Indonesia - Final Paper

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Indonesia:

A Country Analysis

Prepared by:Adnan Gilani

Jorge MartinezDavid Panzer

Manuel RodriguezCaroline Sheu

April 24, 2000Bus. 487: The Politics & Economics of Development

Professor Marvin Zonis

With thanks toCNA Financial,

Deutsche Bank,Diamond Technology Partners,

and Pfizer for their generous support of this research.



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TABLE OF CONTENTS

EXECUTIVE SUMMARY...........................................................................................................................................4

ANALYTICAL FRAMEWORK.................................................................................................................................5

ECONOMIC GROWTH..............................................................................................................................................8

MACROECONOMIC STABILITY..............................................................................................................................................8BANK & E NTERPRISE RESTRUCTURING...............................................................................................................................11COMPETITIVE ADVANTAGE...............................................................................................................................................14

POLITICAL STABILITY.........................................................................................................................................16

JUDICIAL, LEGAL, AND CIVIL SERVICE R EFORM.................................................................................................................16DEMOCRATIC INSTITUTIONS & THE POLITICAL SYSTEM.........................................................................................................20DECENTRALIZATION...........................................................................................................................................22

APPENDICES.............................................................................................................................................................25

APPENDIX 1 -- MAP OF I NDONESIA..................................................................................................................................25APPENDIX 2 -- OVERVIEW OF ASSESSMENT........................................................................................................................26APPENDIX 3 -- MACROECONOMIC VARIABLES.....................................................................................................................27APPENDIX 4 -- IMF-MOTIVATED REFORMS......................................................................................................................28APPENDIX 5 -- STRUCTURE OF TRADE...............................................................................................................................29APPENDIX 6 -- 1999 ELECTION R ESULTS.........................................................................................................................30APPENDIX 7 -- RISK MANAGEMENT IN INDONESIA................................................................................................................31APPENDIX 8 -- PROJECT LOGISTICS...................................................................................................................................32



EXECU T I VE S U MMARY

As many of our interviewees characterized Indonesia, “It’s too early to invest today,

but too late tomorrow.” While we disagree that Indonesia will be much improved in

the near future, we recognize that great rewards can often be achieved during times

of great risk. However, based on an analysis of the factors in our model, our outlook

for Indonesia over the next four years is pessimistic.

Although Indonesia has achieved macroeconomic stability, it will be difficult for the

country to achieve sustainable, long-term growth. There is still substantial cost and

effort associated with bank and corporate restructuring, and it is not clear that the

Indonesian government has the political willpower and clout to overcome the pain

(economic costs and political opposition) associated with restructuring. The debt

overhang will continue to hurt existing enterprises and even new ventures.

Furthermore, Indonesia has limited competitive advantages compared to its

neighbors in Southeast Asia, especially in the area of technical and manufacturing

capability.

Fortunately, Indonesia’s transition from the Suharto dictatorship has thus far been

remarkably peaceful. President Abdurrahman Wahid has been a strong force for

political stability. However, much work remains. The high level of corruption and the

inherently slow nature of complicated judicial and legal reforms will make it a difficultenvironment for foreign investors. There is also substantial risk associated with the

upcoming transition from Wahid to a new government, whether it occurs as part of

the 2004 elections or earlier. Finally, the decentralization of government power to

the provinces, intended to address regional dissatisfaction (including separatist

movements), entails a sweeping reform of Indonesia’s government structure. This

will introduce further uncertainty, especially since it is not clear that the provinces

have the necessary capabilities to govern effectively.

For these reasons, which are analyzed further in this paper, we conclude that there is

high risk and limited opportunity for foreign investment in Indonesia over the next

four years, especially compared to opportunities in other countries.

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AN ALYT ICAL F R AMEW O R K

In order to analyze the opportunities and potential for future investment in Indonesia,

we developed a model that incorporates factors that impact the country’s economic

and political prospects. As Indonesia seeks to overcome the lingering effects of the

1998 economic and political crisis, progress in these areas is critical and a minimum

requirement for external investment.

Investment

Opportunity

Economic

Growth

PoliticalStability

Judicial, Legal and

Civil Service Reform

Democratic Institutions

& the Political System

Decentralization

Bank & CorporateRestructuring

MacroeconomicStability

Competitive

Advantage

ECONOMIC FACTORS -- The currency crisis that began in Thailand in mid-1997 soon

spread throughout Southeast Asia, and by early 1998, Indonesia’s economy had

severely deteriorated. In 1998, the GDP fell 13%, inflation was 66%, and the

Indonesian Rupiah fell 66% versus the dollar. In 2000, Indonesia is still working

through the effects of the crisis and addressing the substantial economic weaknesses

that the crisis revealed.

We hypothesize that investment opportunity depends on macroeconomic stability in

the country, which is a prerequisite for economic growth and realizing investment

returns. Furthermore, the country must conduct bank and corporate restructuring to

address the ramifications of the crisis. This is essential for the country to have ahealthy financial climate and a viable corporate sector. Finally, for Indonesia to be

an attractive investment opportunity, the country must offer compelling competitive

advantages or other reasons for investors to single it out.

While Indonesia has now regained macroeconomic stability, we conclude that

substantial economic, banking and corporate restructuring remains. Furthermore,

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Indonesia’s past competitive advantages are now less attractive, although investors

that bring the necessary skills can reap rewards while participating in the

development of new capabilities in Indonesia.

POLITICAL FACTORS -- Indonesia experienced a unique form of the Southeast Asia

crisis. Whereas most of Indonesia’s neighbors had introduced political reforms prior

to the crisis, Indonesia had not. As a result, the economic crisis was the impetus for

dramatic political reform, i.e., the dissolution of the 30-year Suharto dictatorship.

Today, Indonesia is attempting to build a functioning democracy. This requires the

reform and/or creation of numerous institutions, such as the judiciary and local

government. It has also become clear that the sometimes oppressive dictatorship

helped to suppress ethnic and religious tensions. Now that these tensions have risen

to the forefront (in the form of secessionist demands and occasional mob violence),

Indonesia must adopt a form of government that recognizes the diversity of its

population, empowers the populace and provides channels for grievances to be

resolved.

Indonesia has broad plans for judicial and legal reform. The country is also gaining

experience with democratic institutions and the devolution of power away from the

central government. We anticipate that this will be a lengthy process, with a lot of

“learning by doing.” As such, there will be lower levels of political stability over the

next several years, and foreign investors must deal with this unpredictability.

OTHER NOTES -- Our model does not consider a category of “social factors” to be a

primary concern when evaluating investment opportunity in Indonesia. The reason is

two-fold. First, we see minimal risk in this area. Although there was an increase in

poverty during the 1998 crisis, the government’s relief efforts proved to be very

effective. Many observers found Indonesian society to be surprisingly resilient in the

face of the crisis, due to population mobility, strong extended families and the

abundance of foodstuff that results from Indonesia’s tropic location.1 Furthermore,

during the Suharto years, education was of primary importance; in fact, the Minister

of Education was typically the most powerful cabinet member. Second, we found

that some social factors (e.g., corruption, the implications of religion) were best

incorporated into other areas of our model.

