The Multinational Monitor

October 1990 - VOLUME 11 - NUMBER 10


Rich Land, Poor People

The Economics of Indonesian Economic Development

by Robert Weissman

The Indonesian economy is replete with contradictions. Extreme and widespread poverty exists in a land of immense natural resource wealth. Foreign corporations play a dominant role in a traditionally protectionist economy. Indonesia's development efforts have received strong praise from the World Bank, the International Monetary Fund and the U.S. government but harsh criticism from environmentalists and human rights, labor and community development activists.

Two forces have shaped the Indonesian economy over the last 25 years: Indonesian President Suharto and oil. Suharto launched his "New Order" government after taking power in 1966. He has maintained an authoritarian regime and managed a command economy. His efforts to develop Indonesia received a big boost in 1973, when the price of oil, Indonesia's primary money earner, shot up. Oil money provided up to 70 percent of the government's revenue in the late 1970s, fuelling the government's programs to develop the nation's infrastructure, increase agricultural productivity and improve the national standard of living.

Successful structural adjustment?

The Indonesian government fundamentally reoriented the country's economy in 1983. With the rate of economic growth and the price of the country's main export, oil, declining, the government embarked on an economic liberalization campaign. It devalued its currency (the rupiah) 28 percent, adopted an austerity budget, liberalized trade and substantially deregulated the financial sector. The ultimate goal was to restore economic stability and decrease the country's dependence on oil.

Most significantly, the government abandoned its old model of development and its commitment to protecting national producers. In place of import substitution, it began pursuing a strategy of export-led growth.

In 1986, the country received an economic jolt. International oil prices plummeted and the country's terms of trade declined 34 percent due to fluctuations in U.S. currency valuations. In response, says Richard Caulkins, principal country officer for Indonesia at the World Bank, Indonesia "began its second major effort to restore the economy," intensifying its economic liberalization and deregulatory policies.

As a short-term response, the country again devalued the rupiah, this time by 31 percent. More far-reaching, however, was the country's deregulation campaign, which reached into every sector of the economy and continues today. In 1986 and 1987, the country eliminated tariffs on 59 import components, simplified licensing regulations for the production of goods and relaxed or abolished a host of regulations affecting foreign investors. In 1988, the government introduced a series of measures deregulating the banking sector and established a private stock exchange. In 1990, the government dramatically reduced tariffs.

Indonesia's policies have met with apparent success. Growth rates since 1986 have averaged 5.8 percent. The World Bank has been particularly impressed with Indonesia's economic performance. Deepak Gupta, senior economist at the World Bank, says Indonesia is "one of the most successful developing countries," praising it especially for its performance since the 1986 decline in oil prices. Caulkins calls Indonesia "one of the most amazing examples of structural adjustment in the developing world, with important lessons" for other Third World countries.

A new land of opportunity

A crucial component of the government's deregulation campaign was its opening of the economy to foreign investors.

Foreign investment in Indonesia is regulated by the country's 1967 Foreign Capital Investment Law, which, as amended in 1974, allows foreign firms to hold up to 49 percent of joint venture companies in Indonesia. Many specific economic sectors were designated as off-limits to foreign investors.

As part of its late eighties deregulation efforts, the Indonesian government relaxed the laws governing foreign investment. In 1986, the government doubled the number of business categories open to foreign investors. In 1987, the government decreed that foreign companies could maintain 95 percent shares in Indonesian ventures exporting at least 65 percent of their products. It also changed the law to make joint ventures with majority domestic ownership eligible for treatment as national firms, enabling joint ventures to borrow from state banks, sell products locally and invest in sectors previously open only to local companies. In 1989, regulations affecting foreign investment were further eased.

The government's deregulatory policies and conservative macroeconomic management techniques are designed to attract foreign capital. "Indonesia wants and welcomes foreign investment," states J.B. Sumarlin, Indonesia's minister of finance. "Continuity, predictability and coherence of policy are key elements of our management of the economy. Investors can confidently make long-term plans for investment in our country."

For the foreign investor, says Sudradjat Djiwandono, Indonesia's vice minister of trade, "Indonesia is a new land of opportunity."

Foreign, especially Asian, capital has jumped at the opportunity. In 1989, 294 companies made investments of $4.7 billion (excluding oil-related and financial investments). Japan is the leading investor in the country with a total of $6.2 billion, followed by Hong Kong with $3.4 billion and the United States with $2 billion.

