Indonesia beyond the headlines

By Wimar Witoelar

The following article is based on a paper presented at the annual meeting of Sinclair Knight Merz, a leading Australian engineering company, in Brisbane on Nov. 23, 1996.

BRISBANE (JP): Things are happening in Indonesia, but not in the way you read about them in the headlines. It is still true, as the saying goes, that "business access in Indonesia is difficult, but the rewards are plentiful". Now the rewards will be even more plentiful if you align yourself with the Indonesia of the future, not the Indonesia of the headlines. Looking at the past is dangerous when you are developing business. That would be "... like driving at 60 miles per hour looking only at the rearview mirror," says one of our politicians.

Comparisons are useful, and we may make them with the four tigers of Asia: Singapore, Hong Kong, Korea and Taiwan. It is good to have challenging comparisons, not only with other Asian countries with whom we might compare more favorably. It is true that the four tigers are so far ahead of the pack that Indonesia is being put in the second division of emerging countries like Thailand, Malaysia and now the Philippines, or in the third division featuring Vietnam and China (which are really in leagues of their own).

But the point is that although countries like Korea and Taiwan are way ahead of Indonesia, the sharpest difference is in per capita GDP, not in total GDP, and certainly not in GDP growth.

Now per capita figures are of great concern for the country concerned, but total and growth figures are more relevant to business interests. If you want to be completely pragmatic, that already makes the point for Indonesia as an investment destination.

But if you are on the side of the good guys, we also should understand why Indonesia is not a tiger like Korea and Taiwan, and how it can become like them.

Kenichi Ohmae pointed out that Indonesia was in the same league with Korea and Taiwan in the late 1960s, all in the US$100 to $200 per capita GDP group, but now the two tigers are in the $10,000 plus class, while Indonesia just passed the $1,000 mark.

So what does Indonesia promise in the short-term, long-term and medium-term future? Predictions made for next year by scholars like Mari Pangestu and economic think tanks like Econit say that we will remain constant, with a sustained growth of over 7 percent, disproving the notion of political instability this year and its impact on the economy. The long-term picture is always easy to predict, since we will not be around anyway to be disproved. Besides, as Adam Smith said, "In the long run, we are all dead." So the real question is the medium term, and for that we have to make some planning assumptions, such as the following:

First, we assume that business opportunities will increase, no matter what the political situation is, because in New Order Indonesia, it has always been business before politics. In fact, politics exists to protect business. That is why we have neglected our political homework while we have managed sustained economic growth for 25 years.

Second, financial growth will continue, because of the sustained business growth. Indonesia has several families who are wealthier than the wealthiest in the United States and owners of companies which are among the biggest in Asia. Without looking at the origins of this wealth, we can understand that part of the financial growth comes from domestic savings. Another part is foreign investments, both direct as well as portfolio investments, in the Jakarta stock market. There are now international funds managers running around pouring fresh money into Indonesian country funds.

Third, there will be growing pressures to democratize business, first of all because large-scale foreign investments are aided by open transparent systems, and second because to compete globally, we have to secure the kinds of expertise that lie outside privileged and protected business groups, in the hands of intelligent professionals who tend to be critical. As we sit here now, state enterprises are being restructured and deregulatory moves are finding their way around the still- powerful special interest pitfalls.

So why is it that Indonesia is not a tiger like Korea and Taiwan, when they all started out at the same level? The difference lies in one word: democracy.

You must remember when these three countries started to develop economically, it had to be done with highly concentrated political power and a regimented economy. That is one valid way to lift a nation out of poverty. Even people like Kenichi Ohmae say so. But 10 or 15 years into this phase of growth, Korea and Taiwan began to democratize. Sometimes by violent means, and mostly with the support of an increasingly dynamic middle class. Eventually, they successfully passed the transition, and when they became reasonably open democratic societies, their economies zoomed into the $10,000 plus class.

Indonesia has not made that transition, but we are starting to do it now, preferably without resort to extreme and violent processes. Many argue that the middle class has compromised itself to be part of the oppressive power structure. The more accurate view is that they are being held hostage.

Most would prefer to work in a competitive and professional business culture, such as those offered by some multinational companies, and which some Indonesian companies are developing. While talking to a yuppie who had made a fortune from government contracts, I heard that he would gladly give up 30 percent of his income for a better society, open and democratic, because that would be an investment for the future of his family.

These sentiments are increasingly evident as we quietly mature under the impact of increased information and communication. The decency of the majority of Indonesians is as strong as ever, behind the headlines. Nobody really likes to live in a banana republic.

So as we mull over these perspectives, we may venture a medium-term prediction.

First, there will be a period of volatility before we move from our current condition of managed stability into real democratic stability. It makes no sense to wish for uninterrupted stability, because that would make us forever poor as a country. We will have a political transition in the next few years and it will lead to a more open system. The foreign investor must have the foresight to anticipate this.

Second, reform will come because there are rising expectations due to discontent over special privileges and business playing fields which are not level. The higher the level of business, the more need there is for transparency. We know foreign investors accept abnormal business practices only because they feel there is no choice. But now, the choices are opening up.

Third, there is every reason to believe that the transition will not be violent and that it will not damage business growth, because one good thing about the last 25 years is that everybody is committed to an open market economy. Deviations are made as a matter of vested interest, not principle.

We believe change will be substantial in content but gradual in form, because of a common interest in increased economic development and empowerment of the middle class.

Fourth, worries about the quality of leadership in Indonesia are unfounded because as societies enter transition, individual leadership becomes tenuous. This is true in many countries where significant change has happened or is happening.

The enormous diversity of Indonesia should be more important to those who are planning for the future. It is this diversity which will generate new demands from the nation's leadership, no matter who they may be. Speculation on personalities to emerge from our politics is useful only for political gossip, not for planning and positioning for the future.

Wimar Witoelar is a business consultant based in Jakarta.