However, there is one latent social factor that may impact Indonesia in the future and

thus merits a mention. During our interviews, we were told that Indonesia is

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suffering from an unacknowledged and severe AIDS epidemic. If this is the case, and

the government may acknowledge this in the near term, there will be broad

ramifications for the allocation of government funds and for the country’s social

structure.

In the remaining sections of this paper, we analyze each factor contributing to

Indonesia’s economic growth and political stability. While the depth of analysis is

limited by the allotted space, this paper explores the key factors that will shape

Indonesia’s future and impact the opportunity for foreign investment. We also assess

the short term and long term outlook in each area in order to draw conclusions about

the prospects for future foreign investment in Indonesia. (Our long-term horizon

extends through 2004, the date of the next presidential elections.) Each factor also

includes a description of key indicators and the implications for investment.

As suggested in the Executive Summary, we believe that opportunities in Indonesia

are best evaluated in comparison to opportunities in other countries. Although this

paper does not conduct such a comparative assessment, such analysis should be

integral to the decision process of a prospective investor.

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E C O N O M I C G R O W T H

MACROECONOMIC STABILITY

Short Term Outlook : Indonesia has overcome the macroeconomic effects of the1998 crisis, allowing the government to focus on deeper economic restructuring and political reforms.

Longer Term Outlook : The current signs of economic growth are misleading,because they are merely the inevitable “bounce” following the economic crash. Theeconomic situation remains precarious, because the government has limited fiscalleeway as a result of its huge debt burden. Lasting economic growth will depend onforeign investment and trade, which we suspect is five years away, due to the needfor broad restructuring.

Key Indicators: GDP growth, levels of foreign trade and investment, and progress ineconomic restructuring.

Implications: Investment opportunities as the economy rebounds, but fiscalausterity and political-economic risk limits the potential.

At the least, Indonesia’s macroeconomic environment is solid and stable, and there

are signs that it is recovering from the crisis of 1998. This is good news -- compared

to Indonesia’s other challenges, the macroeconomy is now of little concern. Key

macroeconomic indicators have recovered from the crisis, as shown in the charts in

Appendix 3. Inflation is negligible (-0.9% in 1999), the Rupiah is trading within a

narrow range, and domestic interest rates have fallen. Interest rates and the foreign

exchange swap premium have returned to their pre-crisis levels (domestic rates are

6-7 percentage points above international rates).

The recovery is attributable to two actions: sound monetary management, combined

with the initiation of significant institutional reforms (see “Bank & Corporate

Restructuring”). However, the current signs of GDP growth (3-4% in 2000) are widely

believed to be driven by an increase in domestic consumption, which is a short-term,

unsustainable affect. Non-oil exports have been weak, despite the decline in the

Rupiah since 1997, so exports are not providing a simple path to recovery.2 Also,

total investment contracted by 21% in 1999, and it will take substantial progress in

corporate restructuring and improvements in investor confidence for investment to

rebound.

In the aftermath of the crisis, the economy has significant excess capacity, which is

contributing to the recovery as assets are once again made productive. This over-

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capacity has several implications. For growth to continue, assets must be returned

to use, assuming there is adequate domestic and international demand. However,

some of the excess capacity resulted from unwise, and potentially corrupt,

investments prior to the crisis. As a result, there is a need for corporations to

restructure both their real and their financial assets. While international investmentis needed to provide working capital and to help resolve corporate debt issues,

international investors also need to contribute management expertise and

technology.

Recognizing that foreign investment is critical to future growth, President Wahid is

actively encouraging Asian investors to invest in Indonesia, and in 1998, Indonesia

reduced regulatory barriers to foreign investment. However, foreign investment has

not recovered to pre-crisis levels. (FDI was $4.7 billion in 1997, but -$397 million in

1999.3) Furthermore, domestic investors, who moved their funds to Singapore during

the initial stages of the crisis, are just starting to repatriate their funds. Some such

investors appear most interested in reacquiring their bankrupt companies at bargain

prices, with little intention of necessary restructuring, in order to reestablish the

“fiefdoms” that they enjoyed before the crisis. (The IMF has complained that such

debtors are often viewed as victims rather than perpetrators.)

As the economy recovers, the poverty rate is slowly declining. The rate had doubled

to 20% between Feb. 1996 and Dec. 1998 as the economy fell into disarray during

the crisis. Although the rate is now stable and perhaps declining, estimates are that

it will take more than five years for poverty to fall to its pre-crisis level.4

A large portion of Indonesia’s economy revolves around oil and gas exports (16% of

total 1998 exports). However, in response to the slump in oil markets in the mid-

1980s, Indonesia promoted non-oil/gas exports and has thus reduced its dependency

on oil and gas. In 1998, Indonesia’s main trading partners were Japan, the U.S. and

Singapore, which together accounted for almost half of Indonesia’s imports and

exports. Indonesia’s primary imports are intermediate goods (75%), especiallyindustrial raw materials and spare parts.5

Government debt is quite high as a result of the crisis. Debt increased from 23% of

GDP in March 1997 to 94% of GDP in March 2000. Three-fourths of the increase was

associated with bank restructuring program. Government debt service payments will

absorb over 50% of government tax revenues in future years.

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In 2000, the government anticipates a budget deficit of 4%, a level achieved through

increases in taxes and tax compliance, restructuring of foreign debts, and an

unanticipated surge in oil prices. Indonesia will must take on additional foreign debt

(up to $9 billion) to finance half of this deficit. (Indonesia recently rescheduled $6

billion in existing debt for another 10 to 20 years, leading to an S&P downgrade to“default” status.) The government plans to finance the remainder through asset

sales by the bank restructuring program (IBRA). This is an area of significant risk,

because as described below, political disagreements and the apprehension of foreign

investors hinder the asset sale program. As a result, the government could face a

funding crisis. However, the United States and other countries have committed

themselves to Indonesia’s recovery (and maturation into the world’s third-largest

democracy), so assistance will likely be available in the event of future difficulties.

Organizations such as the IMF are using the release of funds as a club to force the

government to finally implement much-discussed reforms. For example, the

government has pledged itself to a reduction in fuel subsidies, which is critical to

introducing greater market forces and reducing the budget deficit. However, the

plan has been delayed by disagreement over the most equitable approach. Thus far,

the government has been unable to achieve agreement in this area, and it has

frequently abandoned announced plans. It is clear that the necessary economic

reforms depend heavily on the political environment. (See Appendix 4 for an

overview of IMF-motivated reforms.) For this reason, economic stability depends on

the ability of President Wahid to structure a governing coalition that is committed to

the difficult, but essential, economic reforms.

