JULY 1983 - VOLUME 4 - NUMBER 7
Indonesia Shifts Development Gears
by Darcine Thomas
Suffering from the world recession and depressed earnings from its oil exports, Indonesia has recently put a hold on several large and costly industrial projects in an effort to improve its balance of payments deficit.
President Suharto announced in May that the construction timetables for four projects - two petrochemical plants, an aluminum plant, and an oil refinery - had been rescheduled. The projects, which would have chalked up $5.5 billion dollars in costs when completed, are all in their early stages. Reports from Indonesia indicate that 43 other publicly-funded projects including communications and mass transit projects totalling $15 billion in investment may also be delayed or cancelled.
Under the final rescheduling plan expected by the end of July, completion of these projects will be postponed, or the scope narrowed.
This development may indicate a shift away from Indonesia's recent emphasis on rapid development of heavy industry toward a labor-intensive, export-oriented economic approach.
Suharto's military regime took the reins of power from the left-oriented government of Sukarno in 1966 following a coup attempt by leftist elements. In the process, a half million people were killed and the Indonesian Communist Party - the largest non-ruling communist party in the world at the time - was destroyed along with most meaningful opposition.
For a ten year period following the coup, according to Joel Rocamora of the Southeast Asia Resource Center, development efforts concentrated on the "easy industry" introduced by Japanese investors which produced consumer goods for mass consumption. In the early 1970s, foreign investment began pouring in to develop Indonesia's oil and natural gas reserves. By the late 1970s, Indonesia had settled on an ambitious strategy of building up heavy basic industries, mostly owned by the government.
These strategies produced rapid growth while orienting Indonesia's economy to that of the advanced capitalist countries. That connection and the economic growth served the interests of the ruling class, but not of the vast majority.
According to the Far Eastern Economic Review, Indonesia's Economic Coordinating Minister recently stated that funds freed up by the project rescheduling will be applied to local, labor-intensive projects with low import contents. The Review also reports a renewed emphasis on labor-intensive projects in towns and villages. But such a labor-intensive emphasis may actually indicate a turn towards export processing for multinationals in the Singapore and Hong Kong fashion.
But whether a significant revision in Indonesia's development policy is underway or simply an expedient attempt to hold down foreign currency spending until the world economy improves remains to be seen.
Several multinationals will be affected by Indonesia's change in plans. Exxon and Tonen Sekiyu Kagaku of Japan are partners with Pertamina, Indonesia's national oil company, in one joint venture project. Contractors on the other plants include Thyssen of West Germany, the Japanese Gasoline Co., Imperial Chemical Industries of England, and Kaiser Aluminum.
Some contractors and foreign equipment suppliers may suffer financial losses - and may take Indonesia to court.
One of the top recipients of foreign investment in Asia, Indonesia is rich in natural resources such as oil, coal, and timber. The country has little short term or private overseas debt. But Indonesia has recently experienced a decline in export earnings, which has taxed its ability to cover costs.
A recent drought pulled 1982 rice production well below the 1981 production level of 22.3 million tons. Indonesia may actually be forced to import large amounts or rice. The country has also seen a decline in sales of non-oil exports such as rubber, timber, and coffee.
But the most significant cause of Indonesia's decline in revenue was the fall in oil earnings due to contracted world demand combined with a drop in 1981 of Indonesian oil exports. Oil has accounted for as much as 65 percent of Indonesia's total export revenue.
Indonesia has already tested several methods to solve its economic problems, devaluing the currency and slashing oil and food subsidies. None of these efforts were adequate to contract the deficit. A 1982 countertrade policy requiring foreign companies which sold goods to Indonesia to purchase an equivalent amount of non-oil products from Indonesia was strongly criticized in the West.
In contrast, the latest policy of rescheduling projects has received the approval of foreign aid agencies, banks, and Western governments. One Commerce Department official said, "The world has applauded Indonesia's biting the bullet. It had been salutary to the economy." A recent World Bank report congratulated the Indonesian government on its efforts to improve the economy, suggesting that the country continue to scale down industrial projects, borrow $16 billion abroad, and accept a slower rate of economic growth.
Applause for Indonesia's plans came with more reservation from other political observers. "Rephasing does help to alleviate dependence on advanced capitalist countries,'' commented Rocamora of the Southeast Asia Resource Center. But he cautioned, if Indonesia's reported new stress on labor intensive industries leads it to emphasize Singapore -style manufacturing for export, "the character of the industry is such that increases that dependence." It would be a poor bargain for Indonesia, Rocamora commented, if the country abandoned basic industries for "a framework that has been used to control Third World countries. "
Indonesia's economic problems won't be easily solved for they are manifestations of the problems with the political system. Human needs are too often ignored by the ruling elite, and corruption is so rampant that the foreign aid on which Indonesia relies for revenue is often not used properly. The high price of oil allowed Indonesia to be economically successful even with this system. Now that the price is not so favorable, Indonesia might not be so lucky.