The social unrest sweeping Indonesia is threatening to unravel the International Monetary Fund’s painfully constructed bailout plan for that country.
Should that occur and the world’s fourth-most populous country descend into economic as well as political chaos, the results could be devastating for East Asia’s already faltering economies.
Japan, which controls the lion’s share of trade with Indonesia and has been struggling unsuccessfully to ignite its own economy, could be tipped into a recession.
Impoverished workers in Thailand and South Korea, where the IMF’s programs have begun to turn their economies around, could rebel against the idea of enduring new hardships to bail out the world’s bankers. The escalating riots in Indonesia have been fueled by popular outrage against steep fuel price increases mandated by the IMF.
That, in turn, could threaten the fledgling economic recoveries in those countries and spill into the United States in the form of reduced exports and surging imports as Asian nations, unable to sell goods at home, turn to the rich American market.
Certainly, overseas investors will begin fleeing the region. That already has begun to happen in Indonesia, where riots took an ugly turn the last few days as workers in Jakarta and the nation’s other big cities began destroying the shops of ethnic Chinese, who control an estimated 60 to 70 percent of the country’s wealth.
“Many people are going to look at this and say, `Under the way the country is run, how can we possibly consider an investment there,’ ” said Joyce Chang, the emerging markets strategist for Merrill Lynch & Co.
Already, several big companies have begun pulling employees from Jakarta, Indonesia’s capital, including BankAmerica Corp. and Atlantic Richfield Co. Merrill Lynch announced it won’t open its 40- person Jakarta office Friday.
Spokeswoman Bobbie Collins said the firm is also honoring a State Department advisory and not sending anyone into the country.
Citicorp, meanwhile, closed six offices in Jakarta and elsewhere for the “safety of its staff and customers,” a spokesman said.
Indonesian State Enterprises Minister Tanri Abeng was quoted as saying that at least two foreign companies had abandoned plans to bid for stakes in 12 state-owned firms being sold as part of Indonesia’s privatization program, according to the Reuters news agency.
The rising economic stakes helped trigger a major reversal in Clinton administration policy this week. Over the last eight months, U.S. Treasury and IMF officials sought economic reforms in Indonesia that would pull it back from the brink of bankruptcy without jeopardizing President Suharto’s rule or the economic interests of his family.
This week, with protests sweeping the country and six students shot dead Tuesday at an elite Jakarta university, the administration finally admitted that economic reform in Indonesia would be meaningless without political reform.
What’s clear is that the economic turnaround promised by the IMF’s $40 billion bailout program has now been postponed far into the future. Indonesia’s currency plunged more than 8 percent Thursday to 11,450 to the dollar, down from 8,700 to the dollar last Friday. The country’s minor stock market has essentially ceased functioning.
“It has been clear for a month now that the IMF plan was not going to work without political change of the sort that occurred in South Korea and Thailand,” said Steven Radelet, an Indonesia expert at Harvard University’s Institute for International Development.
South Korea and Thailand elected new presidents after being hit by economic crisis. The political changeovers helped assuage popular disgust with the details of the IMF austerity plans.
As in the other East Asian economies that suffered through currency collapses last year, the IMF demanded that Indonesia dismantle many of its cherished industrial development programs. It also imposed steep price hikes in key commodities such as food and fuel and requested that it clean up its banking sector.
The latter programs will require breaking the ties between government officials and private corporations, the so-called crony capitalism that never raised much concern during the days of those countries’ rapid growth. In Indonesia, it could also mean severe financial setbacks for Suharto’s children, who have used their family ties to win lucrative franchises and contracts.
While probably none of the rioters who swept down Jakarta’s streets Thursday would object to that, the IMF program also called for fuel price hikes that fell heaviest on Indonesia’s poorest citizens. On May 4, Suharto hiked kerosene prices 25 percent, diesel fuel 40 percent and gasoline 70 percent.
“Forcing a huge rise in gas prices was not necessary,” Radelet said. “It contributed to the deterioration of the economy, and that has contributed to the chaos.”
Stunned by the reaction in Jakarta and elsewhere in Indonesia, the IMF refused to comment Thursday on the deteriorating political situation. One official, who did not wish to be identified, said the IMF had advised Suharto to phase in the price increases, which he refused to do.
The immediate effect of the crisis on the U.S. will be slight. Indonesia, which has a population of more than 200 million, is a mostly rural and poor country with per capita income less than $1,000 a year. Two-way trade totaled just $13.7 billion last year, with the U.S. absorbing $9.2 billion in Indonesian imports, compared with exports to Indonesia of $4.5 billion.
A few high-profile U.S. multinational corporations have established manufacturing beachheads in the 13,667-island archipelago, including Mattel Inc., General Electric Co. and Avon Products Inc. Nike Inc. contracts with Korean and Taiwanese companies to make about a third of its sneakers there.
Most U.S. involvement in Indonesia is in resource extraction. Caltex, a joint venture between American oil giants Chevron Corp. and Texaco Inc. and the Indonesian government monopoly Pertimina, accounted for about a quarter of Indonesia’s oil and gas receipts of $12.5 billion in 1996.
“There’s still just a small role for U.S. manufacturers there,” said Wayne Forrest, executive director of the American-Indonesian Chamber of Commerce. The group has about 200 corporate members. The American Chamber of Commerce in Jakarta has about 500 members, although many are Indonesian nationals.
U.S. exports grabbed about 12 percent of Indonesia’s total import pie last year, Forrest said.
