Indonesia Raises Concern by Targeting Cronyism

Struggling to recover from the devastation caused by the Asian financial crisis, Indonesia's government is moving to rid the economy of the "crony capitalism" that flourished here for decades -- with a vengeance that some economists find worrisome.

The new buzzword is the "People's Economy," and it stands for a government plan to end the economic dominance of the large conglomerates run by tycoons who enjoyed close ties to former president Suharto and his family. Instead of conglomerates, the government of President B.J. Habibie is aiming at building an economic system based more on in cooperatives and small and medium-sized businesses.

"In Indonesia, 1 percent [of the population] has controlled 60 percent of the gross domestic product, and that is not a healthy economic structure," said Adi Sasono, the cooperatives minister and one of the government's most influential figures. "Now the idea is to promote even playing fields. What we have to avoid is where the big players control everything."

The new approach was approved in broad terms at a special session of the 1,000-member People's Consultative Assembly earlier this month, when it was overshadowed by student protests that ended in bloody confrontations with soldiers. But while it may sound like a refreshing shift from an era characterized by corruption and collusion, it is stirring considerable concern that Indonesia may be simply replacing one rotten system with another.

For one thing, the initiative is fraught with ethnic politics. Most of the largest conglomerates are run by members of Indonesia's ethnic Chinese minority, whose entrepreneurial talents played a key role in the country's rapid growth over most of the past three decades.

The government denies that any ethnic group is being singled out. But many analysts fear that Habibie, who took over in May after mass protests forced Suharto to quit, is running roughshod over ethnic Chinese interests to bolster his political standing and the fortunes of Muslim-controlled businesses allied with him. The result could be a fresh blow to investor confidence, especially among the ethnic Chinese, whose businesses have been frequently targeted during violent unrest in recent months.

"The politicians are weak, so the most appealing policies are populist ones," said Alex Wreksoremboko, head of research at Merrill Lynch & Co.'s Jakarta office. "And sequestering assets from rich Chinese is of course very popular."

So far the International Monetary Fund, which is leading a $43 billion international rescue for Indonesia, has managed to block some of the more extreme schemes to effectively expropriate property from Chinese conglomerates, Wreksoremboko said. But the government has moved to require conglomerates involved in lumber and plantations to transfer 20 percent of their assets to cooperatives, and it has ended their special distribution rights in markets such as cooking oil, a major staple in Indonesian households.

The government's new emphasis on increasing support for cooperatives also is arousing consternation among analysts. Established during the 1950s as a counterweight to avaricious capitalism, thousands of cooperatives run by the state operate at the village level and above in Indonesia, acting in a variety of financial roles, such as making small loans, marketing crops and buying consumer products at cheap bulk prices. Critics accuse them of gross corruption and inefficiency.

"What's happening now is an attempt to go back to this tired old 1950s paradigm, and it's a very basic philosophical break with the way Indonesia has been run, at least in recent years," said Eugene Galbraith, a Hong Kong-based brokerage firm executive who spent eight years working in the Indonesian countryside.

"The cooperatives are a mess. They're not cooperatives like you and I might understand it -- people with common interests, like Wisconsin dairy farmers, banding together. They're organizations run by the state, and they're called cooperatives because the members are told to cooperate," Galbraith said.

An Indonesian banker, who requested anonymity, said his bank was often approached by officials of cooperatives who, when they ask for loans, demand bribes as well -- knowing that the bank can benefit from the deal by qualifying for a government-subsidized loan when it lends to cooperatives.

"Not everybody does it," he said. "But they are not audited, and they're very political, very corrupt. The government wants to put trillions of rupiah into them; they say, `this is for the poor' -- and it sounds good, but it isn't going to work."

Adi and other officials contend that objections to the plan are based on misunderstandings.

"The policy has nothing to do with ethnicity," Adi said, adding that ethnic Chinese could participate in programs to promote small enterprise. "Also, if there is too much disparity [in wealth] in society, the Chinese are put in a dangerous spot, because during riots they become scapegoats," so if wealth is redistributed more fairly, their position will become less tenuous, he said.

The approach is aimed at changing Indonesia from a "primitive market" to a modern one, according to Adi, who said the government had every right to stop a handful of conglomerates from exercising monopoly powers in industries such as paper and cooking oil. And while government-sponsored cooperatives may be corrupt, the government is encouraging the creation of more private ones to compete with the state-run ones.

"This competition can create jobs, and purchasing power, and create demand for goods and services," he said.

The dispute has arisen at a time when Indonesia's economic policies are generally winning high marks from economists, notably the IMF and World Bank, which have praised the government for sticking to a disciplined monetary policy that has brought inflation down.

Last week Dennis de Tray, the World Bank's resident representative, said in a speech that while a new outbreak of political chaos might wreck Indonesia's prospects, the economy "is beginning to mend." He cited a sharp decline in interest rates, which have fallen recently by about 20 percentage points to about 50 percent, and a strengthening in the rupiah, to about 7,500 per dollar in recent weeks from a low earlier this year of about 17,000 per dollar.

But many private economists are skeptical that investor confidence has truly begun to revive. They are particularly dubious about official claims that the rupiah's strength is based on a return of private capital rather than the government spending its international aid dollars to buy rupiah. Evidence abounds that people with money in Indonesia are reluctant to keep it there, experts say, because the political outlook is uncertain at best.

"The new economic policy looks too emotional," said Pande Silalasi, head of the economics department at Jakarta's Center for Strategic and International Studies. "And if investors see that there is discrimination against the big firms, I think they will leave Indonesia."