Additionally, Asian and U.S. banks have responded to the changes in Indonesian banking laws allowing foreign banks to enter into joint ventures with domestic banks and to open sub-branch offices. As of June 1989, Citibank was the largest foreign bank operating in Indonesia, with assets of around $600 million. It was followed by the Bank of Tokyo and Chase Manhattan.

U.S. companies in non-oil sectors have been slower than Asian companies to respond to the open Indonesian economy. "Although Indonesia is one of the countries which really wants U.S. investment," says Karen Gaddin, Indonesian desk officer at the U.S. Department of Commerce, U.S. companies "have not responded aggressively" to the opportunities the country offers.

Indonesia's reputation for maintaining a corrupt bureaucracy and a protectionist economy has apparently deterred U.S. investors. Gaddin says there is a "time lag" for U.S. companies to respond to new conditions. She expects that U.S. companies will start entering Indonesia in greater numbers in two to three years.

Foreign debt

Underlying the Indonesian government's drive to attract foreign investors and increase its export earnings is the need to pay off its massive $39 billion foreign debt. Indonesia last received a loan from the International Monetary Fund, for about $609 million, in 1987. World Bank financing has been more significant, totalling $14 billion since the mid-1960s. In the past five years, the World Bank has loaned Indonesia $1.2 billion a year, both for structural adjustment and sector specific loans "covering all key sectors," according to Gupta. Caulkins says he expects the Bank will loan $1.5-1.6 billion a year to Indonesia over the next five years.

Despite the size of the debt, international bankers do not express concern about repayment. Indonesia has not missed a single debt payment and Gupta reports that Indonesia's debt crisis is past its peak and its debt obligation falling.

Still an oil economy

Despite the government's diversification efforts, oil remains the dominant sector of the Indonesian economy. A member of the Organization of Petroleum Exporting Countries, Indonesia accounts for approximately 5 percent of OPEC's total production. Before the Persian Gulf crisis, Indonesia produced approximately 1.4 million barrels of oil a day, half of which was exported to Japan.

U.S. companies dominate the oil sector, with Caltex, a joint Chevron-Texaco company, accounting for half the nation's oil production. Caltex and other foreign companies operate under contract of work agreements with the state petroleum company, Pertamina. Under an agreement negotiated in 1983, Caltex keeps 12 percent of the oil it produces, with the rest going to Pertamina. Other foreign companies, including the second largest foreign producer, the French company Total, operate at a slightly more favorable 85-15 production-sharing ratio.

Caltex's investment in Indonesia has paid off handsomely. Profits from Indonesia accounted for three quarters of the company's 1984 profits of $990 million, for example, and over 23 percent of Chevron's and 30 percent of Texaco's 1984 worldwide earnings.

Natural resources

As the Indonesian government tried to steer the economy away from oil dependence in the 1980s, it turned to the country's diverse natural resource wealth, which extends far beyond oil. Indonesia has vast reserves of natural gas. Wood products (see "Plundering Indonesia's Rainforests") are its main non-oil and gas export earner, bringing in more than $2.4 billion in the first three quarters of 1989. The agriculture sector, which employs over half of the nation's workforce, earned over $1.5 billion in the first three quarters of 1989. Coffee, tea, shrimp, fish and spices were the main agricultural exports. Non- oil and gas mineral export revenue totalled more than $1 billion in the first three quarters of 1989. Major mineral products include nickel, gold, copper, tin and coal.

In many ways, Indonesia's copper industry represents a microcosm of the country's development path as it opens its economy to foreign investment and intensifies its exploitation of natural resources. Freeport Indonesia, a subsidiary of the Nevada-based Freeport-McMoran Copper Co., is the country's sole copper producer. It entered Indonesia in 1967, after Suharto's coup, but before the country's foreign investment law was written. Because it invested before the regulations requiring foreign companies to invest in Indonesian joint ventures were enacted, it was able to make Freeport Indonesia a wholly-owned subsidiary. Today, the Indonesian government owns 9 percent of the company and a German group owns an additional 3.7 percent.

Freeport has a work contract for a 100 square kilometer area in the Central Fold belt of Irian Jaya. The contract has been tremendously profitable for Freeport. Mines developed under the contract have proved to be among the lowest cost in the world, enabling Freeport Indonesia to maintain high profits even when the world copper price is low. New discoveries have Freeport expecting to produce about 2 percent of the world's copper supply from its Indonesian mines and have led the Mining Journal to remark that Freeport Indonesia "faces unanticipated buoyant years ahead." Freeport's concession also contains significant amounts of gold and silver. And in late 1989, the Indonesian government granted Freeport exploration rights for a huge 2.5 million hectare (9,649 square mile) site adjacent to its existing concession.

