Part three: Economy

Economy

Before WW II, Indonesia exported substantial percentages of the world's rubber, tin, petroleum, pepper, cloves, nutmeg, quinine, coffee, tea, palm oil, and copra. But by 1965, President Sukarno's disastrous economic policies had left the economy in chaos, with a foreign debt of $2.5 billion and a population among the poorest in the world.

Following the crises of the 1960s, Suharto's New Order changed a badly managed economy to a liberal market economy backed by foreign investment and state planning. Within three years, the new regime managed to get the nation's debt under control. By balancing the budget and controlling the money supply, Suharto brought down inflation from a staggering 639% in 1966 to under 15% in 1969. Resources were redirected from wasteful prestige projects to producing food and clothing and the building of roads and harbors.

The new administration wholeheartedly adopted Western development strategies and encouraged foreign investment with such major incentives as tax exemptions and assurances of free profit. With billions of dollars in Western aid and food imports pouring into the country, Indonesia became a model of a successful developing nation.


Foreign Investment
This transformation was executed by a handful of U.S.-trained technocrats--popularly known as the Berkeley Mafia--who reorganized virtually the entire economy. In 1967 the government began allowing 100% equity ownership by foreigners. When this law was held partly responsible for anti-Japanese riots in Jakarta in 1974, it was changed to force foreign investors to take on local partners. Increasing competition for capital among ASEAN nations resulted in the 1992 reinstatement of the 1967 regulation.

Today, Japan is by far Indonesia's biggest trading partner, accounting for about 40% of the nation's exports. Japan is also Indonesia's largest supplier. The rapid appreciation of the yen against all other currencies induced many companies from Japan to relocate manufacturing facilities to Indonesia to take advantage of lower labor and material costs. The lure was powerful enough to induce the Taisei Corporation of Japan to build a $206 million industrial estate in Cikampek, West Java, in 1993.

Foreign investment rose by more than 1,000% between 1985 and 1990. Primary areas of investment include chemicals, hospitality, metals, mining, textiles, and food. Indonesia's greatest asset in the regional competition for foreign investment is its gigantic pool of manpower, the country's one inexhaustible resource. For unskilled labor, the minimum wage on Java is only Rp2100 per day; on Bali, Rp3000 per day. While Indonesia's glut of workers will keep wages low for decades, the booming economy has created an acute shortage of middle-level managers.


Deregulation
From the 1950s to the late 1980s, the state retained control or ownership over so many vital industries and installations the health of the economy was primarily determined by the vicissitudes of the state budget. Initially established to protect vital and strategic industries, the monopolies date back to 1957, when the government nationalized Dutch companies as a part of its West Irian campaign. But the state-owned monopolies frequently created inefficiency and high prices, and suffered from low productivity and a cumbersome and excessively bureaucratic decision-making process.

Very slowly at first, the government began deregulating the economy in the late 1980s. A particular goal has been to privatize the 215 state-run monopolies controlling such crucial commodities as oil, cloves, and palm oil. Hotels, banking, travel agencies, and numerous other industries have been privatized as well. For the first time, privately owned megaprojects have emerged in the mining, manufacturing, and agribusiness sectors. One of the largest and fastest growing conglomerates in Indonesia is the privately owned timber company Barito Pacific; its exports alone in 1992 accounted for 13% of the global trade in plywood.

By the end of the century the private sector is expected to play a much stronger role. It is hoped deregulation will increase the relocation of manufacturers from industrialized countries to Indonesia, taking advantage of the country's abundant natural resources, cheap energy, strategic market location, rapidly expanding domestic consumer market, suppressed labor movement, and exploited and underemployed labor force of 80 million.

Evidence is everywhere of Indonesia's new-found wealth. TV antennae and new housing complexes break the skylines of every city, health-care centers have sprung up all over the archipelago, farmers are subsidized with lime and fertilizers, poor students are sent to universities. A modern network of roads, highways, and bridges is in place, with snarling traffic jams in the centers of all the big cities. Available consumer goods have increased fivefold in the past 10 years.

