America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
Shortly before President Suharto was sworn in last March for a third five-year term as President of Indonesia, he delivered a major state of the nation speech to the People's Consultative Assembly.
The trials of his second term, Suharto said, "have made us more mature and more realistic. These experiences have done away with wishful thinking, especially the illusion that development is not a struggle . . . . We grow more conscious that in implementing development we are sometimes confronted with alternatives - which road should we take so we reach our goal safely. At times this choice isn't between the good and the bad, but only which is less bad than others."
Little more than a decade ago, Suharto and the Army took power and ended the "guided democracy" of the Sukarno era as well as Indonesia's flirtation with the Soviet Union and China. At the time, Suharto made a monumental strategic decision - gambling the development of the world's fifth most populous nation on a partnership with the free market economies of the United States, Japan and Europe. His New Order brought political stability and some economic progress. Indonesia took more effective control of its own oil and other natural resources. Soon soaring oil prices brought a wave of optimism that convinced many that Indonesia might be able to hoist itself dramatically and suddenly from poverty. But then came a worldwide recession. The engine of Suharto's development program, the state oil company Pertamina, derailed, wrecking the illusion that somehow oil would prove a magic balm for the nation's problems.
Today, as Suharto begins what will probably be his last term, his New Order is facing a testing time. Indonesia's problems of population, food and jobs are looming more starkly than ever; around them center many of the themes voiced by his detractors at home.
The years ahead are likely, as well, to plumb the West's commitment to official aid programs, and to test anew the commitment of private enterprise to a responsible role in a nation that has always held a special allure for those seeking riches from the East. Suharto's third term is shaping up as a test of the very worthiness of the West as a partner in development.
The stage for all this was set early in the New Order, when Suharto brought in a team of Western-educated technocrats to run the nation's economy. These included a host of highly able officials, ranged under Widjojo Nitisastro, head of the national development planning agency, BAPPENAS, and sometimes called by Westerners the Berkeley Mafia.
Under their guidance, Indonesia faced up to formidable problems and recorded some impressive achievements. Over the course of a decade, real gross domestic product grew at an average of about seven percent a year to more than $44 billion in 1977. Inflation, which was running at more than 600 percent during the final days of Sukarno, has been wrestled under control, now running at about ten percent a year. Foreign trade has exploded; gross exports of $10.6 billion in 1977 were 12 times bigger than in 1967. The nation's crucial irrigation system was repaired; roads were built up. Schools and hospitals were constructed. Food distribution facilities have been improved, lessening the chances of isolated famine. Indonesia in 1976 inaugurated its own satellite telephone communications. Although average per capita income of about $240 a year still puts Indonesia among the world's poorest nations, most observers contend that living conditions in the absolute sense have improved for millions of Indonesia's citizens.
But during the early 1970s, the technocrats went into partial eclipse, while the development spotlight shone on oil, particularly on a one-time Army doctor, General Ibnu Sutowo. In 1968, Sutowo had been named by Suharto to head Pertamina, which had recently been reorganized as the state oil company with sole rights over the nation's oil and gas reserves and all subsidiary industries. Sutowo radically changed, and improved, the terms on which Indonesia was dealing with foreign oil companies, introducing production-sharing contracts that allowed Indonesia to share directly in oil taken out of the ground and put the burden of risk upon the foreign explorers. This put Indonesia in a stronger position than before and launched a new age in the nation's oil development.
Sutowo, however, operated outside the sphere of control of the technocrats; instead, he had the direct backing of Suharto himself. As oil prices began to edge upward and then to soar, Sutowo moved Pertamina quickly into vast projects far beyond oil. He signed huge contracts to hire and purchase a fleet of supertankers. He launched far-sighted projects to liquefy the nation's vast stores of natural gas so it could be shipped to foreign markets. Suharto assigned him the task of completing the big Krakatau steel mill, begun by the Russians but left unfinished after the attempted pro-communist coup of 1965. Pertamina also branched out into refineries, petrochemicals, fertilizer, airlines, hotels, highways, insurance, and even experimental farming. By 1974, oil export revenues had soared to $5.2 billion from $232 million in 1966. Pertamina was justifiably being called a national development company, the spearhead of the New Order's development drive.
Throughout the early 1970s, foreign businessmen scrambled madly to cash in on Pertamina's foray into the marketplace. A young reporter, arriving in Hong Kong in 1974, was told by an executive of a big multinational chemical company: "Go to Jakarta - it's the boom town of Asia." Suppliers of equipment, oil companies, engineering firms, consultants, tanker owners, and brokers and agents of all kinds lined up at Sutowo's door. As often as not, their sales were made on credit. The Indonesians believe, too, that many of the contracts written during those days specified prices that were far too high, and they complain much equipment purchased ultimately didn't work. Foreign banks, especially but not exclusively American banks, were particularly aggressive. They lent hundreds of millions of dollars to Pertamina on lucrative terms, despite the fact that a fully audited set of accounts for the company was not available.
This display was at once a demonstration of the enormous resources of multinational enterprise and of the alacrity with which it could move. But it was also highly dismaying to Indonesia's technocrats. They not only chafed at the way Sutowo was preempting their franchise over development, but they worried that Pertamina was becoming dangerously overextended. Their opinion was shared by both the World Bank and the International Monetary Fund. In a standby agreement as early as 1972, the IMF went so far as to place limits on Indonesia's external borrowing and specific subceilings on credits to Pertamina. But the ceilings covered only medium-term loans. Many banks questioned the wisdom of the IMF controls. Hungry for borrowers, they began advancing huge sums in credits maturing in less than a year, just short of the IMF limits. It turned out to be a sad episode in the advance of Western banks into the developing world.
