INDONESIA'S FAILING ECONOMY: THE IMPERATIVE FOR REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00794R000200950001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: May 23, 2011
• Sequence Number: 1
• Publication Date: December 1, 1986
• Content Type: REPORT

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The Imperative for Reform
Indonesia's Failing Economy:
EA 86-10047
December 1986
Directorate of
Intelligence
Seer
192
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Directorate of Secret
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Indonesia's Failing Economy:
The Imperative for Reform
This paper was prepared byl
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ffice of East Asian
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Analysis. Comments and queries are welcome and
may be addressed to the Chief, Southeast Asia
Division, OEA
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Reverse Blank Secret
EA 86-10047
December 1986
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Indonesia's Failing Economy:
The Imperative for Reform
Key Judgments Indonesia's economy, in our opinion, cannot grow enough to stem rising
Information available unemployment without either far-reaching reforms that would lead to a
as of 10 November 1986 more open, freer market economy or dramatic increases in the price of oil.
was used in this report.
Even under our most optimistic assumptions, economic growth would
average no more than 3 to 4 percent annually for the rest of the 1980s, a
rate far short of the 5 to 6 percent needed to employ the 2 million entrants
to the labor force each year. Worsening unemployment will increase the
likelihood of antiregime violence and could erode the regime's ability to
rule before the end of the decade.
Rekindling economic growth would require that Indonesia diversify its oil-
dependent and inefficient state-dominated system in favor of a competitive,
export-oriented economy. To do this, Jakarta would have to abolish most of
the regulatory and protectionist measures that have been enacted over
several decades. Moreover, the government would have to eliminate
corrupt business practices, such as import monopolies awarded to well-
connected individuals, which, while politically and socially acceptable, are
crippling the economy. 25X1
Despite a 31-percent devaluation of the rupiah in September 1986 and
several other recent measures to increase export competitiveness and
encourage foreign investment, the government, we believe, lacks the resolve
to implement effective economic reforms. In our judgment, the impetus
must come from those elements of the elite who benefit most from the
protectionist system-high-level officials in the military and the bureau-
cracy and vested business interests, many with close ties to the presidential
palace. The technocrats who favor opening the economy to foreign
competition continue to be overridden by protectionists who favor extensive
regulation, import substitution aided by high tariffs and quantitative
restrictions, and import monopolies.
The key to meaningful economic reform, in our view, is President Soeharto,
who is the final arbiter of all major economic and political decisions in the
country. We see little prospect that Soeharto will move ahead with
comprehensive economic reform because such a course would jeopardize
the political structure he has created over 20 years, a system of privileged
economic access that has allowed his family to build a financial empire
that we estimate totals at least $500 million. The protection of his family's
business interests by all accounts increasingly preoccupies Soeharto, in
particular his consideration of a successor who would protect those
interests when he leaves office.
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December 1986
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Jakarta's dim economic prospects almost certainly will affect US official
and commercial interests in Indonesia. Indonesian officials will be sensitive
to any reductions in bilateral economic assistance or restrictions on access
to the American market. US business investment in the country, which
amounted to less than $50 million last year, will stay depressed until
Jakarta reduces protectionism and economic reform shows some progress.
In addition, US bankers will be watching for indications that Jakarta is un-
able to service its $40 billion foreign debt-a development, in our
judgment, that could restrict new credit and precipitate a debt crisis as
early as mid-1987.
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Key Judgments
Signs of an Ailing Economy
What Makes a High-Cost Economy
Overregulation
The Cultural Factor
3
Focusing on the Cure
5
Stumblingblocks to Reform
6
Prospects for Change From the Top ...
7
... And From Below
8
Implications for the United States
8
Appendixes
A. Key Figures in the Debate
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Indonesia's Failing Economy:
The Imperative for Reform
In our judgment, the devaluation-and most other
common prescriptions such as foreign borrowing and
deficit spending-will not significantly spur growth
and employment as long as Indonesia's economic
prospects are dictated by the world oil market. Under
even optimistic projections, which assume world oil
prices of $15 per barrel, economic growth would
average no more than 3 to 4 percent annually for the
rest of the decade. This rate would be far short of the
5 to 6 percent the World Bank and the International
Monetary Fund (IMF) estimate is needed to employ
the 2 million entrants to the work force each year.
