Multimedia Mania/abacus-multimedia-mania.iso/dp/0021/00213.txt

Text File | 1993-07-27 | 37KB | 584 lines

$Unique_ID{bob00213}
$Pretitle{}
$Title{Indonesia
Chapter 3A.   The Economy}
$Subtitle{}
$Author{Riga Adiwoso-Suprapto}
$Affiliation{HQ, Department of the Army}
$Subject{government
percent
economic
economy
pribumi
investment
enterprises
foreign
labor
chinese}
$Date{1982}
$Log{}
Title:       Indonesia
Book:        Indonesia, A Country Study
Author:      Riga Adiwoso-Suprapto
Affiliation: HQ, Department of the Army
Date:        1982

Chapter 3A.   The Economy

     Immense natural resources and a teeming, predominantly agrarian
population formed the setting for Indonesia's economic development, a process
characterized by the complex interplay of traditional and modern forces and
catalyzed by government commitment and investment. Substantial resources of
petroleum, natural gas, tin, copper, coal, timber, and fish, complemented by a
tradition of irrigated-rice farming and tree-crop cultivation, supported a
diversity of economic activities. Yet, because most of the population was
still employed in smallholder agriculture or in small, family-run enterprises,
the per capita gross domestic product was the equivalent of only US$474 in
1980.

     The economic goals of the Soeharto government did not differ
significantly from those of the Sukarno administration; both talked about
achieving equity between the nation's diverse rural and urban regions,
economic nationalism to favor indigenous and non-Chinese entrepreneurs, and
the balanced modernization of agriculture and industry. Sukarno, however, led
poorly administered attempts to develop the traditional rice-growing sector,
the plantations and industries expropriated from the Dutch, and the
war-damaged infrastructure, without the benefit of Western economic
assistance. By 1965, in the face of poor international prices for its exports,
political disruption at home, and confrontation with Malaysia, the nation
teetered on the verge of bankruptcy. To stabilize this situation, President
Soeharto implemented the conservative policies of a team of Western-trained
technocrats, who were willing to utilize substantial amounts of Western and
Japanese assistance and investment. The government's quick success in
reestablishing financial order positioned the economy to benefit from the
favorable international situation of the 1970s.

     Stimulated by public investment made possible by the rising revenues from
oil exports, per capita production has expanded by over 5 percent per year
since 1970-higher than the average for most developing countries. The
principal achievements occurred in the mining sector, but agriculture also
grew as the introduction of modern seeds and fertilizer revolutionized
farming. Public investment improved the transportation and communications
infrastructure as well-not only on the most densely populated islands of Java,
Madura, and Bali but also on the Outer Islands.

     The government has also improved the institutional framework for
development. Preferring a top-down approach, it gradually extended the power
of the bureaucracy to the lowest levels of the economy, where it introduced
marketing cooperatives to bolster the operations of private traders and
farmers. Supplementing this effort were the activities of state enterprises,
located strategically in almost every realm of economic endeavor, especially
in industry. The state-controlled banking system provided subsidized credit
to priority public and private enterprises. The government invited foreign
participation in selected industries and continued to solicit foreign aid and
loans. An influential national planning apparatus coordinated and managed
these multifarious efforts.

     Economic disparities persisted despite the government's efforts. The
contrasts between traditional agriculture and modern industry were still
obvious in 1982. Even in the large urban centers where modern industry and
services had developed most rapidly, there were glaring gaps between the
incomes and living standards of the wealthy elite and those of the
poverty-stricken majority. Similar discrepancies existed in the rural areas,
particularly on Java, where landlessness was endemic. Likewise, the physical
infrastructure was better developed on Java, Madura, and Bali than on the
Outer Islands. The government's promotion of transmigration from Java to the
land-rich Outer Islands, together with the influx of foreigners and Javanese
to industrial projects located in these area, heightened the disparities
between the more and the less developed islands. The most emotional issue,
however, was the popular impression that the ethnic Chinese minority continued
to dominate the modern economy.