For Pertamina was a bubble. Much of its debt was to fund projects that would take far longer to build than the loans would run. The bubble burst in 1975, when the looming recession and conservation programs in the United States and Japan were eroding demand for Indonesia's oil and when international financial markets, frightened by the collapse of Bankhaus Herstatt of West Germany and Franklin National Bank of New York, were tightening up. The triggering event - Pertamina's failure to meet a payment on a $40-million loan at a time when it had $1.5 billion in foreign bank debt coming due within a year - plunged Indonesia into its worst financial crisis since the days of Sukarno. As the government sorted out the company's affairs, the lowest officially disseminated tally of Pertamina's obligations came to $6.2 billion. This included payments owed to banks, taxes owed to the Indonesian government, and credits owed to suppliers of goods and services, both at home and abroad. Additional obligations - largely promises to pay for its fleet of big oil tankers - boosted the total by some official counts to slightly more than $10 billion, an impossible burden for Pertamina to sustain.
The near-collapse of Pertamina, and the events that followed it, shook Indonesia profoundly. The nation awoke in 1975 to find itself being cited as the developing country where big Western banks came closest to getting seriously burned. The government was forced to mount an emergency bail-out to pay off the foreign banks, an effort that made Bank Indonesia, the central bank, the largest individual borrower of publicly syndicated bank loans in the world in 1975. Even so, Indonesia's reserves of foreign exchange plummeted to less than $450 million in September 1975 (the nation probably had negative reserves at times that year).
No sooner did Indonesia line up its bail-out financing than it ran into a nasty and humiliating battle to extricate itself from Pertamina's tanker contracts. Legal claims from a little-known Geneva tanker charterer, holding $1.266 billion in promissory notes personally signed by Sutowo, tied up Indonesian shipping and threw more than one billion dollars of its newly negotiated foreign debt into technical default. The battle undoubtedly contributed to what must have been one of the most painful decisions of Suharto's career - to fire Sutowo in March 1976. Before settling most of its tanker commitments, Indonesia itself revealed evidence of possible improper dealings between Sutowo and companies with which he put together the tanker fleet.
These events resulted in an important shift of power within the Indonesian government in favor of the technocrats, who obtained a virtual veto over Pertamina's plans. They in turn were forced to make hard decisions on a retrenchment of the company's ambitious goals. Their strategy was to limit Pertamina itself to the oil sector, and to strip it of businesses not related to oil. Some projects were cancelled outright, including a big deep-water port and oil transshipment terminal at Semangka Bay, South Sumatra. Others were deferred, such as an aromatics plant in southern Sumatra and an industrial complex on Batam Island, near Singapore. One by one, dozens of other Pertamina projects were transferred to other ministries of the government.
The government also decided to revise the production-sharing agreements themselves, perhaps Sutowo's proudest achievement. In mid-1975, aides of the IMF sent a brief memo to the Indonesian government estimating oil company profits per barrel in Indonesia at ten times the average in eight major members of the Organization of Petroleum Exporting Countries, and suggesting that both "historical and international comparisons" indicated "some scope" for Indonesia to increase its revenues by lowering profits of foreign oil companies. The IMF analysis was angrily disputed by foreign drillers. But another memo, by Price Waterhouse & Co., the international accounting firm, suggested ways the government might act. In early 1976, Suharto announced that the government would renegotiate the terms of its contracts with foreign drillers in an effort to boost its revenues. This touched off a bitter round of negotiations between the government and the oil companies and brought to a near-halt new exploration for oil in the nation. The government did not abandon the production-sharing concept. But eventually it demanded and won a more favorable split of oil with foreign contractors. To revive exploration, however, it was forced to announce a new and expensive round of incentives. In recent months, exploration has begun to pick up. But the experience taught the government how delicate is its relationship with the foreign drillers.
The Pertamina affair left Indonesia with a devastating sense of opportunity lost. It will probably never be known exactly what the collapse cost the nation in dollars and cents. One economist insists the Pertamina crisis dealt Indonesia "the greatest peacetime loss that any country has ever incurred." Other assessments are more modest. Addressing the Consultative Assembly, President Suharto himself probably put it best. The crisis, "which really was a most expensive experience," he said, "caused a decline in our ability to speed up the rate of development. The rise in the price of petroleum on the world market, which ought to have multiplied our capacity for development, proved not to bring benefits as large as we had originally hoped." The end of the illusion that oil would end Indonesia's poverty and provide development miracles was probably the most important legacy of the Pertamina affair.
It was understandable that the rise, fall, and finally the reconstruction of Pertamina so dominated the thinking about Indonesia's economy for much of a decade. The oil sector played - and plays - a pivotal role, carrying overall growth rates forward and paying about 50 percent of all the government's bills. Its apparent success spurred the government to almost open-handed spending, but also lulled it to complacency. Mainly, the attention, money and energy spent on Pertamina obscured Indonesia's performance on its most fundamental development problems. Now these are looming as the toughest tests for the New Order.
Indonesian government officials are well aware of this. In an interview in March 1977, Widjojo Nitisastro declared that the worst of the Pertamina crisis was over. "But," he said, "it's not just back to normal." Many problems confront Indonesia. These include difficulties in managing natural resources, raising government revenues, and servicing the country's heavy foreign debt load (with about $11.5 billion in foreign debt, Indonesia is probably the third most deeply indebted developing country after Brazil and Mexico). But three areas present planners with their biggest problems - population, agricultural development and job creation.
Policy decisions in these three areas now appear certain to shape the economic legacy of Suharto's administration and ultimately determine the success of his New Order. What looms ahead is not a sudden but rather a medium-term, creeping crisis. These are not the sort of problems that will be solved with big capital-intensive projects. Indeed, sorting out the priorities over a host of such projects that are attractive to Suharto is shaping up as one of the key orders of business in writing the nation's next five-year plan, Replita III, which is likely to be giving greater attention to the fundamentals. It will be a difficult road, for the record of Suharto's New Order in these vital areas is decidedly mixed. Impressive gains have been made in controlling population growth, but the record has been less impressive in the areas of food production and job creation.