In summary, we believe that Indonesia’s macroeconomy has stabilized and is on the

rebound from the crisis. However, there are two areas of significant political-

economic risk. The first concern is the fiscal strength of the Indonesian government,

especially in light of its need to manage debt resulting from the crisis. The second

concern is the political will to implement difficult economic reforms. While the

country currently offers a stable economic environment, potential investors must

recognize that lasting economic growth is possible only if the government

implements the necessary reforms and regains the confidence of foreign observers

through wise economic policies.

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BANK & ENTERPRISE RESTRUCTURING

Short-term outlook: Restructuring will continue at a slow pace, likely just fast enough to appease foreign lenders such as the IMF. Many changes will be cosmetic.

Long-term outlook: Bank and corporate restructuring will achieve momentum.However, this depends on judicial reforms that guarantee the rule of law and

regulatory reforms that enforce corporate/bank accountability, as well as a highdegree of political resolve to spur the process

Key Indicators: Asset sales by IBRA and progress in bank privatizations.Dissolution of the most insolvent banks. Transparency of bank reporting.

Implications: As long as bank restructuring does not progress, companies won’t haveaccess to local lending, and doing business in Indonesia will be more expensive andrisky. Slow corporate restructuring would also delay the interconnected bank restructuring, and it would hinder the formation of a flourishing domestic businesssector.

Our interviewees frequently emphasized the same point: one of the most important

short-term objectives must be to restructure the banking industry and corporations.

Currently, Indonesian companies cannot access credit, and no modern economy can

operate without credit and financial flows. Improved corporate creditworthiness,

which is crucial to achieving sustained economic growth (and avoiding a repeat of

the conditions that precipitated the crisis), will require debt and operational

restructuring. Also, corporate and bank restructuring are so linked that the progress

in one, or lack off, inevitably impacts the other.

BANK RESTRUCTURING:Although everyone recognizes the importance of restructuring the banking sector, it

is now more than two years after the crisis and the work has just begun. As a result

of the crisis, 66 of the 160 private banks were closed. The state took over twelve

banks and, together with the owners, recapitalized eight more. IMF involvement was

also critical to the unfolding of events in the banking sector. In response to the crisis,

the IMF required Indonesia to reduce liquidity, which increased the number of

bankruptcies and further damaged the banking sector. The IMF recommended

closing the initial 14 banks. Since each of these 14 banks was partially owned by amember of the ruling Suharto family, their closure demonstrated that no bank was

safe from closure or government takeover. Therefore, many banks and companies

transferred their remaining assets to foreign countries, especially Malaysia, further

worsening the situation.

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As a result of the bank closures and state intervention, private domestic banks

account for only 15% of the banking system today versus a historical 50%. At the

same time, state banks now account for 75% of the liabilities of the banking system

and 90% of its negative net worth, making the state the most important player in the

industry by far.

Another important player in the restructuring process is the Indonesian Bank

Restructuring Agency (IBRA), an independent agency created to restructure troubled

banks and their assets. Today, IBRA is the third largest non-bank financial institution

with assets worth more than US$ 60 billion. The process of liquidating assets, other

than cars and paintings, has been terribly slow. The Astra automotive group was a

significant asset to be sold. This disposal occurred only in March, and it required two

auctions, since the first winners finally withdrew after deciding the situation was

untenable. Non-official sources have told us that the main obstacle to restructuring

is the political implications, since most of the assets were owned by large, powerful

conglomerates that are trying to recover them at an significant discount.

The shift of banking assets to the state was a required measure in the short run to

prevent a total collapse. However this is neither desirable nor healthy for long-term

development. The bank reform process will encounter the following challenges over

the next several years:

Restructuring and privatizing state banks: Bank restructuring is an urgent issue-- the monthly cost of not restructuring banks is estimated to be least US$ 600

million. But progress is slow. For example, the government has not followed through

on its plans to merge four banks with Bank Mandiri. The IMF recommends that half of

the remaining state banks should be privatized by the end of 2000, with all privatized

by the end of 2002. One of the major obstacles is that responsibility falls

ambiguously between the Ministry of Finance and the Ministry of State-Owned-

Enterprises. As long as there is not a specific, motivated institution responsible and

accountable for privatization, we do not believe there will be much progress.

Increasing bank supervision: Bank distress was caused to a large extent by a

total lack of supervision by the central bank. This led to one of the most expensive

bank bailouts in world history, over 50% of GDP. The following scenario illustrates a

common technique that contributed to the crisis.

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Company X would estimate the cost of a project to be $100M. Theywould tell the bank, owned by the same corporation as Company X, thatthe project cost was $600M. The bank would lend $150M, thusapparently this new project (or company) had a D/E of .33, which mightseem reasonable. Company X would invest $100M and deposit $50M intheir accounts (in foreign banks when things turned sour). The result is

a company with negative equity (and nothing to lose in case of bankruptcy). 6

Accelerating asset recovery: As mentioned, IBRA has a huge amount of assets

under its control. Liquidating them is urgent to restore the assets to productive

owners and generate revenue to assist in the bailout. However, this liquidation is a

particularly complex and sensitive task. Liquidation has to be done with no political

interference and in a truly transparent way. If this is accomplished, it will set

standards of transparency for the rest of the banking industry.

CORPORATE RESTRUCTURING:Corporate restructuring is not at a standstill due to a lack of framework but due to a

lack of implementation. By June 1999, only 80 bankruptcy cases had been

registered, compared to thousands in Korea. Even though bankruptcy laws have now

been revised, most court rulings have proved to be contentious and arbitrary.

Corruption of the judiciary is a key obstacle. Under Suharto’s regime, judges and

many other officials would purchase their positions (i.e. the chief of police position

was worth $2 million). After buying his position, a judge has to recover his

“investment” by issuing rulings based on bribes. This process seems to be impactingbankruptcy cases: all of the bankruptcy claims made by banks have gone to one

Jakarta court, with the same judge presiding and the same lawyer defending. For

example, Bankers Trust filed a case requesting payment of $50 million because of

fraud committed by the borrower. Not only did BT recently lose the case, but it was

forced to pay $50 million in damages to the defendant!

In summary, bank and corporate restructuring is critical to Indonesia’s success.

Assets held by the government must be transferred to the most productive owners,

and companies must have access to credit. The regulatory environment must be

transformed to prevent the illicit dealings that led to the crisis. Until these issues are

addressed, the Indonesian banking and corporate sectors will be inhospitable to

foreign investors. At this time, we believe investors still face great difficulty in

choosing viable partners and suppliers, in conducting domestic financial transactions,

and in operating in the capricious regulatory and legal environment.

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COMPETITIVE ADVANTAGE

Short Term Outlook : Government reforms will (rightly) transform the naturalresource extraction industry, introducing uncertainty for current and potentialinvestors in Indonesia’s most prominent sector.

Longer Term Outlook : Investors will start to capitalize on two key opportunities:filling in the gaps in Indonesia’s industrial structure and selling to the lucrativedomestic market.

Key Indicators: Domestic purchasing power and the composition of imports/exports.

Implications: Foreign investors must supply management and technical skills andmust overcome several disadvantages compared to other Southeast Asian countries.