Freeport has extracted tremendous wealth from Indonesia, but the people who live in areas surrounding the company's mines have not benefited. Only 20 out of Freeport Indonesia's 3,500 workers are local Irianese, according to the London Financial Times. Freeport's mining operations, which encroach on the Lorentz National Park, have reportedly contaminated the Otomona River and a downstream village. A United Nations Development Report states that Freeport has continuously dumped untreated copper mine tailings into a tributary of the Ajika River, damaging the local population's fishing grounds and posing possible health risks to local people.

Now environmentalists fear that Freeport Indonesia's expansion into the 2.5 million hectare tract for which it was granted exploration rights will further damage Irian Jaya's rainforests and the people who live in them. An October letter from an international group of environmentalists to George Mealey, the president of Freeport-McMoran Copper Co., calls on the company to postpone its exploratory and mining activities until an independent entity carries out an environmental and social impact assessment, open to public input. The letter states that "we are concerned about impacts of exploratory and mining activities on the local indigenous populations," and demands that the company respect indigenous people's customary rights. Noting that Freeport Indonesia's exploration area includes part of the Peg Jayawijaya Wildlife Reserve and an additional portion of the Lorentz Nature Reserve, it also asks for guarantees that these reserves not be adversely affected by Freeport's operations.

Mealey has indicated that he will soon offer a detailed response to the environmentalists' letter, saying in the meantime, "I can assure you that Freeport-McMoran Copper Company's operations in Irian Jaya are conducted in full accordance with applicable laws, and that environmental concerns are certainly a significant part of our operational considerations."

Manufacturing and worker repression

While much of the country's diversification away from oil has been into other natural resources, Indonesia's manufacturing sector has also grown at an extreme rapid pace over the last decade. An average growth rate of 13.2 percent over the last five years raised manufacturing's contribution to Indonesia's gross domestic product to 18.4 percent in 1989. After plywood, textiles lead the way, earning almost $1.4 billion in export revenue in the first three quarters of 1989. Gupta says that Indonesia is "successfully following other East Asian countries" on the path to industrialization.

As in the mineral sector, however, the benefits of growth in the manufacturing sector accrue disproportionately to foreign investors and domestic elites. Indonesian workers receive extraordinarily low wages and are denied the right to organize.

To international acclaim, Indonesian Minister of Manpower Cosmas Batubara has declared 1990 the "Year of Wages" in Indonesia. Indonesian workers, however, have not been impressed. In May, 600 workers marched on parliament demanding that the government force employers to pay the minimum wage, which varies from region to region but hovers around 90 cents per day. Over 70 percent of workers in industrial Northern Jakarta reportedly receive less than the minimum wage.

Wages are kept down by a huge surplus labor pool and severe restrictions on workers' rights to organize. The rate of underemployment is 44 percent, according to the Indonesian government. Two million new workers enter the workforce every year. The domestic economy is so overwhelmed by the burgeoning labor force that the Indonesian government encourages workers to emigrate to foreign countries, especially Malaysia.

The Ministry of Manpower oversees national labor policy. The current structure of the Ministry was established by Batubara's predecessor, Kopkamtib Sudomo, a former military officer who created an array of agencies to expand his power base and enhance his control over labor organizations.

Under the Ministry of Manpower's watchful eye, labor is ruthlessly suppressed. In 1985, the government ordered the firing of over 1,600 workers at Pertamina and foreign oil companies, charging that they had been members of the Indonesian Communist Party, which was banned 19 years earlier when Suharto took power.

Though it affords them little protection, approximately five percent of Indonesian workers are trade union members, according to the U.S. Embassy.

The only legal trade union is the government-dominated All Indonesia Workers Union (SPSI), which was formed in 1985. Fourteen of the 17 top SPSI officials belong to the Indonesian ruling organization, Golkar. Even the anti-worker Bush administration has concluded that, "as regards the rights of association in Indonesia, the unitary trade union structure faced by private sector employees remains a problem."

While strike activity is legally permissible in most industries, it is extremely infrequent in Indonesia. The government reports that approximately 40 strikes occur each year. In 1988, in a nation with a population in excess of 175 million, there were 39 strikes involving only 7,544 workers. Critics charge that this low level of strike activity is a result of widespread intimidation of workers and the low level of worker organization. Workers in public enterprises and industries deemed of "national interest" are not allowed to strike at all.