Population is in many ways the most unsettling problem. Various projections estimate that if a net reproduction rate of 1.0 (which means averaging two children a couple) isn't reached until the year 2000, Indonesia will have a population of between 215 million and 225 million at the turn of the century and won't stop growing until it reaches between 330 million and 335 million.1 If the attainment of the net reproduction target of 1.0 is delayed until the year 2021, Indonesia's ultimate population could reach as high as 500 million. Such numbers would mean incalculable strains on the nation's human and physical resources.
Indonesian officials are keenly aware of the problem. Suharto himself was an early convert to the need for family planning programs. In a sharp departure from the policies of Sukarno (who fostered the idea that large families were a virtue), Suharto has lent unstinting political support to family planning. The national family planning coordinating board is answerable directly to the president.
Largely as a result of such support, the program has shown impressive gains. In the eight years since Indonesia started a formal family planning program in the densely populated islands of Java and Bali (home to 90 million of Indonesia's 136.6 million residents), long-run estimates of population have been cut significantly. The total fertility rate in Java and Bali has dropped more than 20 percent and is still declining. Contraceptive use among eligible couples has gone from near zero to more than 40 percent on Java and has topped 60 percent on Bali. As a result, Indonesia's overall annual rate of population growth has slipped from more than two percent to about 1.8 percent, a significant decline. The results of the family planning effort are so impressive that demographers Terence Hull, Valerie Hull and Masri Singarimbun, in a recent monograph, called it a "success story unrivaled in family planning history."2 Planners heartened by the improving trend are accelerating efforts. The government is now aiming to cut the national fertility fate by 50 percent by 1990 so as to reach a target of one percent annual population growth ten years ahead of the schedule mapped out when family planning was begun.
But even if the country meets this revised goal, the latest government estimates put the population at about 210 million by 2000 and see it stabilizing at 275 million by the year 2100. By all analyses, Java and Bali, which together have an area a little more than a third of Japan, will have to carry well over 110 million people 20 years from now.
Thus, population distribution looms as a subsidiary problem. With heavy concentrations of people on Java and Bali, pressures on environment, social and economic systems are mounting. The World Bank, for example, recently reported that landlessness has increased "rapidly" in the 1970s, forcing increases in unemployment and underemployment levels. More and more rural people driven off farms are looking for work as laborers, turning to urban areas when it isn't available in the countryside. On Java, some studies estimate, as much as 75 percent, possibly 80 percent, of the population is landless.
The heavy population concentration in the rice bowl of central and east Java is also beginning to result in clear signals of ecological deterioration. Crowding in certain areas has driven the poor into the hills in search of land and firewood for fuel. In the process, wooded areas are being stripped, leading to erosion that saps the island of fertile soil and destroys water catchment areas. The result contributes to an increase in droughts and floods that plague low-lying rice lands and set off rounds of peasant bankruptcies. Some agriculturalists fear that unless the pressure can be relieved, much arable land will be turned to useless savanna grasslands within the next 20 to 30 years.
One hope for relief is rapid redistribution of population through internal migration. But so far more than 50 years of experimenting with various transmigration schemes have yielded meager results. In the years between 1905 and 1977 fewer than one million people were moved out of Java in official transmigration programs, while the population increased by 35 million. In Indonesia's second five-year plan (due to be completed in 1979), an original target of 250,000 families due to be transferred from Java to outlying islands was scaled down to 100,000. But in the first four years of the plan, only 54,000 families have actually been moved. Officials have ambitious plans to raise the number of transmigrant families to 500,000 in the next five-year plan. But even with massive increases in spending, historical patterns suggest that the target is not likely to be achieved.
Just how much money the government wants to sink into this program is one of the key decisions Suharto is facing this term, a decision that will be shared by the World Bank and other Western institutions backing Indonesian development. Most economists and officials have concluded that transmigration is not a panacea for demographic redistribution, or even a way to spread labor more evenly over the archipelago. The World Bank, in a study of the Indonesian economy this year, stated flatly that transmigration's direct contribution to "relieving pressures on the labor market in Java and to the development of the other islands . . . will be limited."3 And another study - by Alden Speare, Jr. - analyzed the mix of population, urbanization and transmigration figures and concluded transmigration won't make much of a difference in labor force levels on Java by the year 2000.4
Nevertheless, officials and advisers believe that the transmigration effort must continue for two reasons. First, an official program of transmigration appears to pay some dividends in spurring voluntary migration out of Java. Second, economists and planners are concluding there are opportunities to boost food and commercial agricultural production in outer islands by linking transmigration efforts to specific rural development schemes intended to set transmigrants on their feet as commercial, not merely subsistence, farmers.
Indonesia's population situation has a direct impact on the two other key problems for Suharto's third term - agricultural development and employment. In these areas, gains under the Suharto government's first ten years were far less encouraging. In agriculture, food production, after some spectacular early gains under the so-called green revolution, has run into serious problems. At the same time, production levels of key traditional commercial agricultural crops - such as coffee, rubber, tea, pepper, and spices - have not improved significantly over levels reached in the early 1970s, and in some instances have declined. This combination hits Indonesia hard. A trend is emerging that has already made Indonesia the largest importer of rice in the world and, unless checked, could force the nation to use between ten percent and 15 percent of export earnings to pay for food alone. And export earnings themselves are limited by the stagnation in the production of commercial agricultural export crops.
What went wrong with food production in Indonesia? For quite a while the apparent answer was nothing. The green revolution, with its high-yielding rice strains, multiple cropping, increased use of fertilizers, and better irrigation systems, has brought a 50 percent jump in rice production over the past ten years and a 20 percent increase in per capita rice consumption.
