Indonesia’s Economy Still Fragile

Shaken by the depressed oil market, Indonesia’s economy is headed for zero growth at best this year after government countermeasures--including a 31% devaluation of the country’s currency--have failed so far to turn it around.

“We are back on solid ground,” Ali Wardhana, the minister of economy and industry, maintained after devaluation of the rupiah last month.

But businessmen and non-government economists are doubtful. They say that the sharp contraction of oil export earnings has spotlighted fundamental problems within the economy--inefficient monopolies, overprotection of domestic industry and the continued scent of corruption.

The result of inefficiency, government officials concede, is a high-cost economy. Add-ons force the price of locally manufactured goods above world market levels and will burden Indonesia with trade difficulties, whatever the future for oil exports.

Two years ago, carried by steady prices for crude oil and new production of liquefied natural gas, Indonesia’s economy posted 6% growth. Last year, when the economies of neighboring Singapore and Malaysia fell flat, Indonesia managed a growth rate of more than 1%, despite a 14% decline in oil and gas earnings.

This year petroleum exports, which in recent years have accounted for two-thirds of the value of all exports, will no longer keep the economy afloat, authorities said, and the country will register its first economic contraction under President Suharto, Indonesia’s leader for more than 20 years.

Finance Minister Radius Prawiro predicted that oil and gas export earnings will fall to $6.6 billion for the current fiscal year from $12.4 billion in the 1985-86 fiscal year. The collapse of dollar earnings for petroleum exports left the government little choice but to devalue. “They were looking at a $6-billion current accounts deficit,” a foreign economist said.

Even with a devalued rupiah making exports cheaper, Indonesia’s non-petroleum export outlook is gloomy. World markets are glutted for many of its other commodities, including palm oil, rubber and tin.

The results can be seen on the streets of Jakarta and other major cities. The government has produced no hard figures on unemployment, but the jobless and the severely underemployed may amount to 20% of the population.

“If it weren’t for becaks and kakilimas, there could be trouble,” a foreign resident noted, referring respectively to the motorized tricycle-taxis and the sidewalk food stands that provide income for some people.

Prices increased after devaluation, even for rice and other domestically produced items, but have settled at about 10% above pre-September levels. In Jakarta, the price of rice is about 5% higher. In the Java city of Jogjakarta recently, chicken was selling at the equivalent of 45 cents a pound.

Given Good Grades

Over two decades, Suharto and his largely U.S.-trained technocrats have been given good marks for their handling of the economy and national development programs.

“Certainly other countries--Iran, Nigeria and Mexico, for instance--have not done nearly so well in handling oil income,” despite the loan scandals that plagued Pertamina, Indonesia’s national oil company, several years ago, said R. William Liddle, an American specialist on Indonesia.

By achieving self-sufficiency in rice last year Indonesia, formerly the world’s premier rice importer, further bolstered a strong agricultural sector. (The last time Indonesia eliminated rice imports was, briefly, in 1964 under the late President Sukarno.) More recently, the Suharto regime has been concentrating on the non-oil economy, and the devaluation followed a series of measures and reforms designed to streamline those areas.

In 1985, the government moved against the longstanding and notorious corruption in the customs service, bringing in a private Swiss company to handle duties on imports and exports. And last spring, a program of incentives for foreign investors was unveiled.

The so-called May 6 Package was aimed primarily at export-oriented and high-technology industries. The major investors here are Americans (mostly in petroleum) and Japanese. They and others perceived the package as a start, a useful half-step, and turned their attention to a far more controversial area, the question of market access and government regulation.

Domestic and foreign critics of government practices in this area charge that friends and family members of President Suharto have been favored in some cases. Government ministers and spokesmen have denied any wrongdoing.

The information minister called the newspaper’s report a “pure fabrication.” But the charges, substantiated or not, clouded the investment scene here. And, given next year’s scheduled national elections, they could have political implications as well.

The monopolies are partially justified under the policy of import substitution--government protection of nascent domestic industries. A result, however, is the high-cost economy, which is felt most acutely in the cities.

Nonetheless, with a potential market of more than 160 million people and vast commodity resources, Indonesia presents an attractive prospect for foreign investors, though the rate of investment growth has been leveling off.

“They are waiting to see if the president is going to carry on with the reforms,” a Jakarta-based diplomat said.