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Big Chance For A Battered Giant


International Business: Indonesia

Big Chance for a Battered Giant

The June 7 elections offer a choice: Compromise or upheaval

In Jakarta's main business district, thousands of supporters of Indonesian opposition leader Megawati Sukarnoputri ran through the streets in mid-May, beating and kicking anyone who dared brandish the yellow flag of the ruling party, Golkar. Hundreds of miles away in the city of Yogyakarta, a 16-year-old Megawati supporter who strayed into the wrong neighborhood was beaten to death. Nearby, in the town of Jepara, four supporters of Islamic cleric Abdurrahman Wahid were hacked to death with machetes by members of a rival Muslim party.

Such scenes suggest that Indonesia's passage into democracy with the June 7 legislative elections won't end the violence that has gripped the country since the downfall of strongman Suharto last May. With a populace bitterly divided among four dozen political factions, there's a chance that violence will erupt again in this seething, ethnically diverse nation of 200 million, no matter who wins. If Suharto's handpicked successor, President B.J. Habibie, clings to power through unfair means, warns economist Hadi Soesastro, "it could be an explosive situation again."

It's a dark scenario--but by no means the only one. For the scary headlines obscure much that has been going right lately. Taken together, the positive developments could lay the foundation for a new Indonesia. The vital question for the long term is not who wins more votes on June 7. It is whether the rival factions can put aside their feuds and seize the immense opportunity to rebuild this shattered country.BETTER TIMES. The seeds of a brighter future have already been sown. Democracy, though still imperfect, is taking firm root. The indigenous peoples of Indonesia's many provinces are set to win more autonomy and a greater share of the fruits of economic growth. Pressure from the International Monetary Fund has given reformers in the government the cover they need to tackle serious structural problems created during Suharto's 32 years of corrupt rule. The government is adopting policies that address the population's true needs rather than chase growth at all costs.

Underpinning these trends is an economy that finally seems to be bottoming out after 20 months of free fall. Gross domestic product rose 1.3% in the first quarter of this year, the first such increase since the rupiah started to crash in 1997. The currency has stabilized at about 8,000 tO the U.S. dollar, up more than 50% since early 1998. Monthly inflation, once in danger of raging out of control, is near zero. And the central bank's cleanup of the blitzed banking system is under way. "Indonesia has achieved stability," boasts Kadhim Al-Eyd, head of the IMF's Jakarta office.

The most hopeful development does not show up in opinion polls. It comes from talking to Indonesians across a broad swath of society. Most have grown tired of revolt, instability, and poverty and want to get on with their lives. "People are fed up with trying to get jobs," says longtime Suharto cRitic Lukman Sutrisno, an economist at Yogyakarta's Gadja Mada University.

But to move forward, Indonesia's factions must first bury their machetes. That's why June 7, the first democratic vote since 1955, is such a watershed. Habibie could exercise his legal authority to appoint 238 of the 700 seats in the electoral college, which meets in August to choose the President. However, many experts think that a coalition formed on May 21 by the three biggest opposition parties--Megawati's Indonesian Democratic Party-Struggle, Wahid's National Awakening Party, and the National Mandate Party led by Muslim leader Amien Rais--stands a good chance of winning at least 40% of the House seats. If so, a Habibie presidency would be seen as illegitimate and he would have another fight on his hands.

The next government can ill afford a prolonged period of infighting because Indonesia is hardly in a healthy state. With $90 billion in bad loans on local banks' books, and $80 billion in foreign corporate debt, reform must stay on track. And the ethnic Chinese, with the estimated $100 billion in capital they parked offshore when they fled after riots in 1998, must be lured back.

Yet if an all-out brawl between Golkar and the opposition can be averted, Indonesia may be able to dig itself out of the mess. Opposition leaders say they would continue with the IMF's program of tight money, transparency, and bank restructuring. They have not challenged the move toward regional autonomy. Even more remarkably, the opposition is trying to recruit army chief General Wiranto, a former Suharto aide, as a vice-presidential candidate.

Habibie and Golkar have also proved more politically adept than skeptics had assumed. Even though Habibie owes his career to Suharto, he put the former President's son Hutomo Mandala Putra, known as Tommy, on trial for corruption. He has allowed the creation of 45 new parties, ended press censorship, released political prisoners, and offered a referendum on independence to the military-occupied territory of East Timor.

The government has rethought Suharto-era economic policy, too. Wasteful plans for national car programs, new petrochemical complexes, and a local aerospace industry--the brainchild of Habibie's--have been shelved. There is wide agreement that Indonesians must focus on basics: agribusiness and labor-intensive manufacturing.

Despite its abundant pool of cheap labor, Indonesia is at a disadvantage vs. countries like China and Vietnam in luring foreign investment to low-end industries such as footwear and garments. That's because 47% of Indonesian factory workers have no more than junior high school educations. So education needs high priority.

Cronyism certainly won't vanish in Indonesia. Indeed, there is a danger that the next government will simply expropriate businesses from old Suharto pals and hand them over to a new set of cronies.WAIT, WATCH. Multinationals are waiting to see how the political maneuvering plays out. Some have pulled out of Indonesia, but most are hunkering down. Two years ago, for example, French cosmetics maker L'Oreal bought a large site in Jakarta for a $30 million hair-care products factory. That plan is on hold, but not dead. However, serious investment won't resume until business is convinced stability has returned. "The private sector won't kick in before the election," says the IMF's Al-Eyd.

One major test of stability will be how well the opposition alliance holds up after the election. In particular, it has to resolve the delicate issue of which leader would challenge Habibie for the presidency. That could tear the alliance apart. Its most popular figure is Megawati, 52. Her father, the late President Sukarno, was overthrown by Suharto. But Megawati's leadership skills and thinking on many key issues are unknown.

If Golkar prevails, its challenge will be to win back the support of Indonesians alienated by decades of abuse. But if they respond to growing calls for reconciliation, they may give their tortured country a new beginning.By Michael Shari in JakartaReturn to top


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