But since 1974 production has risen at the scanty average annual rate of only slightly more than one percent, while consumption has continued to jump ahead. Acreage in rice is stagnating at early 1970 levels. Productivity, while high in relation to other Southeast Asian countries, is now increasing only marginally. The World Bank earlier this year warned that projections by "authoritative sources suggest the possibility of a rapidly widening gap between domestic production and demand for food."
A variety of factors contribute to this gap. One analyst insists that the Indonesians are "reaching limits of all kinds - human, technological and ecological." In recent years, bad growing conditions have put the nation far behind its target of 18.1 million tons of rice a year by 1979. A run of adverse weather and pest infestations have been the most visible causes. But some of these problems result not merely from bad luck. Droughts and floods, influenced by increasing deforestation and erosion, have become more prevalent. And the quickly mutating brown planthopper has ravaged millions of acres of high-yielding padi since the mid-1970s. The high-yielding rice strains, double and triple croppings, increased irrigation and use of fertilizer that come with the green revolution - all have made it easier for the planthopper to flourish and survive the year round.
In addition, some blame the rice problem in part on shortcomings in government policies and implementation programs. Extension and research programs for pest control and other aspects of rice production have not reached enough Indonesian farmers. Other problems include a failure to extend irrigation channels to their final destination. An increase in absentee landlordism has cut into production, and government-controlled rice price ceilings are thought by some analysts to be too low to encourage increased production. But here the government is caught in a bind. It is battling continually against its ubiquitous inflation. And rice is already too expensive for many Indonesians.
In addition, programs set up specifically to spur rice production have shown discouraging trends. A rural credit program providing two-year loans in kind for fertilizer and other supplies through a state bank specializing in agricultural lending has run into difficulties after a promising start in the 1970s. Average yields per hectare in the intensification program were the same in 1977 as in 1972, loan repayment rates are beginning to slip, and overall participation is leveling off. One government economist feels the program has run into the law of diminishing returns. He and others worry that even with more help from the government, production in Java will increase only marginally.
There have been serious but isolated instances of starvation and hunger in Indonesia. On the island of Flores, northwest of Timor, as recently as early 1978, some people died of hunger due to three years of crop failures and a reluctance among embarrassed local officials to call for help from the central government. Students and other critics cite such instances, repeatedly and angrily, as evidence of the New Order's failure on food. Starvation is always horrible. But it is generally isolated in Indonesia, the result of local failures. So far the government has avoided a genuine food crisis by upgrading the country's storage and distribution network, building stockpiles as a hedge against shortages, and holding prices down. But in 1977 imports reached 2.6 million metric tons, or about two-thirds of the entire world market in internationally traded rice. This cost about $700 million. Prospects for the current year are slightly better, but the government is still looking at rice imports of about two million metric tons annually in the coming years, and a food import bill probably topping one billion dollars.
Other non-rice food crops - which account for 50 percent of total calorie intake by Indonesians - have also shown little or no production gains in recent years. Output of maize, cassava, sweet potatoes, soybeans, and other dry land crops has stagnated since the early 1970s. Simultaneously, export of these crops, which once made their cultivation a worthwhile proposition and provided jobs in the rural economy, has all but dried up.
Commercial crops, too, are worrisome. Their relative importance declined as oil and timber soared in the 1970s. But estate crops - principally rubber, coffee, oil palm, and tea - still account for about 30 percent of Indonesia's total exports, including oil, and provide employment for between 10 percent and 20 percent of the country's total workforce of about 50 million. With the sole exception of palm oil, trends in production are discouraging. In rubber, smallholders' production, about two-thirds of total output, is stagnating or declining. And overall rubber output remains at levels first reached in the early 1970s. Coffee, tea and pepper are showing similar trends.
All these developments affect the third big problem facing Suharto - employment and job creation - which is already discouraging and is getting worse. About 65 percent of Indonesia's labor force works in rural areas. Various studies, including a spring 1978 report by the IMF,5 estimate that 40 percent of this group is currently unemployed or underemployed. In urban areas, unemployment or underemployment is estimated at about 20 percent. The IMF this year estimated that in the 1960s and 1970s the labor force has increased at an average of three percent a year, while the number of persons employed rose by only 2.7 percent annually. The IMF concluded that the "increase in employment opportunities has probably been greater than envisaged, but progress in combating unemployment has been retarded because of a more rapid than anticipated growth in the labor force."
The brunt of the employment burden will probably continue to fall on the rural sector, where the need to create new jobs in the next five years will be critical. Projections put the total work force in the year 2000 at about 87 million, with the rural work force still constituting between 65 percent and 75 percent. So far, modern manufacturing and service industries have absorbed only a small proportion of the increase in labor, and growing constraints on government spending threaten to block any dramatic expansion in public works employment.
To the dismay of planners, foreign investment (principally in export production) has brought little relief. The 1978 IMF report says that direct employment opportunities generated by foreign investment have been "relatively small." A confidential study recently completed for the state planning agency, BAPPENAS, was even more discouraging, concluding that because of a shift to capital-intensive extractive industries, especially oil, from labor-intensive non-extractive industries, the export sector has actually generated negative employment opportunities over the last seven years. The employment generated from exports in 1977, it found, fell by at least 60,000 jobs from the level of 1971, although the value of exports over the same period increased almost eightfold.