Indonesia’s historical advantage has been in its abundance of natural resources. As

shown in Appendix 5, a large portion of Indonesia’s exports consist of fuels, ores and

metals, as well as agricultural products such as timber and food products. Because it

lacks value-added industries to transform these raw commodities prior to export,

Indonesia is missing an opportunity to earn additional revenue and increase the

productivity of its workforce. Instead, the country must import an unusually high

proportion of value-added, manufactured goods, many of which are produced by

neighboring countries utilizing Indonesia’s raw materials. (As noted earlier,

intermediate goods, especially industrial raw materials and spare parts, comprise

75% of Indonesia’s imports.) As shown by the chart in Appendix 5, Indonesia’s

scarcity of value-added industry is especially evident when comparing exports by

Asian countries.7

Indonesia’s lack of domestic value-added industries has constrained international

investment in the past. For example, the Astra automotive group must import a

large proportion of its components from foreign sources, allowing it to focus primarily

on vehicle assembly in Indonesia. However, some observers report that the lack of

value-added manufacturing could be an area of opportunity for foreign investors who

are able to supply capital and, more importantly, technology.

While Indonesia has abundant natural resources, they will not be as easily exploited

as in the past. The Indonesian national government is increasing supervision to

avoid past abuses (ethical and environmental), to ensure that contracts are awarded

without corruption and to ensure that the public collects its share of royalties.

Furthermore, with their increasing autonomy, provincial governments are especially

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interested in ensuring that foreign investors deliver a high return (royalties,

infrastructure investments, etc.) to the local region. In fact, as regions gain authority

through the decentralization process, there are examples of regions imposing

stringent requirements on existing and new investors, a policy that seems to have an

aspect of retribution to redress past inequities. For example, Newmont Miningrecently agreed to pay disputed back taxes to a local government. To settle the

dispute, Newmont also agreed to contribute $1.5 million to establish a community

foundation and another $1 million annually for community development.8

Several factors make Indonesia attractive for international investment. The

workforce is literate, motivated and amenable to hierarchical organization, as

attested to by foreign corporations currently doing business in Indonesia.

Infrastructure, especially on the central islands of Java and Bali, where 62% of the

population resides (on only 7% of the country’s total land area), is in adequate shape.

While travel can become more difficult as you move away from Jakarta, it is still

adequate for a developing country, and the government is continuing to make

investments (to the extent that its fiscal limitations allow). Of course, transportation

in more remote regions, particularly among the many islands, is much more difficult.

Finally, the sheer size of the domestic market -- almost 210 million people, with 76

million in urban areas -- makes this a very attractive market in terms of the potential

for domestic sales. According to the World Bank, Indonesia had a 1997 per capita

GDP (PPP method) of $3390, which is greater than China ($3070) and much greater

than India ($1660). In this respect, the country is wealthier than many people

initially suspect (roughly comparable to many countries in South America and

Eastern Europe), and Indonesia could comprise an attractive consumer market.

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PO L IT ICAL S TAB I L I TY

JUDICIAL, LEGAL, AND CIVIL SERVICE REFORM

Short-Term Outlook: A complete overhaul of the judicial, legal, and civil servicesystems will be impossible; however, the government can take immediate steps,such as raising government salaries and replacing the old guard, to help reducecorruption and increase competence in the short-term.

Long-Term Outlook: Fundamental reform is certainly possible; however, it may take decades, given that over thirty years of Suharto-era corruption must be undone.

Key Indicators: Successful prosecution of bankruptcy cases; publication of court decisions; utilization of disciplinary mechanisms for the legal profession; higher legaleducation standards, higher entry requirements, and transparent promotion

procedures; higher performance-tied compensation, establishment of judge rotationsystem, and annual asset disclosure requirements.

Implications: Investors will encounter significant corruption and arbitrary legal andregulatory proceedings.

For three decades, Indonesia’s authoritarian government promoted economic growth

without developing the necessary accompanying institutions. Then when the

Southeast Asian economic crisis occurred in conjunction with Indonesia’s political

transition, Indonesia’s weak institutions failed to respond quickly and justly to the

crisis. According to The World Bank,

“[w]eak governance has, if not caused, at least exacerbated the

economic crisis from which Indonesia is only just emerging. It spawnscorruption, which exacts a toll on all dimensions of the economy. Onsome counts, corruption in Indonesia costs the country as much as 2percentage points in annual growth since the mid-sixties. It tends tobenefit the rich and tax the poor. It adds to the cost of doing business.It eats into the moral fiber of society.”9

By building strong institutions, the country will be better able to absorb future

external shocks to the economy. In fact, The World Bank contends that investing in

institutions, rather than physical capital, might actually yield higher social and

economic returns.10 While many areas are in need of institutional development, we

believe the two critical ones are the judiciary and the civil service, detailed further

below.

REFORMING THE JUDICIAL SYSTEM

First and foremost, the reformation of the judiciary is critical to bank and enterprise

restructuring. An inept and corrupt judiciary can act as a key bottleneck to quick

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economic recovery. For instance, IBRA has recently lost several bankruptcy cases

against recalcitrant debtors (including the high-profile Bank Bali scandal), despite

mounting pressure from the IMF to restructure the country’s $65 billion private debt

in return for massive foreign aid. “As long as the courts do not show fair treatment, I

don’t really see a lot of hope,” declared Agustus Sani Nugroho, IBRA general counseland senior vice president.11 Preliminary research by Indonesian Corruption Watch

(ICW) claims that only five of the 41 supreme justices in the Supreme Court – the

country’s highest court – cannot be bought.12 According to an article written in The

Jakarta Post, several young lawyers admitted that bribery was a part of their daily

legal work.13 Some lawyers, however, support the longstanding practice: “[judges]

only take money from one side and once they receive the money they will never let

you down, no matter how impossible the case may seem…It’s first come first

served.”14

Several important reasons explain the deep-seated corruption that pervades the

country’s judicial system. First, judges are severely underpaid. Even after a 100%

salary hike, judges take home only Rp 3 million ($400) per month, while a supreme

justice receives only Rp 10 million. Second, judges are overworked. The backlog of

cases compels lawyers to oil the wheels of the judicial system. Finally, the judiciary

lacks a formal external watchdog. The Supreme Court, although corrupt itself, is the

only monitoring body for all the judges in the country.15 Without any accountability,

corruption in the courts will continue.

Fortunately, the Indonesian legal profession has already invested considerable

thought into analyzing the weaknesses of the legal and judicial system.

Recommendations for comprehensive reform include better remuneration of judges,

higher entry standards for legal practice, enforcing disciplinary measures, publishing

more detailed court decisions, and higher quality of legal education. The

government has taken some of the aforementioned recommendations. For example,

a special task force in the Attorney-General’s office has been created to investigate

and prosecute corrupt judges. Furthermore, the government recently announced

plans to reassign up to two-thirds of judges in the capital – including all the chiefs

and deputies of the five district courts – to other courts outside Java.16 While such an

initiative could reduce corruption in the short-run, fundamental structural changes

are necessary in the long-term.