Yet all is not rosy. The country suffers from serious foreign debt and debt service problems. Low-income groups do not benefit from development. There is widening inequality between the urban and rural populations, a shortage of skilled labor, labor unrest, and military intimidation. The country faces an enormous task in educating its 26 million elementary-school-age children, 60% of whom receive little more than perfunctory schooling. The wealthiest 20% of the population derives an income roughly seven times greater than that of the poorest 20%. Twenty-seven million Indonesians live in poverty. Sixty percent of the national wealth is concentrated in Jakarta. The health of the country's banking system was thrown into question when Indonesia's tenth-largest bank, Bank Summa, went bankrupt in 1991.

Industry

During the pre-WW I colonial period industrial development was not a priority. But after the war the Dutch realized how vulnerable and dependent the colonies were on imported manufactured goods. Employment opportunities were also needed for Java's growing population. The first cautious step toward creating an industrial base was a paper factory built in Bandung in 1923.

Though Suharto opened Indonesia to foreign investment in 1967, until the mid-1980s the economy relied too heavily on oil, timber, rubber, and other highly localized products. Foreign exchange was generated through the sale of these raw natural resources, extracted mostly by Japanese and American multinational corporations. The slump in oil prices in 1982 caused a serious economic downturn and again raised questions of overdependence on oil. The government redoubled its efforts to develop the country's non-oil manufacturing industries. By the early 1990s manufactured goods accounted for 27.7% of total Indonesian exports, overtaking agriculture as the greatest contributor to Indonesia's economic output.


Manufacturing
PT Astra International dominates the domestic vehicle industry; Indomobil Utama is the nation's second-largest automaker. An automotive deregulation package announced in 1993 is expected to attract Japanese, U.S., and European auto firms. General Motors already plans a $110 million assembly plant in Indonesia.

Indonesia has also entered the high-tech aerospace industry. The state-owned Indonesian National Aircraft Industry (IPTN) in Bandung produces passenger aircraft and helicopters for both domestic and overseas markets. Other industries manufacture ships, tankers, electric trains, aerobridges, railway coaches, telecommunications equipment, heavy diesel engines, and jetfoils. Indonesia also plans to build nuclear reactors on earthquake-prone, overpopulated Java; Australia will support and supply uranium for the project.

The country's light manufacturing facilities produce tires, furniture, clothing, footwear, electronics, audiocassettes, drugs, toiletries, and cigarettes. Electrical appliance production has grown at a rate of 80% per year since the late 1980s. Textiles are Indonesia's largest non-oil export commodity, totaling $6 billion in 1992.


Oil And Minerals
The first oil wells in Indonesia were drilled near Surabaya, East Java, in 1889. These were soon eclipsed by oil fields in southern Sumatra and East Kalimantan. A Dutch subsidiary of Standard Oil dominated the East Indies petroleum industry until WW II. It was, in fact, a U.S. oil embargo the Japanese used as a pretext for invading the Indies in 1941.

The process of Indonesianizing the oil fields began after WW II. Indonesia eventually took its place as a major oil producer, joining OPEC in 1962. In 1968 the government entered into production-sharing agreements with foreign oil companies, launching a period when petroleum became the driving force behind the economy. When oil prices quadrupled in 1973, Indonesia's export earnings doubled, with oil providing almost 50% of state revenue in 1974-75. This period of abundance ended with the global recession, political scandal, and the near-bankruptcy of Pertamina, the state-owned oil and gas company.

Today oil continues to play a major role as a source of government revenue and foreign exchange. Crude oil production increased from 508.9 million barrels in 1988 to 572.8 million in 1992, an average of about 3.5% per year. Oil now accounts for 20% of total exports. With only 34 of the country's 60 oil basins explored and only 14 developed, Indonesia's recoverable oil reserves will last well into the 21st century.

Natural gas is playing an important role as an alternative energy source. Indonesian production rose dramatically with the discovery of huge reserves in northern Sumatra and East Kalimantan; today Indonesia is the world's largest exporter of natural gas.