A constellation of problems in population, food and employment always sounds unreal in the abstract. To bring home their cumulative impact, take the lot of a typical family in Java. The Sukardis - as we might call them - have a 50 percent to 75 percent chance of not owning any land. Mr. Sukardi and his wife probably have about five children. One or two children probably died before they were five years old. Both Mr. Sukardi and his wife probably work as hired farm laborers, being paid in food; they probably only make a hundred dollars a year or so in cash. They likely live in a home with a dirt floor, and must look hard for firewood. If their children stay in rural Java, they can look forward to living an even harder life, with almost no hope of ever owning land. If they drift into the cities, their chances of finding any job are slim indeed and of finding a good job even slimmer. If they choose to accept transmigration to an outlying province, their lives as settlers will be as rough as that of any migrants in history - without the future promise that lured so many pioneers to, say, the western United States or migrants from Europe to America.
The plight of the Sukardis is now crowding in on planners in Jakarta at a rush. And as if that were not enough, the outlook is darkened by some other factors. For the first time since Suharto came to power, the prospects are bleak for continued healthy rises in foreign exchange earnings to fuel the government's development budget. Both the World Bank and the IMF are predicting that net exports will increase by a mere five to ten percent in the year now ending (1978), mainly because oil export revenues, which increased 30-fold in the past decade as both prices and production soared, are likely to stagnate and possibly decline. The IMF said the "major challenge facing the policy makers over the next few years is to maintain the pace of development in the non-oil sector despite the expected slowdown in oil revenues." "In the next few years," the World Bank forecast in its April 1978 report on Indonesia, "the development program will have to operate in circumstances which, in many respects, are significantly different from those prevailing earlier."
All this is forcing Indonesian planners - and ultimately Suharto - to make some difficult choices. As work progresses on the third five-year plan for 1979-84, a fundamental debate is being waged behind the scenes on what directions development should take. Planners are aware of Suharto's penchant for big projects that change the shape of the nation, and a whole galaxy of such projects is on the drawing boards. These include such schemes as the Bintan Island alumina project, which would cost a minimum of $450 million; the Batam Island oil refinery, which would probably cost $800 million; a new airport projected to cost hundreds of millions of dollars; a $600-million diesel engine factory; a $300-million urea plant that would be built as a joint industrial scheme with the other members of the Association of Southeast Asian Nations (ASEAN); a $750-million refinery at Dumai in Sumatra; a possible $400-million expansion of the already operating liquefied natural gas plant at East Kalimantan; a $700-million possible expansion of the nearly completed liquefied natural gas facility at Arun in northern Sumatra (needed if Indonesia gains clearance to ship LNG to the United States); and a one billion dollar coal and power project at south Sumatra.
The President, says one of Suharto's associates, "likes to cut ribbons." He would like - as a long-time Cabinet member puts it - "to have his cake and eat it too." But increasingly his planners are saying priorities must be reordered to select the big projects that really matter, and that - even to fund these - waste will have to be cut from the administration's spending. Not only will increased external resources have to be mobilized, but greater domestic resources will have to be used and used more effectively. Sorting out these priorities will probably take place over several years. It is a critical exercise, one that, if mishandled, could leave Suharto with an economic legacy that is badly tarnished.
Although these challenges express themselves in forms of economic planning, they have an enormous political dimension. When Suharto and the armed forces ousted Sukarno from power in 1966, brought in a team of Western-educated technocrats to restore order and a degree of Western-style planning to the economy and reopened the country to foreign investment, it amounted to a repudiation of 20 years of Indonesian history. For the first time since Indonesia wrested its independence from the Dutch, the politics of nationalism were no longer in command. Instead, the priorities were economic pragmatism and an accommodation with the Western industrialized powers and especially Japan.
In casting his lot with the major non-communist states, Suharto made a commitment that Sukarno had tried for two decades to avoid. He committed the nation to a dependence on trade and on aid from the major capitalist countries. He saw this as the best strategy to promote rapid economic development at home. But the move went against the dominant political themes in Indonesian history, and as such was a gamble. It opened Suharto's flanks to criticism from nationalists still suspicious of the motives of former imperial powers, to leftists who viewed the concept of liberal democracy as anathema and inherently exploitative, and to radical rightists who felt passionately, for reasons of culture and religion, that the influence of the West, with its secularism and corrupting materialism, must be staunchly resisted.
It must have been clear to Suharto when he made this commitment that, with the communists crushed, his biggest challenges would come from segments of Indonesian society brought up on and still harboring these political views. If he wanted to win over these latent critics, he would have to produce an economic and political record that offered indisputable evidence that his strategic shift brought more benefits than it did disadvantages. He had to deliver the goods. Now, as he enters his third term, the fact that basic development problems are still looming so starkly and a perception that he has not delivered the goods are fueling an increasing amount of criticism - notably from students and religious extremists.
Under Suharto (as indeed under Sukarno before him), the political development of Indonesia has progressed only slowly, in terms of both participation and accountability. Today the question of which individuals hold real power high in the government is almost as hard to pin down as in China or North Korea. What is clear is that although the technocrats play a key role in planning, and take a more public role than other officials of the government in dealing with the foreign press, business and diplomats, real power is generally held by military men. About half of the 24 Cabinet posts are held by members of the armed forces. It is these men the planners must convince. And most observers in Jakarta assume, accurately it seems, that nearly all important decisions are made by Suharto himself.
The key concept in the armed forces' view of the political system is that all legitimate political expression must be channelled through political institutions organized by, and firmly controlled by, the state. To provide an outlet for expression and a structure for parliamentary government, political parties were reorganized in 1971 into three groups. These are the pro-government Golkar (which stands for Golongan Karya); the United Development Party, an amalgam of four old Muslim parties; and the Partai Demokrasi Indonesia, a collection of nationalist and Christian parties. These groups, the Parliament (which meets annually and which makes up half the People's Consultative Assembly that meets every five years to elect the President), and two national elections have provided a semblance of popular participation in the government and a partial outlet for dissent.