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In recognition of this long-term need, on February 16, 2000, Wahid established the

National Law Commission to examine the state of legal development and make

specific recommendations. The Commission will analyze the justice system, the civil

service system, the legal profession, provincial legislation, economic laws, and

human rights. Unfortunately, the Commission does not have the mandate to actuallyimplement its recommendations. This is up to the legislature.

CREATING AN EFFECTIVE CIVIL SERVICE

Indonesia’s civil service is also prone to corruption. According to the 1999

Transparency International Corruption Perceptions Index, Indonesia is tied for 96 out

of 99 countries.17 The reasons appear to be similar to the judiciary – low salaries,

poor performance management, and lack of accountability. The salaries of civil

service clerks, for instance, are about half of their private sector counterparts while

directors-general are about one-tenth to one-fifteenth. As a result of this salary gap,

the following phenomena have emerged. First, development budgets and projects

are used to pay civil service employees – through honoraria, management and

consultant fees, board membership fees, and other function-related pay. Second,

kickbacks from contractors are distributed through an elaborate patronage system.

Third, since actual income has little to do with performance, the quality of civil

service has suffered. Simply raising the salaries of civil servants, however, will not

solve the problem (and will also bankrupt the government). Such plans must be

accompanied with proper performance incentives and corruption penalties. In

addition, the number of civil servants must be reduced while the quality must be

raised.18

Indonesia has taken several steps to reform the civil service. Efforts include a new

civil service law and an anti-corruption law. Actually implementing such laws,

however, take a considerable amount of time and resources. For example, for the

anti-corruption law to be effective, the State Audit Commission must have the proper

technical training, organizational support, and incentive structure to track the assets

and income of all civil servants. Moreover, the commission must be linked effectively

with the police and the Attorney-General’s office so that abuse can be followed by

quick legal action.19 Similar to the judicial system, reformation of the civil service

system is a slow and painful process that requires modification of both structural

18



incentives and cultural attitudes. Thus, foreign investors should expect fundamental

reform to take place over generations to come.

ESTABLISHING THE RULE OF LAW

During the Suharto era, no single financially significant company obtained a contract

without some quid pro quo. Foreign corporations received favorable investment

terms year after year, operating their mines and oil fields and pulp mills and

plantations with minimal concern for the surrounding communities and the

environment. Most foreign governments, business leaders, and advisers have now

warned that if Indonesia fails to uphold its existing contracts, the country will lose

credibility with international investors.

Even under foreign legal systems where the rule of law reigns supreme, many of

these contracts might be deemed invalid and unenforceable. For example, a party

who wins a contract through unlawful means (i.e., bribery and gift-giving) may not

receive any contractual protection under the law. Many existing investment

agreements are tainted by evidence of collusion and conflict of interest. As foreign

companies seek to maintain their suspect contracts, President Wahid is attempting to

insure that Indonesia upholds the rule of law, while salvaging some of the country’s

national resources that were sold off to the biggest international gift-givers. Wahid’s

approach of requesting additional consideration in exchange for honoring corruption-

induced contracts may be the most workable short-term compromise.20

Indonesia’s decision to not enforce unfair contracts does not necessarily indicate that

future, fair agreements will be broken. However, we are still concerned about the

country’s legal and judicial capacity to enforce fair contracts. As the above analysis

indicates, reformation of the judiciary and civil service, along with the application of

the rule of law, is a long-term process that cannot be completed within the next 3-5

years. Indeed, over three decades of Suharto-era corruption must be undone.

According to Mardjono Reksodiputro21, the law was used primarily as a tool to

implement Suharto’s policies. The military viewed “law” as whatever theircommander said it was. In other words, law was a means to an end rather than an

end in itself. Thus, the entire legal infrastructure, as well as cultural and societal

values, must be altered.

19



DEMOCRATIC INSTITUTIONS & THE POLITICAL SYSTEM

Short Term Outlook : Assuming President Wahid remains solidly at the helm, the political transition will continue smoothly.

Longer Term Outlook : The major consideration is the health of Wahid and hisability to complete his term (through 2004). If his health wanes, a succession battleis likely, as his Vice President is considered incapable of running the country. If hedoes complete his term and elections are held as scheduled, his legacy will be thestability he brought and the democracy he helped nurture.

Key Indicators: MPR vote in summer 2000; health of President Wahid.

Implications: A difficult political transition could lead to social unrest, as well aschanges in current government policies.

ELECTIONS

In 1999, Indonesians for the first time changed their government through an open,

transparent democratic process. The June 7, 1999 parliamentary election, contested

by 48 political parties (who fielded candidates in every district), was widely accepted

as open, fair and free. The chart in Appendix 6 shows the results.

The MPR (the upper legislature) is constitutionally the highest authority of the State

and meets every five years to elect the president and vice president and to set the

broad guidelines for state policy. In October 1999, the MPR elected Abdurrahman

Wahid as President and Megawati Soekarnoputri as Vice President.

As in the Suharto era, the military has significant sociopolitical as well as security

roles. Members of the military are allotted unelected seats in the DPR (the lower

legislature) and in provincial and district parliaments, in partial compensation for not

being permitted to vote. Active duty and retired officers occupy important positions

at all levels of government. The military thus far has resisted strong pressure from

student and reform groups for an immediate end to this arrangement, but

incremental change is likely over the next several years.22

INDONESIA’S GOVERNMENT

President Wahid heads Indonesia's largest Muslim organization, the NU, which has 30

million members. Wahid’s position as a moral leader was transformed when he and

his supporters formed the National Awakening Party (PKB) following the Suharto’s

fall. While NU is a conservative religious organization, Wahid has consistently

maintained that faith is a personal matter. In the unrest after Suharto, some

politicians called for Islam to have an institutionalized role in the state. While some

20



Islamic leaders have been critical of Wahid’s stance, he has gained the respect of

many non-Muslims throughout Indonesia, including the Christians and ethnic

Chinese. Perhaps more significantly, Wahid has forged links with the influential

military elite.23

Wahid previously had close ties with Megawati. Before the election, she considered

him one of her key allies, a man who could deliver a huge Muslim following but would

be content to follow secular policies. During the campaign, Wahid, Megawati and

Amien Rais, Wahid's rival Muslim leader, brought their parties together in the name

of safeguarding the democracy process. However, the joint front did not last, and

Wahid later argued that a female president would offend conservative Muslims.

Relationships soured further as Wahid came to regard Megawati as arrogant and

unable to work with other politicians. (Megawati gained the vice-presidency only

after widespread protests by her supporters over her defeat for the presidency by

Wahid.)