Low-sulphur coal deposits were first tapped during the steamship era, and the first commercial mines opened in 1846 in South Kalimantan, East Kalimantan, and West Sumatra. Indonesia's prewar level of annual production was two million tons. In the mid-1980s, Indonesia intensified exploration, rehabilitation, and expansion of its state-owned mining enterprises, diversifying its coal products in an attempt to break away from oil. With greater opportunities for foreign and domestic investment, production increased from two million tons in 1987 to 22.5 million tons in 1992. With proven reserves of at least 1,730 million tons, production is expected to reach 40 million tons by the year 2000.

Although the legends of Indonesia's huge and diverse mineral riches have been exaggerated, the nation does possess huge deposits of tin, copper, nickel, and gold, and limited deposits of bauxite. Indonesia lies in the world's tin belt, and is the fourth-largest producer on the globe. The tin from Riau's Bangka Islands is generally considered the best in the world. Bauxite is mined entirely on Pulau Bintan by Alcoa; another major reserve has been confirmed in West Kalimantan. At present, 90% of Indonesia's bauxite is exported to Japan. A joint-venture aluminum smelter was completed at the massive Asahan industrial complex in North Sumatra in the mid-'80s.

With reserves of over 40 million tons, Indonesia's nickel production accounts for spectacular revenues. A large nickel mine was opened by Canadian-owned INCO at Soroako in southeast Sulawesi in 1978; today it's the site of the largest nickel-smelting plant in the world. Significant nickel deposits have been mined on Pulau Gebe by the state mining company, Aneka Tambang. Copper has been mined in Java, Sumatra, and Timor since Indonesia's Early Metal Phase (around 1000 B.C.), when it was used in the production of bronze. Indonesia's largest copper mine lies in the high, rugged Ertsberg Mountains of Irian Jaya. Opened by Freeport Minerals Inc. of Lousiana in 1967, it is also the largest gold mine in the world.

Agriculture

Indonesia is still very much an agricultural nation. Agriculture continues to employ more than half the workforce and contributes about 25% of the gross domestic product. The current five-year plan calls for increasing the role of the private sector in agribusiness and shifting priorities from food production schemes to agricultural product processing, also known as agroindustry. The agricultural sector enjoys the full support of President Suharto, son of a Javanese rice farmer, who is seen on television more often talking with petani (farmers) than with assembly-line workers or bureaucrats.

Rice is Indonesia's most important crop and is grown virtually everywhere in the country. It is considered the tastiest of all grains and is eaten at least three times a day. Whole dynasties in Indonesia have grown up around the apportionment and control of water for rice growing. As a result of the introduction of high-yield, genetically engineered strains, Indonesia achieved self-sufficiency in rice in 1984. The downside of this 'Green Revolution' is that traditional rice varieties are now grown only in mountainous areas, forced out of the plains by hybrid varieties. The cost of the native varieties are twice that of the IR64 hybrid. Another drawback is that production gains have not been achieved without skirting ecological disaster.

Indonesia ranks among the world's top five producers in rubber, coffee, cocoa, and soybeans. Indonesia is currently the third biggest coffee exporter after Brazil and Colombia. Even though cocoa prices have fallen to a 20-year low, Indonesia produced 215,000 tons in 1992, 160,000 for export. Other significant exports include copra, palm oil, sugar, bananas, tea, spices, and orchids. Indonesia accounts for 70% of the world's production of the fabled nutmeg fruit and boasts the best quality, although poor marketing and smuggling cut into earnings.

About 30% of the population smokes kretek (clove) cigarettes, making Indonesia the largest producer and importer of cloves in the world. The country's biggest cigarette maker is PT Gudang Garam. The Clove Buffer Agency (BPPC) exercises a nationwide monopoly over the purchase of cloves from farmers and cooperatives.


Fishing
Fishing has always been a major Indonesian industry, employing directly or indirectly about 1.5 million people. Salted fish, a valuable item of trade between coastal and inland peoples since early times, still provides the main source of animal protein in the Indonesian diet. There's a large inland catch in lakes and waterways as well. People all over Indonesia also cultivate fish in ponds and rice paddies.

While Indonesia has twice as many ocean fishermen as Japan and perhaps the greatest potential fish stock of any tropical country, productivity is about one-tenth that of Japan's.