Although the unemployed now pose no direct threat to
the regime, the steady increase in their numbers,
particularly in the cities, could fuel unrest and antire-
gime activity. During the unrest of 1984 and 1985, for
example, Muslim radicals exploited such economic
frustrations as unemployment and poor living stan-
dards, in addition to widespread resentment of corrup-
tion among the elite. The antigovernment sentiment
that the radicals whipped up resulted in riots, al-
though the regime quickly and forcefully brought the
underemployment as well.
A sharp decline in economic growth-the result of
weak export performance since 1984 and the plummet
of world oil prices in early 1986-is forcing severe
retrenchment in the Indonesian economy.' Jakarta is
countering reduced revenues from falling oil prices
with draconian spending cuts, a tactic praised by
foreign bankers but stifling economic growth and
exacerbating an already serious unemployment
problem:
? In real terms, the government's budget for fiscal
1987-which began on 1 April-will be around 85
percent of what it was in 1984 and about on par
with the 1981 budget, according to our estimates.
? During 1982-85 annual real economic growth aver-
aged 3 to 4 percent, compared with about 8 percent
in 1973-81.
? According to our estimates, unemployment in urban
areas is on the order of 35 percent, with substantial
the break in world oil prices has
made Indonesia 's commercial creditors nervous about
the country's ability to service a foreign debt that we
calculate has reached $40 billion. Moreover, we esti-
mate that principal and interest payments of $6
billion this year will absorb more than 45 percent of
of world oil prices.
projected export earnings. On 12 September 1986
Finance Minister Radius Prawiro unexpectedly an-
nounced a 31-percent devaluation of the currency.
According to the US Embassy, the devaluation was
prompted by Jakarta's need to cut imports to retard
its current account deficit, which might reach $6
billion this year. The government also hopes that
nonoil exports will increase, partially offsetting the
dramatic decline in export receipts since the collapse
disturbance under control.'
What Makes a High-Cost Economy
We believe that growth prospects are poor because
Indonesia's nonoil exports are uncompetitive in world
markets despite a plentiful supply of low-cost labor.
Jakarta's longstanding policy of state-sponsored im-
port substitution in manufacturing is largely responsi-
ble for the economy's inefficiency, in the view of most
economists. For example, import controls enable do-
mestic producers to charge 25 to 50 percent above the
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world market price for steel products used in Indone-
sia's metal-fabricating industry, according to the
World Bank. These costs are included in the final
price of the product and make it difficult, if not
impossible, for Indonesia to sell manufactured prod-
ucts abroad. Economic Coordinating Minister Ali
Wardhana has publicly criticized the import ban
protecting the state-owned Indonesian Aircraft Indus-
tries (IPTN), which produce aircraft that cost twice
the world price. The cost is borne by civilian and
military consumers who are required to buy IPTN
planes instead of less expensive foreign ones.
The high-cost economy, in our judgment, is ultimately
an outgrowth of the government's dominant role in
society-a carryover of Indonesia's colonial legacy
and its political culture. At the time of independence
in 1945, the lack of private sector institutions com-
pelled the fledgling, and largely military, government
to fill the vacuum left by the departing Dutch, a role
that was reinforced by nationalization of remaining
Dutch enterprises. Today, institutionalized govern-
ment intervention in economic activity is pervasive.
For example, in the manufacturing sector alone, the
government employs more than 20 percent of the
work force and is responsible for over 30 percent of all
value added, The
World Bank reports that the government directly and
indirectly is responsible for more than half of all
domestic investment activity.
Overregulation
Extensive regulation of financial and investment ac-
tivities deter both private domestic and foreign invest-
ment, according to the US Embassy
Private firms are often left to raise much
needed capital in the country's rudimentary stock and
bond markets because state banks, which dominate
the financial sector, are set up mainly to channel
financial resources into the state corporations
private businesses are
further handicapped by their inability to obtain gov-
ernment guarantees to borrow abroad in order to
supplement hard-to-get local financing. The effects of
bureaucratic obstacles are compounded by the re-
quirement that foreign investors take on Indonesian
business partners, who frequently lack experience,
according to US Embassy offi-
cials. Jakarta also restricts foreigners from investing
in most consumer goods industries in favor of the
more costly production of capital goods, semifinished
products, and raw materials. Potential investors claim
that industries such as mining, chemicals, machinery,
and agribusiness offer little short- or medium-term
capital return.
