots, poor Indonesians poured out their anger at being
economically shortchanged by plundering the property of both groups.
   Among targets associated with the president's clan that rioters
destroyed or ransacked were the Goro supermarket, owned by Hutomo
"Tommy" Mandala Putra, Suharto's youngest son; a showroom for Bimantara
Cakra cars, part of the Bimantara stable controlled by second son
Bambang Trihatmodjo; the Golden Truly supermarket, owned by
Sudwikatmono, a Suharto cousin; and Bank Central Asia, Indonesia's
largest privately held bank, whose shareowners include the Suharto
family and their wealthy ethnic-Chinese partners, the Salim group.
   The First Family has a smorgasbord of business alliances with
Indonesian-Chinese interests. Both groups might find their positions
considerably changed in a new Indonesia Inc. Even under the most
optimistic scenarios, the Suharto children are likely to emerge weaker
from the current chaos: It will be difficult for them to strong-arm
their way into business deals that previously they were able to clinch
with their business cards, not cash.
   In projects in which they did invest, their contribution has often
been credit extended by a supplier or partner, or debt raised through
local banks. If the government responds to the demand for change, such
deals will be looked upon less kindly, and local banks might even be
emboldened to call in loans made to the Suharto clan. Some analysts
believe their debt could run into billions of rupiah.
   Should events turn so nasty that the Suharto children are forced to
leave the country, disentangling their businesses could be difficult,
although this prospect is so new in Indonesia that no one has yet
explored the legal ramifications. President Suharto clearly would want
his children treated with dignity, but the groundswell of opinion is
that the First Family should return its wealth to the people.
   Jakarta-based business people believe a witch-hunt is unlikely,
because that would scare away foreign and domestic capital. Moreover,
performing radical surgery to disengage the family from its web of
business interests would also mean taking the knife to intertwined
Indonesian-Chinese groups that hold the key to economic survival.
   The tiny ethnic-Chinese community's disproportionately large share of
economic power, fostered by the Suharto family, embitters Indonesia's
masses. According to Pusat Data Business Indonesia, the
Indonesian-Chinese own nine of the top 10 business groups in the country
and control more than 80% of the assets in the top 300 groups, up from
74% in 1988. Of the country's top 15 taxpayers, 13 are ethnic Chinese.
(The other two are Suharto's sons, Bambang and Tommy.) Even less-wealthy
Chinese are a target of resentment because they control much of the
economic activity at local level.
   As long as the economy was healthy, the rancour remained muted. The
income-inequality gap in Indonesia shrank between 1970 and 1990. But in
the high-growth years up to 1996, the share of national wealth held by
the lowest 40% of the population dropped to 19% from 21%, Prijono
Tjiptoherijanto, an economics professor at the University of Indonesia,
wrote recently in an academic quarterly. The share of the next 40% fell
to 35% from 37% while the top 20% saw its piece of the pie grow to 45%
from 41%.
   Separately, American economist Steven Tabor estimates that the number
of poor will rise from 18 million in 1996 to 40 million by the end of
1998, reflecting the impact of the economic crisis.
   No matter how the Suharto saga plays out, Indonesia will have to
tackle this potentially explosive problem soon. Many Indonesians, both
ethnic Chinese and pribumis (indigenous Indonesians), believe an orderly
redistribution of wealth such as happened in Malaysia is one possible
solution. Malaysia's New Economic Policy has heed to spread wealth
from the economically powerful but minority ethnic Chinese to the
politically dominant Malays, who form the majority of the population. At
the same time, the Malaysian government has encouraged growth policies
aimed at enlarging the economic pie.
   Another model often cited is the United States' affirmative-action
programme. Christianto Wibisono, an economist and ethnic-Chinese
businessman who has allied himself with Muslim opposition leader Amien
Rais, says Indonesia should follow the American scheme. "We need total
transformation, not just an exchange of shares," he notes. "The whole
community should benefit, not a powerful few." The Indonesian-Chinese
head of a financial company, however, believes that for now Indonesia
should emulate the Malaysian approach. U.S.-style affirmative action is
the ideal, he says, "but currently too advanced for Indonesia."
