Indonesia: Will Rising Chaos Cripple the Economy?

Tens of thousands of university students surround the presidential palace in Jakarta and demand that President Abdurrahman Wahid resign. Local revolts spread across the archipelago, spooking big-time investors such as Exxon Mobil Corp., which shut down a natural-gas drilling and liquefaction operation on Mar. 9. The rupiah sinks to a 30-month low of 11,500 to the dollar--a plunge of 20% over two trading days--before the central bank intervenes. Ethnic Chinese business owners, fearing race riots, start moving whatever savings they have left offshore.

The political instability that has mounted since the fall of President Suharto in May, 1998, is reaching new peaks and is threatening Indonesia's fragile economic recovery. Wahid, facing impeachment proceedings in the legislature on alleged corruption charges, says he won't resign, arguing that the country would fall apart if he did. Yet Wahid seems unable to quell secessionist and ethnic tensions, which have been exacerbated by a law enacted on Jan. 1 that hands more power to govern to the provinces.

What's worrying business executives, including foreign investors, is that lawlessness is increasingly affecting their operations. Exxon Mobil closed gas fields and a liquefaction plant in Aceh, where it has invested $3 billion, after guerrillas demanding independence fired on planes carrying the company's employees. In the nearby province of Riau, villagers have torched oil rigs operated by Caltex, a joint venture between Chevron and Texaco that produces half of Indonesia's crude. "It's just chaos and anarchy," complains Bob Galbraith, managing director of Caltex. "You have to provide security for your investors."

While business conditions deteriorate fast, signs are mounting that Wahid may be losing the support of the military. The army didn't fire a single shot when protesting students marched up to the gates of the presidential palace and set up loudspeakers on Mar. 12. In past demonstrations, soldiers have fired blanks, rubber bullets, or live ammunition. Diplomats took the army's restraint as a signal that it was abandoning the President. Meanwhile, General Endriartono Sutarto, the army chief of staff, declared: "We are not going to let a chaotic situation occur nationwide." Diplomats say the army is more and more behind Vice-President Megawati Sukarnoputri, the daughter of Indonesia's founding President Sukarno. According to the constitution, she would succeed Wahid if he is impeached or steps down.

ON THE BRINK? The situation in Indonesia has grown dicey enough to concern the Bush Administration. On Mar. 13, Secretary of State Colin Powell told Indonesian Foreign Minister Alwi Shihab in Washington that the U.S. would consider providing aid to Indonesian police, particularly in regions where U.S. companies are active. But it's hard to imagine that such aid could prove effective in quelling separatists. That means Indonesia's investors are likely to remain nervous, whether or not Bank Indonesia officials dip repeatedly into the country's $29 billion in reserves to shore up the rupiah, as they promise to do.

So Jakarta could be on the brink. The demonstration outside the presidential palace was strongly reminiscent of the May, 1998, protests that unseated Suharto. The 1998 unrest was triggered by the government's lifting of fuel subsidies. That may be why Wahid decided on Mar. 12 to push forward to October a 20% increase in consumer fuel prices required by the International Monetary Fund. If a peaceful transition of power doesn't come by then, the stage could be set for a violent handover. And that would have sweeping economic consequences for Indonesia and beyond. Europe is under siege. On Mar. 13, the outbreak of foot-and-mouth disease that has spread throughout Britain crossed the English Channel to western France. Now, more than 300 million European animals are at risk, and economists estimate European trade could suffer losses of more than $400 million. But the biggest casualty is likely to be the European Union's $38 billion Common Agricultural Policy, which is already strained from compensation costs resulting from bovine spongiform encephalopathy (BSE).

Britain remains the epicenter of the foot-and-mouth outbreak. More than 160,000 animals have been slaughtered. Tourism officials fear that the industry, which receives $19 billion each year from foreign visitors, will suffer. Even Ireland, currently disease-free, estimates its tourism industry has lost $20 million as a consequence of outbreak. Russian President Vladimir V. Putin's Mar. 12 pledge to revive conventional arms sales to Iran is sure to produce diplomatic clashes with Washington. While the Bush Administration probably won't mind if Moscow sells Tehran cold-war-era tanks, Washington will object if it offers Iran sophisticated arms, such as its S-300 antimissile system. Under U.S. law, the Administration would have broad latitude to ban U.S. companies from trading with Russian companies that sell arms to Iran. And it could cut up to $20 million in bilateral aid. Putin clearly thinks risking sanctions is worth it: Moscow aims to sell up to $2 billion in arms to Iran over the next five years.

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