Two Faces of Indonesia : Skyscrapers and Squalor, Free-Market Capitalism and Sanctioned Monopoly Exist Side by Side

JAKARTA — A walk along the fetid canal in Kota, the historic district where colonial architecture rots slowly in the tropical sun, is a journey into the underbelly of Indonesia’s economic bonanza.

Squatters’ shanties line the viscous waterway, and the narrow lane that threads along this ramshackle encampment leads from the traffic-congested streets of modern Jakarta to a timeless world of misery. Small children display weary smiles and sores on their skin. Fumes from charcoal cooking stoves choke the air. Residents use the canal as a privy, and a sink.

“These people have nothing,” Sudirman, a 19-year-old student and impromptu guide, shouts over the shrill tones of portable radios, gesturing theatrically at Jakarta’s lower depths. “The government is always talking about social equity, but it does nothing for the poor.”

Amid the squalor, it’s hard to imagine the other Jakarta, the one where a skyline of towering bank buildings rises along broad avenues, where well-heeled shoppers buy jewelry in air-conditioned malls, where sleek families line up at American junk-food franchises.

Indonesia today is a study in contradictions. The world’s fourth-largest country (population: 180 million) boasts a robust economy that is drawing foreign investment like a magnet. It is an emerging powerhouse in the world’s most dynamic economic zone, a model for Third World development.

But it is also beset by an onerous burden of corruption, which critics complain is tarnishing the country’s hard-won progress.

The children and cronies of President Suharto, who has ruled for a quarter century, are coming increasingly under fire for alleged abuses of the government’s otherwise laudable privatization program. A privileged few, critics say, have created state-sanctioned monopolies that make a mockery of free-market reforms.

Moreover, the country remains an impoverished giant, with non-socialist East Asia’s lowest per-capita income level--about $600, or one fifth that of neighboring Malaysia. Nearly 30 million Indonesians live in abject poverty.

The mix of new prosperity with old-time corruption and poverty makes Indonesia a potentially unstable and unpredictable player in the region, where its sheer size gives it the strategic role of a diplomatic big brother.

With Japan ascendant and China’s coastal areas flourishing, futurists and Pacific Rim soothsayers have their sights fixed on East Asia as the new center of global prosperity in the “Pacific Century.” Indonesia is far too important to be ignored in any assessment of the region’s economic destiny.

“Indonesia is a great success story,” said James W. Castle, president of the American Chamber of Commerce in Jakarta. “Barring external shock, the country is looking at 10 to 15 years of good growth, stable politics and a very profitable business environment.”

Castle’s optimism is shared by many foreign analysts. The Indonesian government has approved $8.7 billion in foreign investment the past two years. Significantly, the capital influx, led by the Japanese, is occurring while investment is declining elsewhere in Southeast Asia.

Americans, long dominant in the oil industry, are getting into manufacturing. Mattel is investing in a $20-million Barbie doll plant in western Java. General Motors, which abandoned the market to Japan in the 1970s, announced plans to reinvest in a joint venture to make right-hand-drive cars.

With a boom in textile and shoe factories, Indonesia’s economy has diversified away from its oil dependence. And it continues to grow at a healthy clip, about 6% annually, despite a government crackdown on credit last year prompted by fears of overheating.

The effervescent mood has been dampened, however, by recent concerns that nepotism and cronyism have become so egregious that they threaten to undermine fragile social harmony. Suharto, 70, is esteemed as an effective and rational leader, but in what could be the twilight of his long reign, his children and his friends are his blind spot, critics say.

After a decade of being tolerated, the abuses are inviting condemnations from an ordinarily muzzled press and timid public. Speaker of Parliament Kharis Suhud broke the ice in late March in a euphemistic complaint, which emboldened other critics.

“The government should not close its eyes to this present business controversy that may tarnish its image abroad,” Budi Hardjonon, a member of Parliament, told the Jakarta Post. “What if (foreign) investors link their investments to these monopolistic practices?”

The master plan crafted by Jakarta’s technocrats was to revitalize the economy by disbanding state monopolies and putting the means of production and distribution into private hands, creating competition and efficiency. But something went awry.

“The axle of the economy has changed from public hands to selected private hands, offering no real value-added benefits to the economy, and this is very worrisome,” said Hartojo Wignjowijoto, a Harvard-trained economist and business consultant. “I used to say corruption was a kind of industry in Indonesia, but that becomes meaningless now if you look at the massive transfer of wealth from public to chosen private hands.”