But the most influential political developments still originate outside the formal political structure - for example, in student movements, religious indoctrination or campaigns by dissidents. Although such outside expression may be tolerated briefly as a way to ease pent-up pressure, when it has persisted it has been firmly stopped by the military. This happened, for example, in January 1978, when, shortly before the presidential election, hundreds of students were arrested and the nation's major newspapers were closed for two weeks.
Indeed, in its more recent moves the government appears to be doing little that will diminish the distrust of its more vocal opponents. In a new Cabinet formed in April, technocrats are represented in about equal numbers with generals. But the Cabinet had only one new minister drawn from the ranks of a political party - he was from the pro-government Golkar and a general to boot. For the first time since 1971, the Cabinet included no opposition party leaders, this despite the fact that the Muslim party scored some significant victories in the parliamentary elections in May 1977, increasing its representation by several seats.
Twelve years after assuming power, the armed forces show no indication that they are prepared to return to civilian rule. Their numbers are sprinkled throughout the bureaucracy. Were Suharto to die during his current term, Adam Malik, who became Vice President in March, would become nominally - and quite possibly temporarily - President. But real power would be exercised by such men as General Maraden Panggabean, Coordinating Minister for Defense and Political Affairs, General Surono Reksodimejo, Coordinating Minister for Social Welfare, General Andi Mohammad Jusuf, Minister of Defense and Commander of the Armed Forces, General Widodo, Army Chief of Staff, and General Amirmachmud, Minister of Home Affairs.
At the end of his third term, Suharto would be almost 63 years old. In his August 1978 National Day speech, he said that one of the key political jobs of his third term would be to watch over a shift in the generations of leadership. "In or at the end of the next five years," he said, "the change of generations will begin to take place." Nonetheless, it is inconceivable to most Indonesians that the presidency could ultimately go to someone other than a general from Java. Among current senior officials, this leaves Surono and Widodo as the liveliest choices should something sudden happen. But lower ranking generals could move to the fore. Suharto hasn't, at least publicly, named a successor.
The apparent permanency of military rule has created a degree of malaise among intellectuals wanting to see a return to some form of government that would allow opportunities for civilian leadership. Though frustrated, those that we have talked with seem relatively comfortable in their university positions or their civilian jobs. The major challenges - if they can be called major - come instead from orthodox Muslim groups and students.
Of the two groups, the Muslims worry the government the most. In its 33 years of independence, the central government has fought several lengthy guerrilla wars against Muslim separatist groups or those calling for the creation of an Islamic state in Indonesia. Although the country is nominally 90 percent Muslim, many Indonesians, especially in the political heartland of Java, leaven their Islam with a wide mix of other cultural influences. The Suharto government believes that should popular momentum ever build for a theocratic Indonesian state - which would presumably lead to a partial rejection of the Western-oriented development path - civil war might occur, wiping out the gains of the past 12 years.
That threat at this stage appears more perceived than actual. Muslim groups in the country are by no means unified. There are those favoring Western-style development as well as those wanting a return to Koranic law. At the moment, physical confrontation is occurring only in the province of Aceh at the northern tip of Sumatra. There a "liberation movement" has sporadically caused problems for the security forces. Aceh, however, has been a fanatically purist Islamic province for centuries and has traditionally resisted central rule from Java. In addition, the government claims that a shadowy group of Muslim extremists called the Komando Jihad (holy war command) is out to spread terror and disrupt government policies. About 700 or 800 alleged members of this group have been arrested. At trials of several of their alleged members, witnesses have testified that they received financial aid from Libya. Separately, and more recently, the government arrested several leaders of Jakarta's Muslim groups who had criticized the government for corruption and other abuses. On the Jakarta cocktail circuit, there has been sporadic talk of "Qaddaffis" in the lower ranking officer corps. But if there is evidence that they exist, it hasn't surfaced. All in all, although it is the threat taken most seriously, the Muslim threat does not appear to be an imminent danger.
The students, although more homogeneous, lack national organization and ideological focus. They are united in general distrust of the government, but are vague in proposing alternatives to the abuses they see. Their links to other segments of society are tenuous, although sympathy exists for their protests. The students, however, were dealt a severe setback in the January arrests of hundreds of their members who were speaking out prior to the election. Student organizations were banned and campus activities brought more firmly under government control. Since then, the student movement has been in low profile.
But while neither the Muslims nor the students are presenting the government with what appears to be a tangible threat at the moment, their political sniping touches the very themes with which Suharto will be struggling in his third term. (Military rule itself has also become a theme, but a secondary one.) Behind the complaints of both Muslim and student movements lies dissatisfaction with the results of the government's development strategy - including the links Suharto forged with the industrial powers. Both are calling for a rejection, or at least a moderation, of the turn to the West. One Indonesian stressed this several times to us. "Indonesians," he said, "feel uncomfortable with the dependence on the West . . . it would be a mistake to underestimate that."
High on the list of complaints are inequalities critics feel are exacerbated by the development program. Both students and Muslim critics claim the gap between the rich and poor is widening. They insist that foreigners and ethnic Chinese residents of Indonesia are reaping the gains of development, sharing them with corrupt generals and officials in high office. They charge that Suharto's administration has created a materialistic culture of corruption from top to bottom, enriching its elite through its partnership with the West. Suharto himself is under attack in student circulars because, they allege, his family has taken advantage of its position and become rich in the process. Specific evidence of corruption in the Suharto family has not surfaced.
In the 1977 parliamentary campaign, the Muslim party struck hard at the twin themes of religion and social justice. At mass rallies, it accused the government of coopting all legitimacy, power and privilege in Indonesia, of bartering away the country's natural resources, running up a massive debt, and charting development policies without reference to the desires of the people. On the floor of Parliament shortly before the presidential election in March, Muslim leaders launched the most direct attack yet on the government's economic policies. They called on the government to place top priority in creating jobs and raising income levels of the "bottom 40 percent." They said the government had perpetuated a colonial economic structure that was dependent on the export of oil and inflows of foreign aid.