The government trumpets Indonesia as stable and strike-free in wooing foreign investment. In 1987, for example, Ginandjar Kartasasmita, chairman of Indonesia's Investment Coordinating Board, boasted that "there is no labor strife in Indonesia, nor are there communal or religious disturbances." The government touts its low wage structure as well; average Indonesian wages are approximately one-fifteenth South Korea's and half of the low-wage neighboring countries of Malaysia and Thailand.

Perhaps the most significant problem with Indonesia's labor policy, argue critics, is that SPSI functions as part of the government's system of social control. Nishiskawa Atsushi, writing in the Japan-Asia Quarterly Reznew, says, "it is clear that the unions' aims are not to protect the workers. They are, rather, the people who control the workers." The AFL-CIO argues in a 1989 petition requesting that the U.S. government refuse Indonesia privileged status under the Generalized System of Preferences because the Indonesian government denies workers basic rights that "what Indonesians defend as a tripartite system of labor-management-government relations is in reality a technique of social and political control. Control is exerted both by the civilian elements of the power structure, represented by Golkar, and by the army." (The Bush administration denied the AFL-CIO's petition, just as the Reagan administration denied similar petitions in the two previous years.)

The AFL-CIO points to an August 1988 regional SPSI congress in Tangerang, located outside of Jakarta, to justify its claims. Workers in Tangerang, the AFL-CIO reports, frequently stage illegal, wildcat strikes. When the workers' election committee met to choose a new district chair, "their review was interrupted by the local military authorities. The committee was compelled to relocate its meeting at Tangerang military headquarters. As a result of this blatant interference and intimidation, the committee elected as the new chairman of the SPSI's Tangerang regional office a retired military officer named Darmawan Eddy, who was then a personnel officer at a local textile plant. Eddy was also a leader of the APINDO [employers' association] organization bureau.... Eddy has since resigned from his two management slots."

The Indonesian government defends itself against the AFL-CIO's claims, saying that the U.S. Iabor organization's complaints "reflect an American cultural bias in favor of dispute resolution through an adversary system and a less paternalistic governmental approach." The Indonesian government asserts that the country's national philosophy, known as Pancasila and embodied in five principles in its constitution-"Belief in the One Supreme God; A Just and Civilized Humanity; the Unity of Indonesia; Democracy guided by the wisdom of deliberation/representation; and Social Justice," justifies the close relations between the government and SPSI and explains the low level of strike activity in the country.

Responding to the Tangerang incident, the government argues that the involvement of the military in civil society must be understood in the context of Indonesia's "tradition, history and culture, [which] have combined to give the Armed Forces a role in the 'nation's development' under the doctrine of 'dual function."' That military officers "are elected to high union positions has to do with the respect accorded to members of the Armed Forces." The use of the military hall and the election of Eddy were purely innocent, the government claims: "Pursuant to the dual function principle, use of a military building by social and political organizations is common. This does not mean, however, that the groups who use the building have their independence and autonomy undermined by the military. Mr. Darmawan Eddy represented the company trade union during the Regional Congress. Based on the leadership abilities he demonstrated, he was elected chairman of the Regional SPSI."

Indonesia's sordid labor record is dismissed or ignored by those who tout its magnificent development record. Gaddin of the Commerce Department says that although she is aware of the AFL-CIO's petition, violations of worker rights in Indonesia are "not a big problem as far as I am aware." She points to the Manpower Ministry's "Year of Wages" campaign as evidence that the government is "very concerned" about worker rights and that all Indonesians benefit from the country's development. The World Bank's Gupta reports that "in our assessment, in comparison with the region generally, Indonesia has a good set of labor policies. In practice, they work relatively well."

Poverty and the poverty of development

Along with the high rates of economic growth, Indonesia's advocates say, the country has been extremely successful in alleviating poverty. Gupta says that in comparison to other countries, Indonesia has been "eminently successful" on this score. The government, he says, has focused on human resource development and has "protected social programs even when major [budgetary] cutbacks" have been necessary. Caulkins too says that Indonesia has done an excellent job, particularly in improving access to healthcare and education.

Some of the national statistics support these claims. Per capita GNP stands at about $450, having risen at a 4.3 percent rate in the period 1965 to 1988. The infant mortality rate has fallen from 125 per thousand in 1965 to 68 per thousand in 1988, according to the World Bank, although the United Nations puts the current figure at 84. The UN reports that life expectancy has risen from 41 years in 1960 to 57 years in 1987 and that the literacy rate has gone from 54 percent in 1970 to 74 percent in 1985.