Dominating the industry today are large mechanized commercial fleets owned by Chinese or Indonesians who've entered into joint ventures with the Japanese and Taiwanese. They account for up to a quarter of the catch yet make up only two percent of the total fleet; their trawlers and purse seines are resented by traditional fishermen, who angrily destroy boats, nets, and engines. Trawling was banned off Sumatra and Java in the early 1980s, and everywhere else except far eastern Indonesia in 1983. Illegal fishing is common off Maluku, where the Indonesian coast guard occasionally takes into custody Taiwanese fishing vessels.


Forestry
Indonesia has the largest tropical forest reserves in the world after the Amazon basin, about 122 million hectares. The hardwoods of Indonesia have been in high demand since ancient times. During the Japanese occupation, large tracts of forests were cut down to plant cash crops, and in revolutionary times more forests were cleared during fuel shortages. Because start-up costs were low and logging permits easy to attain, the forestry industry attracted major foreign investment from the very beginning of Suharto's New Order regime. After petroleum, timber became Indonesia's second largest export earner, the industry selling 18 million cubic meters of tropical timber overseas in 1973. Between 1970 and 1980, production grew by almost 10% per year, peaking in 1978 when Indonesian timber exports comprised over half the world's total.

In 1985 the government finally prohibited the export of raw, unprocessed timber. Exports dropped abruptly at first, but a steady increase in plywood production returned Indonesia to the ranks of the world's leading timberfellers. Almost 30% of Indonesia's landmass is presently logged by 550 logging concessions, about 60% joint ventures with foreign companies. A staggering one percent of the country's irreplaceable rainforests is cut annually--faster than any other place in the world. Environmentalists fear that in 20 years the lowland forest areas of Sumatra, Kalimantan, and other large islands will be totally gone. Because of the worldwide clamor over Indonesian clearcutting, the government has in the last several years made reforestation a priority.

Tourism

The government looks to tourism to increase foreign exchange earnings, provide employment opportunities for the nation's huge labor force, and attract investors. It's hoped profits from resort development will eventually trickle down; this proved to be the case on Bali, where a major village handicraft industry appeared in the wake of the first tourist boom in the early 1980s.

The government began shoring up the industry in the mid-'80s, with visas-on-arrival, inflight immigration formalities, easier customs clearance, facilities for foreign air carriers, and joint services with Garuda by foreign carriers. There were over 2.5 million visitors to Indonesia in 1991, the highest in ASEAN in spite of the Persian Gulf War. Backpackers and surfies, who spearheaded the tourism boom of the 1970s and '80s, are now being replaced by family groups and leisure visitors. Prestige, the U.S. magazine of affluent lifestyles, awarded Indonesia eight awards for excellence in 1993. Now $200-per-day cruises, unabashedly tapping upmarket clientele, are common. There are 12,000 five-star hotel rooms in the country. Sheraton plans to open as many as 20 hotels before the end of the century.

Two-thirds of all visitors to Indonesia arrive from the Asia-Pacific region. Of these, the largest number--around 70%--come from Singapore, taking the 30-minute boat ride to Batam and Bintan, two rapidly developing islands between 20 and 30 km south of Singapore. The next largest groups journey from Malaysia, Japan, and Australia. Europe accounts for 21% of all visitors; that percentage is growing.


Tourist Development
Minister of Tourism Joop Ave declared that $295 million was invested in tourism projects in the first seven months of 1993. Road, rail, ferry, and shipping infrastructures have improved spectacularly, more cruise ships and commuter aircraft are coming on line, and modern international airports have opened in Jakarta and Bali. In 1991, the government initiated a Tourism Awareness Program to protect indigenous cultures and help local people adjust to changes caused by tourism.

To fulfill the need for skilled workers in the industry, there are now 66 tourism training schools throughout the country. Presently, the best tourist facilities are found on the western, more densely populated islands of Sumatra, Java, and Bali. The trend, however, indicates foreign tourists are visiting in greater numbers more remote portions of Java, as well as Sumatra, Sulawesi, Maluku, and Lombok. To divert business from overburdened Bali, the government is improving the tourist infrastructure on other islands. At least 10 new megaresorts, modeled after Bali's large-scale, integrated Nusa Dua complex, are under construction in places like Biak, Tasik Ria in northern Sulawesi, Palau Belitung in the Java Sea, Baturaden in Central Java, and Merak Belantung in South Sumatra. All should be operational by the year 2000.