The students are attacking along the same lines. One of their manifestos is the "White Book," a lengthy report by a particularly active group at the Institute of Technology at Bandung. The White Book, which was banned but circulated widely before the March presidential election, stated flatly that youth had lost faith in Suharto and didn't want him to be President. Its references to Suharto's family were derisive. It charged the country's development strategy has led it to insurmountable debts and a reliance on foreign advisers (Widjojo was accused of listening too eagerly to "whisperings" from Harvard and Berkeley). It criticized the reliance on foreign aid and the government's penchant for showcase capital-intensive projects. (Such themes were among those that led to the violent clashes between students and police upon the arrival in Indonesia in January 1974 of then Prime Minister of Japan, Kakuei Tanaka.)
There is a tragic irony to all this. Despite the heavy-handed way in which the government has reacted to the most vocal of the dissident leaders (Heri Achmadi, the Bandung student leader who signed the "White Book," was jailed, for example), government economic officials share many of the same concerns. Any number will promptly concede that the gap between the rich and the poor is a worrisome problem. But they contend that it is a temporary one, common to all developing countries as gains begin to take hold. They seem firmly convinced that the shift in development strategy they are now urging - a frontal attack on the fundamental problems of population, agriculture and employment - is the route best able to overcome the problems that worry the critics most. The question seems to be whether the shift is coming too late.
President Suharto himself seems acutely aware of the issues. In his state of the nation report, he specifically addressed the key ones in a lengthy defense of his development strategy. He hewed to his fundamental strategy of ties to the West. "Although I have explained the problems related to this matter repeatedly," he said, "questions are still raised about it by some ranks in society, not seldom accompanied by suspicion of the policies outlined and even, at times, with accusations as though we have sold ourselves to foreign parties or have pawned our beloved country." He then reiterated promises he wouldn't allow private enterprise and foreign investment to "dominate" Indonesian society. And he insisted foreign capital investment would be used only "so far as it doesn't cause constant dependence and isn't damaging to the national interest."
The problem, of course, is that the dependence is a reality. Indeed, the New Order and its development strategy for the next five years would collapse overnight were that partnership severed. It would be severely hampered if the partnership were curtailed. It's not that Suharto is entirely without options, but they appear few. Occasionally, for example, there is talk in Indonesia that maybe the nation should try what the Chinese tried - the road of self-reliance. But such talk is being increasingly eroded by the startling changes in China itself, which is shucking Maoist ideologies so quickly these days that it seems to be conceding a colossal blunder.
Suharto, too, could press for a greater alliance with other Third World nations. Sukarno took a high profile in the Third World. Indonesia, under Suharto, while active in Third World movements pressing for a new international economic order, has taken a lower profile. Yet there is a strong feeling in Indonesia about Third World solidarity. Even such a conservative man as Widjojo can talk - as he did in an interview with us last year - passionately about the importance of the southern voices in the North-South dialogue. But making Third World solidarity work for development isn't easy. Even on their most tangible industrial projects, the five members of the Association of Southeast Asian Nations (the Philippines, Indonesia, Singapore, Malaysia, and Thailand) are still squabbling, despite years of talk. Suharto has sought to raise significant capital in Saudi Arabia and other Arab nations. But he found that the Saudis (according to at least one well-placed aide to the government in Jakarta) had a price for their aid - a greater role for Muslims in Indonesia. This was every bit as unacceptable to Suharto as any other strings on aid from any other nation.
So, Suharto has no realistic place to turn - except to hurry the pace of development in rural areas, working at resuscitating agriculture and at creating jobs. Sketching the outlines of the coming five-year plan for the first time, Suharto, in his National Day state address in mid-August, confirmed these areas would be taking greater priority. The plan would emphasize more "equitable distribution" of the benefits of economic growth. The economic and political challenges, he said, make the next five years "important and decisive." To meet these challenges, Suharto will also have to hack away at corruption and bureaucratic ineptitude and inertia that also fuel dissent. If he appears at times to be failing in this, protests could increase to the point of confrontation again (as in early 1974 and early 1978). Each time this happens, Suharto's image would be a bit more tarnished. But the likelihood that he would become such an embarrassment that his fellow officers would remove him appears, at least for now, to be slim.
If Suharto is on the spot now, so is the West. And for those who would like to see the West remain an attractive ally of Indonesia in particular and the developing world in general, this must rank as the most important fact of Suharto's third term.
Foreign aid - both multi- and bilateral - will probably have to be provided in greater amounts than in the past if Indonesia is to grapple successfully with the fundamental problems it is now facing. This is true even if Indonesia successfully mobilizes, as it must, a far greater amount from its own resources. Foreign aid played the dominant role during the New Order's first five-year plan, Replita I, which ended in 1974. Such assistance financed more than half of the three billion dollars in development expenditures under that plan. This ratio began to decline in the mid-1970s, as oil revenues began to pour in. During the current five-year plan, Replita II, the World Bank estimates, development expenditures will amount to some $22 billion, of which about $7.6 billion, or only 35 percent, is expected to be financed by external sources.
But the work now facing the New Order - population, food and jobs - is precisely the type for which private multinational corporations are least fitted, at least in terms of any direct approach. As the World Bank noted:
In view of the moderate expectations concerning oil revenues during the next five years, and despite expected continued success in mobilizing other domestic revenues, the desire to attack poverty on a broad front is likely to increase the need for reliance on external sources to finance development expenditures.
Given the need for "continued prudence" in external borrowing, it said, "an expansion of the Government's development program will undoubtedly require an increasing flow of foreign resources on concessionary terms." In addition, the World Bank has suggested it might become "increasingly desirable" for external aid to finance not only foreign expenditures, but also part of local expenditures as well.
