Thu, 22 May 2003

Economic fallout of Aceh war will spread

Martin P.H. Panggabean, Visiting Researcher, Institute of Southeast Asian, StudiesThe Straits Times, Asia News Network, Singapore

It shouldn't just be the people of Aceh who are concerned that last- minute peace negotiations have failed in Tokyo, and that war is now imminent. People in neighboring Sumatran provinces, as well as those in countries such as Singapore, Malaysia and Thailand should be concerned too.

What the people of this region need least at this time is another source of economic uncertainty. The region has been battered by bad news since September 2001.

There are those who think Aceh is too small and insignificant for war there to matter much. After all, they argue, the province's contribution to Indonesia's gross domestic product has continued to dwindle, from 3.6 percent in 1990 to only 2.2 percent in 2001 (the year for which the latest provincial data is available).

The only time Aceh appeared in the news in the context of an important economic story was in relation to its gas field in Arun/Lhok Semauwe. These oil/gas fields are operated jointly by Indonesian government-owned Pertamina, Exxon-Mobil and Jilco, a Japanese company.

Even in the oil and gas business, Aceh's contribution to Indonesia's GDP has continued to decline, from 13 percent in 1990 to only 5 percent in 2001, partly due to the substantial depletion of its gas reserves after years of exploration.

Aceh's contributions in other economic sectors have also been minimal. Agriculture contributed to only 3.6 percent of the nation's 2001 agricultural output, while manufacturing's share contracted from 4.2 percent in 1990 to only 1.8 percent in 2001. Other sectors exhibit the same tendency.

Given these statistics, it is easy to ignore Aceh.

But war in Aceh will have regional economic implications, through Aceh's interaction with other provinces, both directly and indirectly. Those provinces may, in turn, have commercial linkages with Indonesia's neighboring countries.

A protracted war in Aceh will disrupt production activities there. Given Aceh's status as a supplier of primary products to other regions, a production disruption will, first and foremost, hurt the Aceh economy itself. Some studies show the estimated impact to be a 14 percent decline in output.

By making it difficult for Aceh businesses to maintain their production schedules, the war will also hamper the province's ability to supply raw materials to other regions. My estimates show that the entire island of Sumatra, outside Aceh, can be expected to suffer an output contraction of almost 11 percent, with the brunt borne by South Sumatra (6.7 percent), followed by North Sumatra (1.3 percent) and Riau (1.1 percent).

The combined provinces in Java will have their output reduced by 0.6 percent as a result of Aceh's inability to supply raw materials, while the rest of Indonesia will feel only minor economic effects.

The biggest economic impact of the impending Aceh war will be through the disruption of oil and gas delivered from Aceh. This implies that if the war cannot be avoided, the next best thing that the Indonesian government can do to minimize the economic impact would be to secure the oil and gas fields around Aceh and the shipping routes.

But even if the oil and gas fields are secured, the economic impact of the war on other regions cannot be completely eliminated.

For the Indonesian government, there are clear economic incentives to settle the Aceh situation peacefully. A peaceful solution will put less pressure on the already-strained state budget, and will indirectly help the country's image in the eyes of foreign investors.

But war or no war, it is imperative for the Indonesian government to implement a new economic development paradigm in Aceh. Economic mishandling has turned a once-rich province into one of the poorest and slowest-growing. Its people are suspicious of foreign influence. Such a vicious circle of poverty and suspicion must be eliminated if the welfare of the people is to be increased. This, of course, is also in the best interests of neighboring countries along the Malacca Straits.

The economic well-being of the Acehnese is best represented by those who speak and act in peace. Unfortunately, this message gets lost at the negotiating table.