Indonesia’s Economy Is a Study in Contrasts

Indonesia, the developing nation whose troubled economy became the focus of international worry Thursday, is an unlikely country to affect trillion-dollar global markets, largely because of its widespread poverty.

But its large population and economic potential have made it a focus of investment for years, as well as a leading nation among the Assn. of South East Asian Nations.

That’s why world markets are nervous about Indonesia. They fear unrest as President Suharto, 76 and ailing, appears uncertain as to his successor.

And world markets reacted this week when Suharto issued a new government budget that seemed to flout International Monetary Fund prescriptions for his economy.

Indonesia’s economy, like that of most developing countries, is a thing of contrasts--some of them poignant.

“The country is rich in natural resources,” says Richard Baker, a senior fellow at the East-West Institute, a think tank in Honolulu. “It has oil and gas, rich agriculture and lumber.”

But it also has an underdeveloped economy with only about 20% of its people at a level of income and education that would qualify as middle-class.

The nation has a gross national product of roughly $160 billion--or $800 in output per year for its 200 million people.

It’s a country almost the size of the United States, but spread over 17,500 islands where the South China Sea meets the Indian Ocean. Yet almost 60% of its people live on the island of Java, site of the capital, Jakarta, and one of the most densely populated places on Earth.

In an effort to broaden its middle class and develop a modern economy, Indonesia has long made elementary education compulsory. It has done a good job spreading literacy, Baker reports.

Yet once you educate people, you have to find work for them. Indonesia’s economy needs to create 2.3 million jobs a year just to keep up with new entrants to the work force. That’s roughly as many jobs as the U.S. economy, the most developed on Earth, creates annually.

So Indonesia is challenged, which helps explain why it’s a nation heavily in debt--with foreign borrowings of more than half its annual gross product and 200% of its total annual export.

Even though Indonesia has received heavy investment in recent decades from global companies involved in oil and gas development, textiles and apparel, timber and wood manufacturing, the country has also had to borrow from global banks to finance social and job-creation programs.

Japanese companies are major investors in Indonesia, and Japanese banks are leading lenders to the country. U.S. and European companies, too, have investments. But U.S. involvement is more political--a long history of military cooperation with the Suharto regime--than economic.

U.S. imports from Indonesia amount to about $6 billion a year in oil, rubber, plywood, textiles and footwear. Exports amount to about $4 billion--in aircraft, soybeans and heavy industrial equipment.

Until recent months, Indonesia had no trouble borrowing. Its economy was growing 7% a year. Its abundant rice harvest provided work for the majority of its labor force, while the development of its cities, such as Jakarta, population 11 million, provided construction work for those same farm laborers in the off-season.

But Indonesia was hit last year with a devastating drought, which contributed to the environmental disaster of Indonesia’s burning forests. Economically, the drought not only kept food short in a normally abundant agricultural nation, but it denied a cash income to farm laborers.

When the laborers came to the cities, they found construction projects shut down because the Asian banking crisis had hit the nation hard.

All of those events eroded respect for Suharto’s government, which suddenly was castigated for giving lucrative jobs and contracts to cronies and family members.

“Now there is a political crisis because Suharto won’t name a successor and facilitate a transition,” said Baker.

Yet Indonesia’s 52-year history as a post-colonial independent nation indicates how that political crisis will be settled, Baker said: “Ultimately, the army will decide who is to lead the country and hold it together.”

The army plays a central role in Indonesian history and society. The army founded the country, which was formerly the Dutch East Indies, during Japanese occupation in World War II. When peace came in 1945, Indonesia immediately became an independent nation.

Since then, the army has played a role in keeping united the far-flung country of 300 ethnic groups and hundreds of languages.

Ethnic Chinese business people, at about 4% of the population, dominate the economy and have endured occasional outbreaks of violence from other groups. But the army, recruited from the country’s thousands of villages, works to quell internal strife.

It’s as if Indonesia’s leaders, whatever their other failings, recognize that the country will warrant greater attention and status internationally if it can retain its size and economic potential. Indeed, the world’s concern over Indonesia this week confirms their insight.

* INDONESIAN WOES: Fears that bailout plans may collapse sent the country’s currency plummeting. A1