The new government cabinet has been hailed in the international media as a “break

from the past,” but its composition reveals the opposite: the Armed Forces (TNI) and

the Golkar Party—the two pillars of Suharto's regime—have a powerful presence and

continue to hold all the key security ministries. The cabinet resulted from Wahid’s

deals with Golkar, the army and a Rais’s coalition of Islamic parties in order to win

the presidency. Wahid repaid his debts by allowing his allies to deliver cabinet

positions to their supporters.24

By many accounts, Wahid has exceeded all expectations. A skilled political

operative, he has excelled in his balancing act during this tumultuous time of political

consolidation (which is still only in its early stages). Many believe that he is the only

one who can bring about a smooth transition. However, his health is his most

significant handicap -- and the greatest political risk for Indonesia. (A brain

hemorrhage in 1998 led to his near total blindness). If Wahid’s health wanes (an

unfortunate but realistic assumption), there is no clear successor. In the aftermath of the 1999 elections, Megawati is now widely perceived as incapable of leadership.

Her initial goodwill, which came through during the election as a result of her family

name and the general discontent with the Suharto era, is on the decline. In fact, the

MPR will likely change the rules when it meets in summer 2000 in order to keep

Megawati from readily assuming the presidency. While the MPR currently votes for

21



the President every five years, they will likely change this “vote of confidence” to

occur annually.

Amien Rais is also mentioned as an alternative for the presidency. He wields

substantial power through his cabinet appointees, his religious following and his deal-

making savvy. However, although it is likely that he will play the role of king-maker

again, his is too right-wing to garner the support of moderates, who comprise the

majority of the electorate. A seldom-mentioned player is the chairman of Golkar,

Akbar Tandjung. Wahid originally selected him as his vice-president but chose

Megawati to appease her very vocal supporters.

ROLE OF THE MILITARY

For the last four decades, the military legitimized the authoritarian regime of

president Suharto and implemented public policy. In fact, the military has been in

charge of duties that usually belong to the civil society in democratic countries. Until

recently, the military seemed to be a threat to the new democracy. However, Wahid

has been successful in reducing the power of the military. For example, he

appointed a civilian to run the Ministry of Defense, and he forced General Wiranto,

who had been Suharto’s military commander, to resign. Despite rumors of an

impending coup in early 2000 (during the height of the Wahid/Wiranto conflict), most

observers now believe that a coup is very unlikely. Wahid enjoys the support of most

of the military, as well as support from the general population and the international

community.

Investors should also recognize the military’s significant involvement in business,

which results from concessions it received during the Suharto regime as a source of

further income. This involvement will decline when the country succeeds in creating

more transparent legislation and open contracts.

DECENTRALIZATION

Short term: Despite its plans, the government has achieved little with thedecentralization process. Indonesia’s lack of institutions and skilled people outside

Jakarta makes decentralization difficult.

Long term: Decentralization is key to maintain governance under such a diversecountry. Thus, we could reasonably expect a higher level of autonomy of the

22



provinces in the following years, but complete decentralization is a process that willtake over 5 years.

Key Indicators: Creation and strengthening of local institutions.

Implications: Decentralization is essential to address regional grievances; delay could exacerbate social and political tensions.

The Indonesian government has historically dictated public policy from Jakarta, even

policies that affect distant provinces. Currently, the central government is

responsible for over 80% of national spending. Because of their limited role in

governance, the provinces lack strong institutions and hold significant resentment

toward center. Regardless of the efforts and good intentions of Wahid, it is unlikely

that the planned decentralization will occur soon. A lack of institutions and skilled

people outside Jakarta complicates the process, and it is questionable whether the

central government would give more taxing and spending autonomy to the

provinces, especially to the richer ones, since this would limit the current policy of

redistribution.

Legislation has already been implemented that seeks to return over 40% of spending

to lower levels of government, but these new laws are still incomplete. For

decentralization to succeed, there must be strong institutions and skilled managers

at the regional and local level. The central government will likely have to relocate

numerous officials from Jakarta to the provinces. The central government must also

develop guidelines to hold local authorities accountable for the administration andexercise of their resources. There is also confusion about the division of

responsibilities between the central government and local governments.

Another important factor is the separatist movements, some involving isolated

violence, in several regions of Indonesia. These movements range from the recently

successful independence of East Timor to separatist movements in Aceh , Irian Jaya,

and Kalimantan, to frequent rioting in Jakarta, and to religious intolerance in Lombok.

The separatist sentiment arises from the fact that in the aftermath of the Suharto

regime, many groups in Indonesia want greater control of their lives and a greater

share of the revenues that they generate. This is a major issue for Wahid to resolve,

because the secession of a separatist group could mean a major loss of revenue

(e.g., natural resources) for the country and would set a precedent that would

strengthen other separatist movements. This is a great risk for Indonesia, because

while the population is concentrated on the island of Java, the remote provinces

23



generate much of the national income through natural resource extraction. For this

reason, if separatist movements succeed, it could lead to the disintegration of the

country and the impoverishment of much of the population. However, we believe

this scenario is very unlikely. The central government recognizes the critical nature

of this issue and is introducing decentralization policies to address the grievances.

24



A P P E N D I C E S

APPENDIX 1 -- MAP OF INDONESIA

Source: The World Factbook 1999. The Central Intelligence Agency.

25



APPENDIX 2 -- OVERVIEW OF ASSESSMENT

Factor Overview

Factors contributing to Economic Growth

MacroeconomicStability

Much progress, but risks associatedwith government budget. Growthlimited by investor mistrust.

Bank & CorporateRestructuring

A long, difficult process with largeramifications for Indonesia’s futureand for investors.

Competitive Advantage Limited compared to neighbors.

Factors contributing to Political Stability

Judicial & Legal Reform A long, difficult process with large

ramifications for Indonesia’s futureand for investors.

Democratic Institutions& the Political System

Much progress, but limitedprecedent makes the future difficultto predict.

Decentralization A long, difficult process, withdifficult-to-predict ramifications.

26



APPENDIX 3 -- MACROECONOMIC VARIABLES

Sources: BPS, Bank of Indonesia25

27



APPENDIX 4 -- IMF-MOTIVATED REFORMS

In April, the government of Indonesia announced that it had complied with 90% of

the 42 reforms required by the IMF. (The IMF suspended disbursement in early 2000

due to lack of progress in Indonesia.) The following list shows the high-level areas for

reform, as described in Indonesia’s letter of intent with the IMF.26 We present this list

because it provides potential investors with insight into the current situation and the

degree of change that Indonesia faces in the near term.

a) fiscal and trade policy reforms

b) fiscal decentralization

c) banking system reforms

d) corporate restructuring, legal reform and governance

e) reform and privatization of state-owned enterprises

f) reform of the energy sector

g) competition and investment policy

h) agriculture policy and forestry

i) environment

28



APPENDIX 5 -- STRUCTURE OF TRADE

Foreign Trade -- Exports

Food and

agricultural raw

materials

18%

Fuels, ores, and

metals

33%

Manufactures

49%

Foreign Trade -- Imports

Food and

agricultural raw

materials

14%

Fuels, ores, and

metals

13%

Manufactures

73%

Manufactured Exports as a % of Total Merchandise Exports

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

J a p a n

K o r e a ,

R e p .