Other figures are less positive, however. Only 38 percent of the population has access to safe water. The per capita GNP of the lowest 40 percent of households is $160.

One development worker in Indonesia who asked Multinational Monitor to withhold her name and organizational affiliation says that while schools and health centers are more accessible than they were a decade ago, "the income gap is widening and people feel poverty more." She adds that "poor people in the cities are not better off," and that the burgeoning population is worsening the situation by intensifying competition for resources--like clean water or jobs--which are already insufficient.

Some groups have not benefitted at all from Suharto's mixed development record. Indigenous people, whose access to forests and other natural resources is now curtailed by concessions to natural resource exploitation companies, are undoubtedly worse off than they were before Suharto's New Order government (see "Uprooting People, Destroying Cultures: Indonesia's Transmigration Program").

The authoritarian, top-down strategy of economic development has also had, and promises to continue to have, high costs for labor and the environment. Indonesia may be the best example the World Bank can trot out to demonstrate the efficacy of structural adjustment policies, but it is not a model of sustainable development.

Off the Pesticide Treadmill

Hailed by environmentalists, Indonesia's program for dealing with agricultural pests stands out as a glaring exception to the country's unsustainable development model.

In 1986, with the support of the United Nations Food and Agriculture Organization (FAO), the Indonesian government implemented a crash integrated pest management (IPM) program, which emphasizes the use of natural predators to control agricultural pests and strongly discourages pesticide use. That year, the government sent out agricultural extension officers to train farmers in IPM techniques and banned the use of 57 insecticides on rice. In 1987, pesticide subsidies were cut to 40-45 percent from 70-75 percent; in January 1989, the subsidies were withdrawn entirely.

Indonesia's far-reaching program, says Sandra Postel of the Worldwatch Institute, "is among the largest in the world."

The program achieved rapid success. Use of organophosphate insecticides fell from 14,200 metric tons in 1985-86 to 5,800 tons a year later. According to Sjamsoe Soegito, executive director of Indonesia's National Development Information Office, "within three crops (about 18 months), Indonesian farmers trained in IPM reduced the average number of pesticide applications per crop from 4.5 to 03. At the same time, average rice yields rose from 6.1 tons to 7.4 tons per hectare."

By reducing its pesticide subsidies, the government saved almost $50 million per year. Decreased pesticide imports have saved the country more than $100 million a year, reports Ida Nyoman Oka, a member of the IPM steering committee of Indonesia's National Development Planning Agency.

Indonesia implemented its wholesale shift to the IPM program in response to a severe rice crop crisis. In 1986, the brown planthopper, traditionally an insignificant pest but one of growing importance in the previous decade, became a major threat to the nation's rice crop, destroying 75,000 hectares of rice paddies. Indonesia had previously responded to pest outbreaks with massive pesticide applications. This time, the government decided a different tack was necessary.

Past pesticide spraying had actually helped bring about thebrown planthopper explosion, which Monica Moore of the San Francisco-based Pesticide Action Network calls "a green revolution-induced crisis." The "green revolution," which promoted chemical-and capital-intensive agriculture, helped Indonesia become self-sufficient in rice production by introducing crop varieties which could be grown year-round. But the pesticides sprayed as part of the green revolution program killed the brown planthopper's natural predators, and the year-round growing season enabled the pest to thrive. The IPM program took Indonesia off the pesticide treadmill and reduced the brown planthopper population.

The IPM program encountered resistance, however. Seventy percent of Indonesia's pesticides came from plants owned by four multinational companies, Bayer, ICI, Dow Chemical and Chevron, and these corporations strongly objected to the government's new pesticide policy. The Agriculture Ministry also disapproved of the program, but was circumvented with the help of the FAO.

Despite its success, the IPM program is now under attack, reports Dr. Michael Hansen, a pesticide analyst at the U.S. Consumers Policy Institute, an affiliate of Consumers Union. Opponents charge that the IPM policy has caused an outbreak of the white stemborer and that pesticides are needed to eradicate it. Defenders of the program point out that the pest has proliferated throughout the region, including areas with high pesticide use. They also argue that the white stemboret's growth in Indonesia may be due to the continued, illegal use of pesticides. Because the Ministry of Agri-culture does not support the program, they say, it does not enforce the pesticide ban stringently.

For now, it remains uncertain whether the once-defeated pesticide lobby will be able to mobilize the political influence to overturn the 1PM program. The success of the program will not be enough to guarantee that its preservation. Both environmentalists and government officials acknowledge that the decision will be made on political rather than scientific grounds.

- R.W.

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