All this, in our view, adds up to the increasing
tendency of investors from countries such as Japan to
place their funds in "safer" and more investor-
friendly areas such as North America and Europe. As
a result, as economic growth has faltered and govern-
ment regulations have multiplied in recent years,
private foreign investment approvals (including oil
investment) have declined-from $2.9 billion in 1983
to under $900 million in 1985, according to Indone-
sian Government data-compounding the effects of
reduced oil earnings. Moreover, these figures reflect
foreign investment approved by the government; actu-
al investment traditionally amounts to only about a
third of approvals, according to IMF data
Protectionism
Since independence, Jakarta has progressively built
up barriers to imports-such as licenses, tariffs, and
quantitative restrictions-to protect developing manu-
facturing industries. For example:
? Steel imports are controlled by five trading compa-
nies-one of which, P. T. Krakatau Steel, controls
80 percent of the Indonesian steel market.
? Import bans confer absolute protection to television
production. According to the World Bank, the
industry is made up of a large number of small
firms that are unable to capture the benefits of cost
reductions from mass production. As a result, televi-
sions and other electronic consumer goods cost 20 to
50 percent more than in international markets.
Accompanying these barriers are tortuous customs
procedures, a maze of often conflicting government
regulations, import monopolies, a profusion of middle-
men, and ponderous licensing requirements. Accord-
ing to the World Bank, this has led to price distor-
tions, misallocation of resources, abuse of authority,
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straightforward, according to
the US Embassy:
? Potential US investors often lose out to foreign
competition that is willing to participate in an
approval process frequently requiring under-the-
table payoffs and kickbacks to officials.
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Investing in Indonesia has never been easy or
? Official approval must be obtained from numerous
offices in government technical and planning de-
partments before a project can go forward. Any one
of these offices can block a project, and, even if
approval is ultimately granted, the process is time
consuming-typically six months to a year.
? Because nationalist sentiment in Indonesia is very
strong, few bureaucratic careers steer from stone-
walling foreign projects. Moreover, an official who
gives rapid approval of a foreign venture that later
becomes a problem is often dealt with sternly.
? Local partners are an absolute. necessity for the
success of a foreign investment. Few Indonesian
businessmen are suitable partners, for they often
lack experience and capital. Those who are suited
are often greatly overextended financially.
? Government regulations require local majority
ownership after 10 years. This requirement is trou-
blesome to many foreign investors particularly
the Japanese who wish to establish a long-term
presence in the country.
corruption, widespread inefficiency, and business un-
certainty. The cost of this protectionism is borne by
the consumer in the form of higher prices and by the
economy because the country is unable to sell many of
its manufactured goods abroad. F_~
Moreover, protectionist measures have increased in
the past two years in response to the country's
balance-of-payments difficulties and sluggish econo-
my, according to US Embassy reporting. Jakarta, for
example, recently granted exclusive cotton importing
rights to a consortium of textile firms. According to
the Embassy, this action forced up the cost of raw
cotton to textile mills by 25 percent and threatens to
squeeze competition from the domestic market. As it
? Strict land-use laws and a system of commercial
law-including many outdated Dutch laws and ad
hoc procedures-subject to varying interpretation
by authorities further deter foreign investment.
? The lack of effective protection of patents, copy-
rights, and trademarks dissuades many foreign
investors from risking control of their product,
technology, and production processes. Only Indone-
sian-produced works, for instance, are protected by
copyright, and foreign materials-including sound
recordings and computer software-have been fla-
grantly pirated. Indonesia still does not have a
patent law, and draft patent legislation is inade-
quate by US standards.
is, the World Bank estimates that Jakarta's import-
substitution development strategy is nearing its limit
with more than 95 percent of the consumer goods and
65 percent of the capital goods in Indonesia being
domestically manufactured.
The Cultural Factor
We believe that cultural traits have contributed to the
development of Indonesia's high-cost economy
the politically dominant
Javanese generally disdain the competitive free-for-all
necessary to develop an efficient economy, preferring
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Figure 1
Indonesia: Direct Foreign Investment,
1982-85
The Indonesian Cement Industry:
A Case Study in Inefficiency
Before 1978 Indonesia's three state-owned cement
plants producing about 4.8 million metric tons per
year-were incapable of meeting domestic demand,
and the government had to import cement. Since then,
however, the government has made a major effort to
develop self-sufficiency in cement to meet the needs of
the country's diverse construction projects. By the
end of 1980 there were seven plants producing a total
of 8.5 million tons per year with a rough balance
between production and consumption.