H o n g K o n g ,

C h i n a

B a n g l a d e s h

C h i n a

S i n g a p o r e

M a l a y s i a

I n d i a

T h a i l a n d

P h i l i p p i n e s

I n d o n e s i a

data source: World Bank World Development Indicators, 1999 (using 1997 country data)

29



APPENDIX 6 -- 1999 ELECTION RESULTS

33%

22%

13%

11%

7%

14%

Indonesian Democratic

Party of Struggle (PDI-P)-

MegawatiGolkar- Akbar Tandjung

National Awakening Party

(PKB)-Wahid

Unity and Development

Party (PPP)

National Mandate Party

(PAN) - Amien Rais

Others

As evident in the chart, Wahid’s party won only 13% of parliament seats, and thus his

accession to the Presidency was unexpected.

30



APPENDIX 7 -- RISK MANAGEMENT IN INDONESIA

In our discussions with a major international bank in Indonesia, the bank provided the

following risk management areas that any foreign investor must consider.

a) selection of a local partner -- A local partner is essential to navigate the complex

local environment. Some foreign investors have selected partners based on

cursory, superficial investigation, only to discover that they have been taken

advantage of.

b) acquisition of land -- Land titles are complex, and it is difficult to acquire a clear

title.

c) application of law -- Foreign investors should not rely on the application of law to

resolve disputes.

d) changing markets -- Changing government policies (including subsidies) can

drastically change the competitive environment, thus changing the viability of a

project.

e) export/import -- There is significant corruption in Indonesia’s harbors.

f) foreign exchange risk -- Indonesia has a rudimentary and expensive derivatives

market, which complicates attempts to hedge FX risk.

g) insurance -- Import and political risk insurance is generally unavailable. Other

domestic insurance policies is not reliable.

h) financial reporting -- Financial statement standards are regularly flaunted, which

complicates acquisitions, alliances, etc.

31



APPENDIX 8 -- PROJECT LOGISTICS

As part of our field research in Indonesia, we met with the following organizations

and individuals, all located in Jakarta. This information is provided to document the

sources of our information and to assist teams that conduct future analysis of

Indonesia. Of course, the conclusions in this paper are our own and should not be

attributed to any other organization or individual.

Name/Organization Contact Information NotesABN-AMRO Bank, N.V. Mr. Erik Moen

Vice President, COO Jl. Lr. H. Juanda 23-24P.O. Box 2950

Jakarta 10029, Indonesia+62 (21) [email protected]

Mr. Clemente EscanoDirector - Treasury

Jakarta Stock ExchangeBuilding

Tower II, 11th FloorSudirman Central BusinessDistrict

Jl. Jend. Sudirman Kav. 52-55 Jakarta 12089, Indonesia+62 (21) 515-6838+62 (21) 515-4470 (fax)[email protected]

ro.com

ABN-AMRO provided anexcellent perspective onsurviving the crisis and doingbusiness in Indonesia.

American Chamber of Commerce

Mr. Francis X SheaDirector, Corporate FinancePrasetio Strategic ConsultingArthur AndersenWisma 46 Kota BNI Levels25-28

Jalan Jenderal Sudirman Kav1

Jakarta 10220, Indonesia+62 (21) 575-7906+62 (21) 574-4521 (fax)[email protected]

rsen.com

Mr. Phillip Shaw(see separate entry)

We enjoyed a lively breakfastdiscussion with sixinternational businessmen.

BAPPENAS(National DevelopmentPlanning Agency)

Dr. Ir. Sujana RoyatBureau Chief for HumanSettlements and UrbanDevelopment

BAPPENAS provides a goodperspective on developmentinitiatives andregional/central relations.

32

mailto:[email protected]










Jl. taman Suropati 2 Jakarta 10310, Indonesia+62 (21) 334-819+62 (21) 310-1921 (fax)[email protected]

Chase Bank Jakarta, Indonesia Chase provided insight intothe banking and business

environment.ECONIT Dr. Arif Arryman

Director

Jl. Prof. Dr. SoepomoSH. No 47, 4th Floor

Jakarta 12810, Indonesia+62 (21) 830-4850+62 (21) 835-4743

ECONIT is an economicsthink tank. Dr. Arryman isalso active in Indonesianpolitics.

Embassy of Mexico inIndonesia

Mr. Ismael Sergio Ley-Lopez,Ambassador

Embassy of Mexico

Menara Mulia, Suite 2306 J. Gatot Subroto Kav. 9-11 Jakarta 12930, Indonesia+62 (21) 520-3980+62 (21) 520-3978 (fax)[email protected]

The Ambassador provided aninsightful perspective onIndonesia.

Embassy of Pakistan inIndonesia

Jakarta, Indonesia The Ambassador provided aninsightful perspective onIndonesia.

Embassy of the United Statesof America

Ms. Pamela J. SlutzCounselor for Political Affairs+62 (21) 344-2211 x2280+62 (21) 386-2259

[email protected]

Ms. Judith R. FerginCounselor for EconomicAffairs+62 (21) 344-2211+62 (21) [email protected]

Jalan Medan Merdeka Selatan5

Jakarta 10110, Indonesia

The Counselors have deepknowledge of the situation inIndonesia.

International Monetary Fund Mr. John Dodsworth

Senior ResidentRepresentative

IMF Resident MissionBank Indonesia

Jalan Kebon Sirih 82-84 Jakarta 10002, Indonesia+62 (21) 231-1884

Mr. Dodsworth, who is

central to IMF activities inIndonesia, provided a clearassessment of the situation.

33



arranged through:Gertrud WindspergerIMF Public Affairs Division+1 (202) 623-4983

Jakarta Stock Exchange Mr. Mas AchmadPresident Director

PT Bursa Efek Jakarta Jakarta Stock ExchangeBuilding

Jl. Jend. Sudirman Kav. 52-53 Jakarta 12190, Indonesia+62 (21) 515-0234+62 (21) 515-0550 (fax)

Mr. Achmad provided a goodoverview of the state of equity markets.

Prof. Mardjono ReksodiputroProfessor of Law at theUniversity of Indonesia andSecretary of the National LawCommission

The University of Indonesia Jakarta, Indonesia

Prof. Mardjono is an excellentresource in the area of thelegal system.

Ministry of Investment and

State-Owned Enterprises

Dr. Asril Noer

Expert to the Minister onInstitutional Relations

Jl.Dr.Wahidin No. 2Jakarta 10710, Indonesia+62 (21) 386-4448+62 (21) 348-31774

Dr. Noer provided insight into

the privatization process andinvestment objectives.

Mr. Soedarpo SastrosatomoExecutive ChairmanSamudera Shipping Line, Ltd.

Samudera Indonesia Bldg.8/FLetjen S. Parman Kav. 35

Jakarta 11480, Indonesia+62 (21) 548-0088+62 (21) 534-7171 (fax)

[email protected]

Mr. Soedarpo is one of themost successful businessmenin Indonesia, and he wasinvolved in the formation of the country.