   Indonesia's own programmes for poverty alleviation and income
distribution have not fared well. Perhaps the most high-profile example
of an Indonesia-style affirmative-action programme was introduced in
1995 by several primarily ethnic-Chinese businessmen who came to be
known as the Jimbaran group. They entered into a partnership with the
government to provide 23 billion rupiah in initial capital to he 11.5
million poor families set up small businesses.
   The financial-company head who favours affirmative action was a
member of the Jimbaran group, but now rejects its approach as completely
useless. "Money doesn't go to the poor," he says, "but to the
officials."
   In their defence, the Indonesian-Chinese say they have been kept out
of top positions in other walks of life, such as the bureaucracy, armed
forces and politics. (Mohamad "Bob" Hasan, Suharto's golfing buddy, is
the first Indonesian-Chinese in his cabinet.) Asks the
president-director of a trading company who fled to Bangkok when the
riots started: "What else can we do, except to run businesses?"
   The entrepreneurial skills the Indonesian-Chinese thus developed,
however, will now be crucial to an economy in shambles. The latest
violence has wreaked considerable havoc: Property valued at about $250
million has been damaged, and the retail and distribution network,
largely controlled by the ethnic Chinese, has been wrecked.
   It is likely to be the Indonesian-Chinese who will rebuild the
country's trading infrastructure. Foreign investors won't step in until
the mess is cleared and Indonesia guarantees that it has changed the way
it does business, says the research head of a European brokerage house.
   Many Indonesian-Chinese are nevertheless confused about which path to
take. "Should I support this president or not?" asks the head of a
computer-assembly company, on reaching Singapore. "This one is close to
the Chinese. I don't know if another president will be so."
   But Richard Yeap, a business consultant in Perth, who advises many
wealthy Indonesian-Chinese moving into Western Australia, says most of
his clients tell him that if Suharto goes it will be easier for them to
pick up the pieces in Indonesia than start again elsewhere. Adds Lee
Verios, national vice-president of the Australia-Indonesia Business
Council: "There will be a very strong and quick recovery once there has
been some stable alternative political structure put into place."
   Still, recasting Indonesia Inc. won't be easy. Frank Taira Supit,
president-director of the ethnic-Chinese Dharmala group, appeals to his
compatriots to eschew revenge: "We will need a sagacious approach, not a
witch-hunt. We'll have to be inclusive and do it right this time."
Indonesian-Chinese business houses like Dharmala, Rodamas, Sinar Mas,
Jan Darmadi and, to some extent, Lippo, are among the business not
tainted by links to the Suharto family that may play a major role in
kickstarting the economy. Others include pribumi groups like Tahija and
ethnic-Indian companies such as Indorama.
   That would mean a new economic paradigm, says economist Wibisono, who
believes reforms will be smoother without Suharto at the helm. "It will
be much easier to carry out the necessary changes to remove unnecessary
costs from the economy," he says. Like many Indonesians, he hopes the
president's departure -- if and when it happens -- will end the era of
corruption and nepotism in which vested interests have thrived.
   Yet some believe even that won't change Indonesia's bad ways.
"Cronyism is the way of life in Java; it is perhaps the most
rent-seeking culture on earth," says Michael Backman, the
Australia-based author of a book titled Overseas Chinese Business
Networks in Asia. "Many cabinet ministers have their own
mini-conglomerates, and everyone is a potential mini-Suharto . . .
Whoever comes next will say 'It is my turn now.'"
   Indeed, the expectations placed upon a Suharto successor will be
enormous. Sharon Siddique, a Singapore-based social scientist, says
old-style relationships between ethnic-Chinese tycoons and military
generals will have to go. "Indonesia will need a new model," she says.
She expects some populism in the approach, including some
nationalization of companies controlled by both the Suharto family and
the ethnic-Chinese. This would be followed by distribution of the
companies' shares as unit trusts to the pribumis, through large
corporations created by the state -- as happened in Malaysia.
   But the road to normalcy can't be achieved without Indonesia's
ethnic-Chinese daughters and sons. Agnes Safford, president-director of
ABN Amro Securities Indonesia, is optimistic they will return. Says she:
"Do the Chinese ever run away for good? No. A new class of businessmen
will move in and pick up the pieces. There is genuine fear just now, but
there is also pragmatism."