Indonesia has yet to realize 10% of its tourism potential. The eastern islands, with their huge potential for coastal/marine recreation, remain relatively untouched.

Corruption

Corruption (korupsi) in Indonesia has been refined into a complex art--the perfection of rottenness. It permeates every level of government, from the lowliest post office clerk to the first family in the land. The government admits at least 50% of the annual GNP disappears through institutionalized and illegal levies, and it's estimated 30% of all development funds are skimmed off by dishonest officials. One can't help but wonder how prosperous Indonesia might be if so much weren't lost through graft. Most Indonesians have come to accept petty graft as a way of life. The right amount to the right person at the right time is like applying oil to a big unwieldly machine.

Before the arrival of white people there was no such thing as corruption on these islands. When the first European trading companies set up shop there were few guidelines governing salaries or benefits, yet employees were still expected to carry out their duties. Often left to fend for themselves, they were forced to impose illicit levies in order to survive. From there the practice grew. It's accepted that widescale corruption crippled and finally brought down the Dutch East Indies Company in 1799.

Corruption became entrenched during the Japanese occupation; the bewildering number of regulations and permits gave officials ample opportunity to demand unofficial levies to supplement worthless wartime scrip. During the revolution, salaries were so erratic and ludicrously low, and resources so limited, that corruption ran rampant in the Indonesian bureaucracy and armed forces.

Corruption stems in part from the traditional Asian attitude of paying deference and presenting gifts to one's superiors. Low salaries are a prime cause as well, with civil servants looking for other sources to buttress their meager wages. A man of standing in the community must maintain an appearance of affluence--good clothes, a car, comfortable home, ritual feast every so often. He also has weighty responsibilities on his Rp120,000-180,000 per month salary: support relatives, send his kids to good schools. He feels he must seek and accept bribes. Many officials don't even look at it as corruption but rather as the way things ought to be. Those who have the education, competence, and power to sign papers or make decisions believe bribes are their due. Skimming and off-budget administrative 'fees' enable an official to accomplish much--a Hari Raya bonus for his staff, a new village school, a fishpond.

Corruption starts at the top and filters down. A legislator who gets a substantial discount on a car purchase sells the purchasing permit to a car dealer. Many small bureaucratic offices are managed like a family agricultural plot, where only kin, family, and ethnic group can play any real role. A poor peasant must pay the teacher a bribe so his child may graduate from the fifth to sixth grade. Even the judicial system is not immune. Indonesians say the best way to tip the scales of justice is to first tip the judge trying your case. This is true whether you're up for a traffic ticket or murder. In fact, people don't even use the legal system unless they have the money. Bribes of Rp210 million are not uncommon in important cases, and during preliminary negotiations the verdict may go first one way and then the other as rival bids are put in. About Rp100,000 can get a month lopped off a sentence. Poorly trained and underpaid guards running the prisons demand bribes to allow prisoners to obtain a mattress, work in the kitchen, or sleep away from the lavatories.

Graft is practiced with equal elan by foreign investors. For any capital-intensive project, whether financed by private funds or government aid, 10-15% of the investment routinely goes to bribes and kickbacks for officials whose signatures are required to move the paperwork through to completion. In 1991 the chairman of the Association of Construction Companies told the press he regarded it as only natural to pay money to government officials who award contracts. It's a way of thanking them, he said.

Of course every few years a presidential commission announces a big anticorruption drive, headed by some highly vocal and visible general. In the end, a couple of petty offenders are suspended while the big fish go free or accept early retirement. The real objective of these purity drives is mollification of students and the foreign press. Chronic corruption in the 1980s was so acute the government took the extraordinary step of contracting a Swiss firm to carry out customs inspections on its behalf, completely bypassing the notorious Customs and Excise Service.