Indonesia Overcomes Oil Slump
Asian island nation finds substantial economic gains from diversifying its industry. TRANSFORMING AN ECONOMY
INDONESIA has been one of the least likely survivors of the petroleum price tumble witnessed by members of the Organization of Petroleum Exporting Countries. There are many obstacles to development here, ones common to other less-developed countries. Yet tangible economic gains are evident. ``She [Indonesia] made the transition from an oil-based and government-dominated economy to one where different markets are opening simultaneously,'' says Richard Drobnick, director of the International Business Education and Research Program at the University of Southern California.
As global recession surfaced in 1982-83, Indonesia was not considered attractive for foreign investment - vital for its ability to infuse new levels of technology as well as cash. Petroleum-based products made up three-fourths of all exports and world prices dropped precipitously. Government revenue and hard currency were scarce.
Indonesia's currency, the rupiah, was pegged to the rising dollar, making sales overseas difficult. This predominantly Muslim nation had a high birthrate. Some 26 million have been added to the population since 1981, which is 176 million today. This alone slowed growth in per capita income beyond the current $390.
The former Dutch colony, a vast archipelago of 13,000 islands, faced other obstacles. Currency dilemmas surfaced a second time in the mid-1980s: Nearly half of its $40 billion worth of outstanding debt is denominated in revalued yen.
To confront these obstacles, several priorities were outlined as national leaders prepared a five-year plan in 1984-85, one of a continuing series of long-term economic agendas. The country embarked on a program to transform oil from a handicap to an engine of future growth. More emphasis was placed on energy exports of liquefied natural gas (LNG), favored by many countries for its relatively benign environmental impact.
The Southeast Asian nation tallies 1.2 million barrels of oil daily, and is still ranked among the top 10 producing nations. Balancing output of various grades of crude oil for different uses has proved difficult.
``Just like Venezuela,'' says A.R. Ramly, an official of Pertamina, the state-run energy agency, ``our own heavy oils are not readily exportable.''
Ironically, the country is forced to import certain blends, such as those used for lubricants and for asphalt production.
Although oil in revenues fell by 50 percent since 1985 (when they were $14.6 billion), diversification to LNG ensures new markets. Taiwan and Japan are now major purchasers, and Indonesia has become the world's top LNG exporter. Sales this year may top the $4 billion mark. An LNG plant at Blang Lancang, across the Strait of Malacca and neighboring Malaysia, is the world's largest. In time, it will yield 10 million tons of LNG destined for utilities in Korea and elsewhere.
Energy continues to play a key role in economic affairs. Advanced geophysical techniques point to promising new oil fields. With the demand for electricity rising rapidly, some will be generated with oil. The island of Java will require a fivefold increase in power, to the 20-gigawatt level, by 1999. A plan to introduce compressed natural gas as an energy source for domestic transportation may succeed in balancing the fuel mix.
Another part of the diversification plan calls for more domestic refining. Officials in Jakarta insist that this should increase the value of petroleum products sold overseas. Greater European purchases of low-sulfur coal are foreseen.
A dramatic change in the composition of trade has occurred in the past few years. The value of petroleum-based products fell to 40 percent of all exports. Nonoil exports accounted for sales totaling $6.7 billion in 1986, more than $9 billion by 1987, and some $11.3 billion last year. This group included textiles, manufactured items, electrical equipment, food products, and wood products.
One of the newer products is aircraft parts. Plants in West Java are turning out wings for Boeing 737s. Components for General Dynamics' F-16 fighter aircraft are produced, as is radar equipment for Westinghouse.
Total Indonesian exports rose to $18.7 billion last year and should surpass $20.3 billion in 1989. Textiles is one field where the upscale shift in design, quality, and variety is essential. Indonesia was able to penetrate country markets where quotas were not in place. Since 1983, a tenfold increase in textile exports saw revenue reach $1.8 billion in 1988.
Education of managers for the fledgling private business is critical. This is only one budget quandary. During the oil slump ``it was tempting to shave budgets for social services, irrigation, and education, but Jakarta resisted those efforts,'' says John Wilton, a specialist at the World Bank.
Financial policies created acrimony, but they brought results. Inflation fell from 10 percent in 1987 to half that level. Real growth above the 1988 gross domestic product of $67 billion is seen at 4 percent this year.
Most attribute the liberalization of Indonesia's economy for both domestic and foreign investors to what Radius Prawiro, chief of the central bank, terms ``debureaucratization.'' Procedures for licensing were streamlined, and reforms enabled foreign-based multinationals to invest in indigenous corporations. Reducing the number of state monopolies, plus an end to restrictions on foreign-based banking, was also significant.
Efforts to attract outside investment have drawn more than $21 billion in the past eight years. Nearly a third of that originated in Japan, but Korea and Taiwan shares are growing as their own competitive posture changes.
``Whole industries could migrate there,'' declares Dr. Drobnick, ``because Indonesia's whole package, not labor alone, is low cost.''
Supplementing that money is a large pool of foreign assistance from Japan - $2 billion this year, nearly all of it in soft loans.
With the size of the domestic consumer market increasing, the new prosperity is expected to aid rural sections where development lags. Absorbing better-educated youth into meaningful jobs is a challenge, and more than 2 million join the work force each year. National cohesion has been helped by using satellite television to help forge a single language from hundreds of dialects. Foreign observers say corruption has decreased. But fears of commercial domination by ethnic Chinese persist.