The building of new plants-state owned and pri-
vate-continued in the mistaken expectation that the
oil boom and, therefore, the construction boom would
continue, with the result that Indonesia now has a
cement production capacity of about 17.4 million
tons per year. This increase was largely accomplished
through the erection of severe protectionist barriers
that allowed producers to make substantial profits by
selling cement on local markets at double the world
price. As a result, roads, buildings, and all other end
uses of cement are more expensive.
to maneuver behind the scenes to gain an advantage
over business rivals. Jakarta's economic policies also
favor the native Indonesian businessmen (pribumi)-
such as the requirement that foreign investors take on
Indonesian partners-often at the expense of the more
industrious but, according to the US Embassy, widely
resented Chinese minority.
The bureaucratic tendency to "fix" government eco-
nomic decision making by quietly brokering influence
puts Indonesian exporters at a disadvantage. In 1985,
for example, Jakarta reestablished direct trade with
China after nearly 20 years because Indonesian au-
thorities wanted to save the cost of doing business
through middlemen in Hong Kong and Singapore.
Despite this move, bilateral trade declined almost 9
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Despite recent efforts to improve efficiency and to
lower costs by converting the cement plants from oil
to coal, the industry continues to be one of the most
subsidized in Indonesia.
the subsidy
amounts to $32,000 per year for each of 10,000
workers employed in the industry. Depressed private
markets and cutbacks in public works and other
development projects are forcing plants to produce
well below capacity-about 9 million tons per year in
1985, according to the US Embassy. Indonesian
attempts to increase plant utilization by boosting
exports are stymied by an inability to meet the stiff
price and quality competition from other Asian pro-
ducers.i
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South Korea or Taiwan.
three "commissions" were involved-for the purchas-
ing authority in China, for the seller in Indonesia, and
for the middlemen-amounting to several times the
single commission paid on Chinese imports from
Focusing on the Cure
Figure 2
Indonesia: Merchandise Exports,
1980-86
ers, and quantitative restrictions
The IMF and the World Bank have recommended for
over a decade that Jakarta adopt a strategy for
channeling new investment into manufacturing and
agricultural activities, such as plantation agriculture,
that use Indonesia's plentiful supply of low-cost labor.
This cure would require minimal or no protection by
tariffs, import quotas, or subsidies. Such a strategy
would require major reforms including:
? The simplification of investment regulations and
licensing procedures.
? A substantial reduction of import bans, tariff barri-
reporting
The rapid erosion in oil and government tax revenues
in the last several years and the devaluation in
September have fired up the continuing public debate
among senior economic policy makers over the go-
vernment's industrialization strategy. On the one
hand, the so-called technocrats or reformers-led by a
group of Western-trained economists-are vigorously
pressing the argument that Jakarta should dismantle
the maze of protectionist regulations to stimulate
more efficient production. Led by such figures as
Finance Minister Prawiro and Planning Minister
Sumarlin, this group has publicly called for govern-
ment efforts to bolster the private sector and improve
the climate for private investment (see appendix A).
Some have urged Jakarta to sell smaller inefficient
state-owned enterprises, according to US Embassy
Entrenched protectionist interests, the so-called
developers, on the other hand, argue that the road to
efficiency lies in reduction of imports and complete
protection of domestic industry until all phases of
production, from raw materials to finished products,
are mastered. This group-led by Industry Minister
Hartarto and Junior Minister for Domestic Product
Production Ginanjar Kartasasmita-insists that Indo-
nesia can become a modern and efficient nation only
Other
Liquefied natural gas
by creating a broad base of government-nurtured
industries. Indeed, Kartasasmita, wrongly, argues
that protectionism is not to blame for inefficiency and
high costs, according to US Embassy reporting. In-
stead, he sees protectionism as a way to shelter
companies from the high costs of doing business that
result from bureaucratic inefficiency, corruption, in-
adequate infrastructure, and low labor productivity.
Rather than deregulate the economy, this faction,
according to the US Embassy, favors pushing the
system to the extreme and creating several large
industrial groupings, modeled after the Japanese sys-
tem, that would dominate and control the economy.