Consider the clove industry. Ostensibly to rectify anomalies in supply and demand, the government created a distribution monopoly for clove, the aromatic spice Indonesians love to inhale in their kretak cigarettes. The beneficiary: a company controlled by Suharto’s youngest son.

An array of similar government favors has been granted, allowing lucrative deals for the Suharto “kids” and “cronies” in oil and natural gas contracts with the state petroleum company, Pertamina, and in timber concessions. Suharto’s second son has a distribution monopoly for oranges. The collection of subscription fees for state television was entrusted to a private enterprise linked to the first son. Private monopolies have put a chokehold on imported industrial materials such as plastics.

The leaden hand of the clove monopoly, for one, has wrought a highly publicized fiasco, excoriated even by the World Bank in a confidential report on the Indonesian economy. A higher floor price promised to farmers--with the implicit guarantee of a higher margin for the middleman--triggered overproduction and a crushing surplus of clove stocks.

The Clove Support and Marketing Board, chaired by Suharto’s youngest son, Hutomo (Tommy) Mandala Putra, is mired in debt, and seeking to have a quarter of the spice trees destroyed to make the market work. That logic is hard for an increasingly confident--and cynical--public to swallow.

“They say the monopoly is to benefit the people,” said Aldrin Tando, a young businessman. “But if they buy cloves at a high price, they have to sell them to the cigarette companies at a higher price, and the cost is going to get passed on to the smokers. Who smokes in Indonesia? The people!”

As the June 9 general election for Parliament approaches, the “kids’ shenanigans”--in the words of an influential former cabinet minister--are proving to be an embarrassment for Suharto’s ruling Golkar Party. Though few predict a serious blow to the party, which holds a 70% majority, the problem could complicate an orderly succession when Suharto decides to step down.

“The patronage system will be thrown into confusion when somebody succeeds the president,” said a prominent Indonesian journalist.

Other analysts say there are mitigating factors in the nepotism.

“Of course, the family has become more greedy than a few years ago, but things basically aren’t that bad,” said Hadi Susastro, an economist and director of the Center for Strategic and International Studies. “Take their investment in television broadcasting--it’s opened an entirely new era for the country. It’s only because of the involvement of the Suharto children that we have private television.”

Indonesia’s confusion over free-market principles perhaps can be best understood in light of the enormity of its problems.

Population growth is far from under control, and the economy must expand enough to provide 2.4 million new jobs each year to cap unemployment. The labor pool is already so saturated the government has difficultly enforcing minimum wage standards of about $1.25 a day.

Complaints of geographic as well as class and ethnic inequities persist. The squatters along the canal in north Jakarta, some of whom toil at a nearby dockyard, are considered wealthy compared to their rural cousins.

The military killings last November of scores of pro-independence demonstrators in East Timor, a former Portuguese colony annexed by Jakarta in 1976, was symptomatic of the difficulties the government is having winning hearts and minds in the nation’s impoverished outer fringes.

The country has a staggering foreign debt of $51 billion, although it has never defaulted on a government-to-government loan. With rapid growth, the infrastructure, most notably telecommunications services and electrical power supply, is stretched beyond its limits. Possibly the biggest trade barrier to a visiting foreign businessman in Jakarta is getting an outside telephone line from his hotel room.

Indonesia suffers from tensions between descendants of Chinese immigrants (3% of the population) and the ethnic Malay majority, a common phenomenon across Southeast Asia. Chinese entrepreneurs are the driving force in business--and resented for their wealth and power.

“It’s true that the distribution of wealth is not ideal,” said MarkusParmadi, 43, president of Lippo Bank, a non-Chinese executive at the Chinese-owned Lippo conglomerate. “But if you look around, things are so much better compared to the past. The problem is that it’s difficult for the rich to remain inconspicuous.”

Although the gaping abyss between Indonesia’s new rich and its old poor is hotly debated, there are signs that a middle class may be emerging that will add a powerful consumer engine to the economy--and perhaps contribute to social stability. At the very least, abject poverty is declining steadily, from an estimated 60% of the population in 1970 to 17% in 1987, according to a World Bank study.

“Despite the excesses of the relatives and cronies, I think Suharto has done a great deal to trickle down the benefits of development,” said Jusuf Wanandi, political analyst and chairman of the Center for Strategic and International Studies. “If he was up for reelection by popular vote today, I think he’d win an overwhelming victory.”