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The Years Of Growing Furiously (Int'l Edition)


International -- Intl' Business: INDONESIA

THE YEARS OF GROWING FURIOUSLY (int'l edition)

Tri Agus Susanto was born the son of a humble Javanese farmer but rose to middle-class status the moment he graduated from university. He soon learned to enjoy meals at McDonald's and Dunkin Donuts in Jakarta, watched the news on a private television channel that uses CNN footage, and wore fancy long-sleeved shirts from the glitzy Matahari department store.

But Susanto's middle-class values got him into trouble. He adopted the view that Indonesia was too rich to justify President Suharto's strict controls on public gatherings and printed matter. As a result, he edited a liberal newsletter with an article saying Indonesian President Suharto's press censorship caused "disorder." In September, the 29-year-old Susanto was sentenced to two years in prison for "intentionally insulting the president."

The case speaks volumes about change in Indonesia, the world's fourth-largest nation with a population of 190 million. For years, a major guessing game in Southeast Asia has been what will happen to Indonesia after Suharto, now 74, passes from the scene. This vast multiethnic nation scattered across 13,000 islands has been held together since 1965 by a unique Suharto balancing act. The wily President has used the military, Islamic clerics, and an economic combination of family members and rich Chinese tycoons to spur moderate growth while keeping a lid on political opposition. The fear was that Indonesia--and the entire region--was heading for a wrenching post-Suharto transition.

But the surprise is that even with Suharto likely to win a sixth five-year term in 1998, the enigmatic nation already stands at a crucial watershed. Ironically, it is Suharto who is helping force the pace of change. He's scurrying across the country, giving speeches and signing decrees in the name of free trade, transparency, and competitiveness--all miracles he wants to see in his lifetime.

He's also trying to juice up Indonesia's economic growth. In August, he raised the nation's growth target from 6.2% to 7.1% per annum under a five-year development plan that runs through Mar. 31, 1999. As his relations with the military grow more distant, Suharto appears to be concluding that a faster dash for growth is what will buy him broader political support in general elections in 1997. Suharto recently revoked 25 of the military's 100 reserved seats in the parliament, which has a total of 500 members. Most political observers say the ruling Golkar Party will emerge stronger, and that Suharto's reelection by the new Parliament in 1998 is already a safe bet.

But it's not a strategy without risks. In economic terms, private borrowing and the stronger yen recently pushed Indonesia's foreign debt beyond a psychological barrier of $100 billion. The World Bank has 11% of its portfolio tied up in Indonesia, second only to Mexico, and Indonesian banks rang up $4.5 billion in bad debts in June. For the first time in five years Indonesia posted a trade deficit in June, to the tune of $205 million.

Spurring rapid economic change also could alter Suharto's power base. Increasing wealth, for example, means that the army is starting to withdraw from day-to-day politics to assume a more professional defense role under a new generation of Western-trained officers. And some of the country's most powerful but increasingly moderate Islamic clerics are becoming ambivalent toward the government for making concessions to Muslim militants.

BOLDER STEPS. These kinds of shifts in the Indonesian model could be amplified as a genuine middle class emerges. With per capita income reaching $900--and several times higher in urban areas--the middle-class population is now estimated at 14 million. "It's true that the Indonesian middle class has never had it so good as now, and their children are going overseas to study," says Harold Crouch, senior fellow in political science at the Australian National University in Canberra. "At the same time, they are grumbling a lot." He argues that young urbanites such as Susanto are increasingly prepared to fight for their beliefs but don't want to go so far as to topple a system that has enriched them.

No matter the economic and political risks, Suharto appears determined to put Indonesia on a more competitive path. Honoring his promises to eradicate trade tariffs within the seven-nation Association of South East Asian Nations by 2003, Indonesia is taking bolder steps than many other Asian nations. Suharto slashed tariffs on 6,000 imports by as much as 50% on May 23. Just 11 months earlier, he had opened key service sectors, such as telecommunications and power generation, to private investment. The results: $6 billion worth of tentative deals with a half-dozen international telephone companies and a $2.5 billion contract to build a power plant with U.S. and Japanese investors.

The fruits of deregulation also are ripening for companies run by Suharto's grown children, who have long had access to the service sectors foreign investors are most eager to plunge into, says Crouch. The family businesses are taking on new foreign partners, raising funds on the Jakarta Stock Exchange, and moving their assets offshore, where they will be harder to nationalize if Suharto dies.

The problem is that the crony system is so entrenched that the reforms might not cut deeply enough. Suharto allies enjoy thick levels of protection. The National Logistics Agency, for example, sets high price supports on agricultural imports and appoints sole agents to import them at vast profits, benefiting such prominent ethnic Chinese tycoons as Liem Sioe Liong. And Bambang Trihatmodjo, a son of Suharto, benefits from a 40% tariff and surcharge on imported polypropylene plastic, which his NASDAQ-listed company, P.T. Tri Polyta Indonesia, produces domestically.

Even Suharto concedes that the favoritism and corruption that permeate the system are major impediments to revving up growth. Small exporters are vulnerable to government officials' demands for illegal levies, and red tape is still a strong deterrent to foreign investment. After investors look closely at all the permits they'll need to start up an export-oriented factory, only the persistent hang around. At the current rate, only 54% of the $30.1 billion worth of foreign-investment bids approved in the first eight months of this year will actually reach fruition.

For Suharto to achieve his goals, he'll have to face up to these challenges. "This is a problem of political will. Is the government really able to clean up this mess?" says Thee Kian Wie, senior research associate at the Center for Economic & Development Studies, a state-owned institute. "If we can't tackle this, forget about competing with Taiwan."

Suharto may also have to accommodate pressures for a slightly more open political system. He has already ruled out the possibility of adopting a more pluralistic system along U.S. or European lines, which diplomats say would in fact reveal significant popular support for his government. But Indonesia's major aid donors and trade partners--Australia, Japan, Singapore, and the U.S.--are likely to keep up the pressure on him to play the tolerant democrat yet still keep the country stable. "It's going to be critical for Suharto in the next few years, but he'll remain in control," says Hilman Adil, director of the Center of Social & Cultural Studies, another government think tank.

Suharto has little choice but to roll with the powerful punches that increasing affluence carries. "Once the genie is out of the bottle, you cannot suppress it," says researcher Thee. The irony is that small but significant shifts in Indonesia's model could help propel it toward becoming a newly industrialized economy. In this land of paradoxes, change could be painful and risky--but ultimately beneficial.

SUHARTO IS PUSHING FOR FASTER GROWTH BY:

-- slashing tariffs on 6,000 imports by as much as 50%

-- opening key service sectors, such as telecoms, power generation, and toll road construction, to foreign investment

-- introducing capital market reforms to shore up investor confidence

-- raising economic growth from about 6.2% to 7.1% annually

BUT NEW WEALTH POSES THESE POLITICAL CHALLENGES:

-- an emerging middle class wants political freedom to go with power

-- satellite television shows people what civil liberties they lack

-- a better-trained army officer corps wants less involvement in hands-on political control

-- middle-class elements of Islamic institutions are ambivalent toward government

DATA: WORLD BANK, BUSINESS WEEKBy Michael Shari in Jakarta


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