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Stumblingblocks to Reform
The debate over industrialization strategy and eco-
nomic reform is complicated by the political risks for
the government, in our judgment. Since coming to
power two decades ago, the Soeharto regime has used
its virtual monopoly of economic access-control of
government contracts, of jobs in the bureaucracy, of
business permits, and of state bank financing-to
reinforce its political dominance. Similarly, control of
the purse strings has enabled the government to co-
opt many potential detractors, such as former student
activists, with government jobs or lucrative contracts.
Alternatively, authorities have stifled domestic critics
by threatening their economic interests. For example,
several prominent politi-
suffered business reversals in recent years as a result
of criticizing the palace. At lower levels, plant labor
leaders who challenge the status quo face the threat of
job loss, according to the US labor attache
Moreover, conflict of interest is widespread and gen-
erally tolerated among Indonesian official and busi-
ness circles. Government officials-technically pro-
hibited from owning businesses-often do so
indirectly behind the name of a relative or bogus
business partner, according to US Embassy reporting.
It is common for senior officials and their staffs,
provincial governors, and military commanders to
serve unofficially as "sponsors" or "patrons" for
companies that deal with the government. Virtually
every major company has a senior official on its board
of directors who, for a share of the profits, awards it
major contracts and protects its licenses and interests.
Rationalizing the economy would require Soeharto to
undercut powerful interests, including his own family
members and key figures in the military (see appendix
B) who profit from current arrangements. The growth
of Soeharto's financial interests over the years has
been such that presidential businesses are involved in
virtually every sector of the domestic economy. The
Soeharto family's holdings also include real estate in
Hong Kong and Singapore, banks in the United
Indonesian Corruption:
Greed or Patronage and Largess?
Indonesians traditionally have maintained a high
degree of tolerance for what by Western standards is
considered corruption and conflict of interest. Those
in positions of influence are expected to attend to the
financial needs of their relatives, friends, and subor-
dinates-an ingrained system of patronage that rein-
forces allegiance to the regime's political and eco-
nomic leadership,
Indeed, a person's prestige is a reflection of his ability
to share the material rewards of his position. To the
extent that they personally benefit financially and
politically, most middle- and upper-class Indonesians
thus have a vested interest in preserving the system.
Because official pay scales are low and many civilian
bureaucrats and military officers depend on under-
the-table income to survive, many Indonesian busi-
nessmen resort to payoffs to secure the approvals,
permits, and financing necessary to conduct business.
Thus, according to several Indonesian press observ-
ers, many high school and college students consider a
position in the civil service attractive because of the
opportunities for under-the-table income.
Despite the lack of reliable statistics on corruption in
Indonesia, some Indonesian officials claim the prob-
lem is becoming worse. During 1983-85, for example,
more than 2,000 people were found guilty of various
corrupt practices-an increase of more than 400
percent over the previous two years, according to
reporting from the US Embassy. Even before this
trend became apparent, the perception among some
Indonesian officials was that the problem had
reached major proportions. Vice President Umar,
formerly chairman of the National Audit Board, once
estimated that waste and corruption accounted for 30
to 40 percent of the state budget.
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States, and exclusive rights to import select commod-
ities such as gold, plastics, and cloves-a key ingredi-
ent in Indonesian cigarettes
On most matters, but, on the issue of business deal-
ings in particular Soeharto does not tolerate criticism
of his family he
views criticism of either the press ency or the family
as an attack on the government. Unwritten guidelines
prohibit the media from publicizing stories critical of
the First Family, and Soeharto has never allowed the
holdings of his family or close associates to be investi-
gated. To deflect public criticism of official corrup-
tion, Jakarta periodically conducts nominal anticor-
ruption campaigns, which usually implicate only low-
Prospects for Change From the Top ...
technocrats' efforts to streamline the economy will
have little impact. Citing Indonesia's bleak economic
prospects for 1986, Economic Coordinating Minister
Ali Wardhana earlier this year announced initia-
tives-dubbed the May 6 Package-to promote eco-
nomic growth. These proposals purportedly would
Indonesian firms, as is now required.
reduce nontariff barriers and extend to foreign invest-
ment projects rights normally reserved for wholly
indigenous ventures. For example, foreign investors
would be allowed, under certain circumstances, to
obtain loans from state banks at subsidized rates and
to distribute their own goods in the domestic market
without having to market them through wholly owned
It is questionable in our judgment whether Jakarta
will follow through with effective implementation,
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which has been a problem with reform packages the
government has announced over the years. According
to the US Embassy, the May 6 Package is the result
of much compromise and bureaucratic infighting,
while the terms are generally vague and at times
contradictory. For example, there is a provision for
refunds of import duties paid on materials that are
incorporated into exports and a separate provision for
the exemption from import duties for exporting firms.