Mr. Philip J. ShawPundi Stratejasa Indonesia

13th Floor, WismaMetropolitan II

Jl. Jend. Sudirman Kav. 31 Jakarta 12920, Indonesia+62 (21) 570-3750+62 (21) 571-1556 (fax)[email protected]

Mr. Shaw operates aconsulting firm that assistsinternational companies andis very knowledgeable aboutIndonesia.

Sucofindo Mr. Zafar D. IdhamDirector of Operations

Jl. Raya Pasar Minggu Kav. 34 Jakarta 12780, Indonesia

P.O. Bo 2377, Jakarta 10001+62 (21) 798-3666 x1803+62 (21) 798-6980 (fax)[email protected]

Sucofindo is an inspectionand certification companythat is very involved inimports/exports. Mr. Idhamprovided a good overview of

commerce.

Mdm. Asti SuhartoPresidentPT. Maritosa Coalindo

Jln. Kenali Asam I B Jakarta 13240, Indonesia+62 (21) 478-61032+62 (21) 478-64669 (fax)

Mdm. Suharto is a successfulbusinesswoman whooperates an export/importcompany and is veryknowledgeable about

34



Indonesian affairs.

Tirtama Comexindo Ms. Tatyana SekarprijastinaBusiness Development

PT Tirtamas ComexindoBidakara Building, 7th Floor

Jl. Jend. Gatot Subroto

Kav.71-73 Jakarta 12870, Indonesia+62 (21) [email protected]

Comexindo is aninternational tradingcompany (specializing inoffsets) that was affectedhurt by the crisis.

United National IndustrialDevelopment Organization(UNIDA)

Mr. Syed Asif HasnainRepresentative

UN Building Jl. M.H. Thamrin 14P.O. Box 2338

Jakarta 10001, Indonesia+62 (21) 314-1308 x601+62 (21) 390-7126 (fax)

[email protected]

UNIDA is focused onIndonesia’s post-crisisdevelopment.

United Nations SupportFacility for IndonesianRecovery

Dr. Satish MishraChief Economist

UN House, 4th Floor Jl. M.H. Thamrin 14P.O. Box 2338

Jakarta 10240, Indonesia+62 (21) 314-1308 x110+62 (21) 392-1152 (fax)[email protected]

UNSFIR is focused onIndonesia’s post-crisisrecovery.

The Wall Street Journal Mr. Jay SolomonIndonesia Correspondent

14th Floor, Deutsche BankBldg.

J. Imam Bonjol 80 Jakarta 10310, Indonesia+62 (21) 3983-1340+62 (21) 3983-1342 (fax)

[email protected]

Mr. Solomon has been inIndonesia for five years and

has closely watched themany dramatic events since1998. (Mr. Solomon may beassigned to a new country inthe near future.)

The World Bank Mr. Mark BairdIndonesia Country Director

Lippo Life Building, Suite 301 Jl. H. R. Rasuna Said, Kav. B-

10Kuningan, Jakarta 12940,Indonesia+62 (21) 252-0316+62 (21) 252-2438 (fax)

arranged through:Lieke Sastrosatomo, programassistant

Mr. Baird provided anextensive assessment of Indonesia’s recovery.

35



[email protected]

Additional logistics information:

• In addition to the organizations listed above, you may wish to attempt to make

contacts with large foreign corporations (e.g., Comexindo, mining companies,

Reebock) and with members of the legislature.

• We stayed at the Hotel Menara Peninsula, a comfortable business-class hotel that

offered very good rates. The hotel is a short taxi ride from the business district,

although there are other hotels that are even closer. You can contact the General

Manager, Kevin O’Hagan, and mention we sent you. +62 (21) 535-0888, +62 (21)

535-0938 (fax), [email protected].

• If you want to see more of Indonesia, consider a trip to Mt. Bromo (fly to

Sarabaya). To see Hindu culture, consider Bali, where you may wish to stay at the

Hotel Bali Padma (Mayke Boestami, Public Relations Manager, +62 (361) 752140,

[email protected]).

36



E N D N O T E S

37



1 Several of our interviewees commented that Indonesia’s lush, tropical environment mitigates poverty (starvation is rarewhen fruit grows abundantly).2 According to World Bank data, Indonesia’s exports fell 10% in 1998 and remained constant in 1999.3 “Indonesia Quarterly Update.” The World Bank, 3/20/00.4 “Indonesia: Seizing the Opportunity -- Economic Brief for the Consultative Group on Indonesia.” The World Bank,1/26/00.5 “Indonesia Country Profile.” The Economist Intelligence Unit, 1999-20006 This scenario is not exaggerated; we interviewed executives of an import/export agency (owned by the son-in-law of Suharto), that had no assets and debt of more than $200M.7 World Bank Development Indicators, 1999.8 “Newmont Reaches Settlement With Indonesia's N. Sulawesi.” Asia Pulse newswire, 4/20/00.9 The World Bank, 1/26/00, p. 13.10 “Indonesia: From Crisis to Opportunity.” The World Bank. 7/21/99, p. 3.1.11 Chew, Amy. “IBRA Sees Slow Indonesia Debt Progress.” Reuters, 4/10/00.12 Unidjaja, Fabiola Desy. “Payoffs Prominent in Court System.” The Jakarta Post , 1/22/00, p.2.13 In fact, one lawyer claimed that at the Jakarta provincial court, judges do not even look at your case if you cannot comeup with at least Rp 75 million ($10,000). Another attorney recounted the time he represented a business tycoon in a trillionrupiah bank scam: “I remember carrying the suitcase containing all the money. I also handed it over to the judge himself.”

14 Unidjaja, Fabiola Desy, p. 2.15 Unidjaja, Fabiola Desy, p. 2.16 “Jakarta Judges Moved Around in Major Government Shift.” The Jakarta Post.com, 4/20/00.17 The higher the ranking, the higher the perceived level of bribery by the 770+ senior executives of multinationalcompanies surveyed.18 The World Bank, 1/26/00, pp. 14-15.19 The World Bank, 1/26/00, p. 16.20 In the recent tax dispute between gold mining company PT Newmont Minahasa Raya, a subsidiary of American miningcompany Newmont Mining corporation, and the local government of North Sulawesi, the parties agreed to an out-of-courtsettlement, whereby the government would drop its lawsuit and honor the contract in exchange for $500,000 in overduetaxes and a $1.5 million contribution to the local people (plus an additional contribution of $1 million per year for threeyears in community development programs). “Newmont Reaches Out-of-Court Settlement.” The Jakarta Post.com,4/20/00.21 Professor of Law at the University of Indonesia and Secretary of the National Law Commission.22 United States State Department.23 Asiaweek.24 United States State Department.25 The World Bank, 1/26/00.26 Government of Indonesia and Bank of Indonesia, “Memorandum of Economic and Financial Policies,” 1/20/00.

Documents

Indonesia - Final Paper