Requests for such aid will largely be going before, in addition to the World Bank, an array of nations belonging to the Intergovernmental Group for Indonesia (Australia, Austria, Belgium, Canada, France, West Germany, Italy, Japan, the Netherlands, New Zealand, Switzerland, Britain and the United States in addition to Indonesia). But in many ways the toughest decisions will be faced by the United States. Requests for aid will be going before an Administration in Washington increasingly seeking to use its favors in pursuit of human rights.
If the Carter Administration, or Congress, chooses to make an issue of human rights in Indonesia (which it has so far refrained from doing), it will find a ripe target. Since the abortive pro-communist coup of 1965, Indonesia is holding more political prisoners than any other developing nation allied with the West. Last year, it released about 10,000 of the detainees. It is releasing another 10,000 this year and plans to release the remaining 10,000, by its count, in 1979. But that won't end its vulnerability. In its crackdowns in 1974 and 1978, the government has shown no hesitation to resort to mass arrests, detention without charges or trial, or other breaches of Western notions of civil rights. There is scant sign that the law enforcement or legal system is making an effort to safeguard basic rights of citizens or to assure them of fair or rapid trials. It would be surprising to see any of these change radically during the next five years.
Many Indonesians resent outside pressure on the human rights questions. At a press conference in Jakarta two and a half years ago, a visiting Dutch politician who sought to lecture on morals was almost booed by Indonesian reporters every bit as liberal-minded as their Western counterparts. If, during the home stretch of the New Order, the United States chooses to press the human rights issue, the result could sunder the partnership.
The role of multinational enterprise is going to become more difficult, too. Indonesia is currently enjoying the confidence of foreign businessmen. Not only are the oil companies resuming exploration, but the nation's access to foreign private capital markets, following the recovery of Pertamina, is easier than it has been for a long time. Indonesia recently raised funds on the international bond market for the first time, opening a new source of funds that has been difficult for developing nations to tap. Mining firms, timber cutters, equipment suppliers and companies in other fields are looking at a variety of new projects. But the mood in Jakarta is far different than during the days of the oil boom. Technocrats now negotiating terms with foreign business are imbued with the memories of Pertamina. They are wary of the sort of high-pressure lending pursued by foreign banks in the early 1970s. They are skeptical of the big-ticket equipment purchases. They are apt to fight far harder for a stronger position for Indonesia in joint ventures.
Traveling back to New York from Jakarta after settling Indonesia's billion-dollar tanker dispute, Raymond Burke, Sr., the New York shipping lawyer who fought the battle for Indonesia, made an apt comment on the overall impact of Pertamina. "I do believe," he said, "that the Western adventurers no longer can come to Indonesia and get an easy deal." He wasn't suggesting - nor are Indonesian officials suggesting - that the nation is closing its doors to foreign investment. On the contrary, planners in Jakarta seem more eager than ever to do business with foreign companies. But in negotiations over terms, the burden of proof, largely as a result of Pertamina, has shifted to the outsiders. One of the themes Mike Mansfield has been sounding since his arrival in Asia as U.S. Ambassador to Japan is the need for multinational business to forget about the "quick buck" in Asia. Nowhere does this seem more appropriate advice than in Indonesia, where all too many foreign companies - particularly banks - have sought their biggest bucks the quickest. By no means have all foreign companies followed such a route; many have launched major investments on which it will take years to realize a return. But overall it's yet unclear whether foreign business as a whole will prove merely a fair weather friend to Indonesia. The next five years will probably go a long way in telling.
Undoubtedly, there are those who will scoff at the suggestion that any time is crucial for Indonesia, or even that Indonesia is crucial for the West. For, to succeed in its development struggle, Indonesia will have to overcome generations of history. From the days when the Dutch first headed for the Spice Islands, the archipelago has seemed a particularly easy and lucrative land for exploitation. Its cornucopia of resources is the fullest and most enticing in Asia. Access to them has often been made easier by corruption, mismanagement and poverty. There is a view among many friends of Indonesia that the nation itself has gotten off rather lightly, considering the size of the mistakes it has made, and its failure to wipe out the corruption and bureaucratic abuses which have so frequently sapped its development effort. But it would seem a major setback for the West if Suharto's New Order, which gambled on the West, were to fall short of its goals because the West fell short of its promise.
1 Population growth, of course, is a function of mortality rates as well as birth rates. The net reproduction rate of 1.0 would mean that Indonesia's population would stabilize in terms of increase by reason of a high birth rate. But Indonesia's population growth has come in large part not because people are having so many more children as because the children are surviving longer and having children of their own. So, whenever a net reproduction rate of 1.0 is achieved, the population would still grow for some time.
2 Terence Hull, Valerie Hull and Masri Singarimbun, "Indonesia's Family Planning Story: Success and Challenge," Population Bulletin, Vol. 32, No. 6, Washington, D.C.: Population Reference Bureau, Inc., 1977
3 International Bank for Reconstruction and Development's Annual Report on Indonesian Economy, April 1978. This document is the latest of the reports the World Bank prepares each year for the spring meeting of the intergovernmental group for Indonesia. Restricted for the use of the Bank, it is not available in the generally published literature on Indonesia.
4 Alden Speare, Jr., "Alternative Population Distribution Policies," Bulletin of Indonesian Economic Studies, Vol. XIV, No. 1, March 1978, Department of Economics, Research School of Pacific Studies, Australian National University, Canberra, Australia.
5 "Indonesia: Recent Economic Developments." Washington, D.C.: International Monetary Fund, April 1978. This paper was prepared as part of the IMF's regular reporting on Indonesia. An internal IMF document, it is not part of the generally published literature on Indonesia.