Few of the measures cited by foreign investors as
necessary to improving the investment climate, such 25X1
as relaxing the regulation that requires local majority
ownership after 10 years, were directly addressed in
the package, according to the US Embassy.
economic problems. Indonesian trade officials
Jakarta took further steps on 25 October 1986 by
announcing a series of economic measures that build
on those outlined in the May 6 Package. They include
dismantling six import monopolies and eliminating or
reducing a wide range of import duties. The measures
initially have been well received by Indonesia's for-
eign assistance donors-the IMF, the World Bank,
and the Intergovernmental Group on Indonesia-who,
according to the US Embassy, regard the measures as
a realistic attempt to cope with the country's current
also realize that freer
trade would help promote economic recovery, but they
point out that the 25 October measures excluded
import monopolies that benefit high-ranking govern-
ment officials. In fact, two of the most striking
omissions from the list of import monopolies to be
abolished are plastics and steel, sectors that have
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significant First Family business involvement. More-
over, according to press reports, only a small percent-
age of Indonesia's imports will be affected by the
monopolies to be eliminated.
... And From Below
We see no indication that disparate elements have
begun to make common cause against the elite and
the system of economic access, although signs of
unease are present. The unrest in early 1985, for
example, largely took the form of antigovernment
pamphleteering, sermons, bombings, and arson, aimed
at criticizing the elite's blatant corruption, particular-
ly its ties to key Chinese businessmen. There have
been few significant incidents since then, but we
believe this is primarily the result of the government's
cracking down on all opposition. The regime has
sentenced several of its political and Islamic critics to
long prison terms, and recently security officials have
renewed warnings to the press to avoid sensitive
issues-such as First Family corruption and specula-
tion about the economy. Nonetheless, US Embassy
officials believe Soeharto must move against massive
vested interests if he expects to dispel a growing
popular mood of economic frustration that could
cloud the April 1987 parliamentary election and
Soeharto's reelection to a new five-year term in 1988.
In the longer term, if the regime fails to make needed
reforms and to deal effectively with the social strains
stemming from the weak economy, we believe the
likelihood of popular violence will increase, especially
violence aimed at the ethnic Chinese community. A
protracted economic downturn or only a slowly grow-
ing economy could eventually start to erode the broad
popular confidence in the institutions of Soeharto's
government, complicating his plans for a smooth
transition of power to a successor who would perpetu-
ate Soeharto's basic political and economic olicies-
and protect his family's financial interests
Jakarta's dim economic prospects seem certain to
affect both official US and American business inter-
ests in Indonesia. Indonesian trade officials are likely
to intensify their press on Washington for preferential
access to the US market for Indonesian products,
especially such goods as textiles and plywood. In
addition, the performance of the Indonesian economy,
particularly the extent to which Jakarta dismantles its
protectionist barriers and implements economic re-
form, will in part determine whether American busi-
nessmen will revive now slumping investment in Indo-
nesia and move more enthusiastically into sectors
other than petroleum and gas. According to Com-
merce Department data, US firms are waiting for
Indonesia's economic conditions to improve so they
can invest in such industries as machine tools, furni-
ture manufacture, agribusiness, and pharmaceuticals.
Further, US bankers, although continuing to give
Jakarta high marks for its pragmatic financial man-
agement, will be watching for signs that Indonesia is
unable to service its $3.3 billion in medium- and long-
term debt to the US private sector. On the basis of
World Bank and other estimates of Indonesia's debt
service obligations and likely foreign revenues, Indo-
nesia needs new credits of some $6 billion for 1987 to
avoid a debt repayment crisis.
While at the moment the political situation is quiet,
we cannot dismiss the possibility that radical Islamic
and other frustrated groups would exploit the econom-
ic downturn to renew their antigovernment activity
and criticism of Jakarta's political and economic links
to the United States. Such a deterioration in civil
order would further deter US investment. More
broadly, Indonesia's economic well-being and political
stability are important to US regional security inter-
ests. Washington benefits from Jakarta's political and
economic orientation toward the West and its cooper-
ative role within the Association of Southeast Asian
Nations (ASEAN). Despite frequent differences over
votes in the United Nations, Jakarta is a moderating
force in OPEC, Islamic, and Third World forums.
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Appendix A
Key Figures in the Debate
All Wardhana
Coordinating Minister for Economics, Finance, and Industry
Often called Indonesia's "financial guru," Wardhana has been an economic
adviser to President Soeharto for almost 20 years. Among technocrats he is
perceived as one of the strongest proponents of the free market and deregulation.
According to press reports, Wardhana is staunchly opposed to protectionist
measures, especially with regard to industries that produce materials to be used
later in the manufacture of finished products.
Golkar, the government political party.
Wardhana is a charter member of the so-called Berkeley Mafia, having received a
Ph.D. in economics (1962) from the University of California at Berkeley. He has
served as an adviser to the Presidential Economic Advisory Team (1964-68) and as
Minister of Finance (1968-75), where he played a pivotal role in reducing inflation
and stabilizing the economy. Wardhana has been Chairman of the Board of
Governors of the World Bank (1972-73), and the Asian Development Bank (1972-
73). In January 1984 he was named to the Presidium of the Advisory Council of
Radius Prawiro
Minister of Finance
Prawiro is another key economic policy maker who espouse policies favoring a
market-oriented development strategy, foreign investment, free convertibility of
currency, a flexible exchange rate, prudent external debt management, and the use
of fiscal and monetary policy to maintain stable prices.
Advisory Council of Golkar.
Prawiro-a certified public accountant who received an M.A. in economics (1962)
from the University of Indonesia-has worked with the State Audit Board and as
governor of Bank Indonesia (1966-73), the country's central bank. He has been
Trade Minister (the job he had before his current position), a governor of the
World Bank and the IMF (he was chairman of the IMF Board of Governors in
1971), and an alternate governor of the Asian Development Bank. In June 1983
Soeharto appointed him to the board of commissioners of Pertamina-the national
oil and gas monopoly-and in 1984 he was named to the Presidium of the
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Johannes Baptista Sumarlin
Minister of State for National Development Planning;
Chairman, National Development Planning Board
Sumarlin, another member of the so-called Berkeley Mafia, favors a market-
oriented development strategy and strongly encourages cooperatives and private-
sector ventures. Although he has encouraged state companies to seek private
financing and be more competitive, he argues that strategic economic sectors such
as natural resources must be under government control for maximum public
benefit. FI
Sumarlin received an M.A. in economics (1960) from the University of California
at Berkeley before earning a Ph.D. (1968) from the University of Pittsburgh. He
has served as Minister of State for Control of State Apparatus and vice chairman
of the National Development Planning Board. Sumarlin is also a member of the
Board of Directors of Pertamina, the national oil and gas company. In January
1984, he was named to the Presidium of the Advisory Council of Golkar. [
Hartarto
Minister of Industry
Since his appointment as Minister of Industry in 1983, Hartarto has pushed
vigorously for development projects that would decrease the country's need for
imports. He believes that protectionism is necessary to foster domestic industry
and to create capital-intensive industry. The technocrats recently had a difficult
time convincing Hartarto to agree to the "May 6 Package," which is intended to
encourage more foreign investment and to reduce nontariff barriers to imports.
Hartarto-who holds engineering degrees from the University of Indonesia and
the University of New South Wales in Australia-has directed the offices of pulp
and paper; machinery and chemical industry; silicates, fertilizer, and petrochemi-
cals; and basic chemicals. He was also a director of PT Semen Cibinong, a large
cement plant that was a joint venture of the Indonesian Government and Kaiser
CementF
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Ginanjar Kartasasmita
Junior Minister for the Promotion of the Use of Domestic Products;
Chairman, Capital Investment Coordinating Board
An up-and-coming official in President Soeharto's brain trust, according to US
Embassy reporting, Ginanjar Kartasasmita earned a degree in chemistry (1965)
from Tokyo University. He plays what are often contradictory roles concerning
domestic production and foreign investment within the government bureaucracy.
As junior minister for the promotion of domestic products since March 1983,
Ginanjar has vigorously spearheaded a "Buy Indonesian" campaign. However, as
chairman of the Capital Investment Coordinating Board since February 1985, he
has been charged by Soeharto with overcoming the slump in Indonesian invest-
ment by cutting bureaucratic redtape and eliminating rules and regulations that
had chased off foreign investors. F_~
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