     Economic nationalism was perhaps the single most persistent concern.
Despite Soeharto's abandonment of the stridently antiforeign rhetoric of
Sukarno and the vital contribution of foreigners to the development of the
modern economy, the government remained sensitive to criticism regarding
foreign economic activities in Indonesia. Given the long history of anti-Dutch
and anti-Chinese sentiment among a large part of the population, the fact that
some 5 percent of the nation's gross domestic product in 1980 went overseas as
payments of wages, profits, and interest on loans was potentially a source of
popular criticism. The government has therefore sought to make cooperation
with foreign partners as beneficial as possible to Indonesians.

     The government's policies, however, have evoked some criticism. Domestic
critics complained that too little investment was going to rural development,
education, and public services; that corruption was widespread; and that the
Chinese maintained their influence through collaboration with prominent
military officers in the government. Foreign critics focused on the
government's restriction of private enterprise, overcentralization, and
discretionary regulations. Nonetheless, these shortcomings could not
overshadow the positive achievements of the 1970s, when technological change
penetrated to the most remote areas of the archipelago and improved the
average standard of living.

     The prospects for the late 1980s and beyond, however, were clouded by the
undeniable fact that unemployment, rural and urban, was bound to worsen as the
pace of technological change quickened and more labor was freed from
traditional agriculture. As the nation's mineral wealth became more expensive
to exploit, government revenues would be strained. Inefficiencies, either from
corruption or from misguided subsidies, would become more costly. The main
task for the early 1980s was the construction of an industrial base that
could absorb this rapidly growing labor force.

Patterns of Development

     Since the late 1960s the Indonesian economy has grown rapidly and, by
some measures, has experienced a profound structural transformation. Data
suggest that although real national income rose significantly during the
periods of 1923-28, 1934-39, and 1953-57, the expansion since 1967 has been
unprecedented. Especially striking is the contrast between the growth in the
1970s and the economic stagnation of the 1957-67 period (see Parliamentary and
Guided Democracy, 1950-65, ch. 1). From 1960 through 1967 the real rate of
growth of the gross domestic product (GDP-see Glossary) averaged less than 2
percent per year; in only one year did it top 5 percent. On five occasions
during this seven-year period the rate of economic expansion failed to keep
pace with population growth. It was not until 1968 that the economy recovered,
finally responding to stabilization measures implemented by the new Soeharto
government. The GDP growth rate was over 11 percent that year and, as of late
1982, had not dropped below 5 percent.

     The reason for this remarkable recovery and subsequent long-term
expansion was a shift in the pattern of national expenditure away from
consumption toward productive investment. During the 1967-71 period gross
investment expanded by over 26 percent per year, even adjusted for inflation.
In current and constant prices (see Glossary) the share of investment in the
composition of GDP reached nearly 16 percent in 1971 (see table 3, Appendix).
Over 36 percent of the investment came from overseas-about 6 percent in the
form of direct private investment, some 5 percent as grant aid, and most of
the rest as loans to the public sector. By the late 1970s domestic savings
equaled domestic investment, although the government chose to borrow abroad to
finance many projects.

     Increased investment had a dramatic effect on production and income in
construction, manufacturing, and mining and resulted in an improvement in
agriculture. The share of agriculture in the economy, however, declined. In
constant prices agriculture, forestry, and fishing accounted for 54 percent of
GDP in 1960, 44 percent in 1971, and just over 31 percent in 1980. In current
market prices this trend was more striking; agriculture's share of GDP in 1980
was less than 26 percent. Industrial production (including mining,
manufacturing, construction, and utilities) represented over 41 percent of GDP
in 1980 in current prices and over 30 percent of the total calculated in
constant 1973 prices-two and three times its contribution to the economy in
1960. At the same time there was a much less pronounced shift in the
composition of the labor force; the industrial labor force in 1980 was less
than 13 percent of the total, while agriculture employed over 55 percent of
all workers.

     The large differences between calculations of industrial production based
on constant rather than current prices explain an important force behind
Indonesian economic development-the sudden increase in the value of the
nation's oil production after 1973. As a member of the Organization of
Petroleum Exporting Countries (OPEC), Indonesia benefited greatly from the oil
price increases implemented by this international cartel beginning in 1973.
From 1974 to 1980 the gain from this terms of trade effect-the effect of
changing international prices on the value of exports and imports-was
equivalent to almost one and one-half times the value of GDP in 1973. The
increase in prices alone could have financed 30 percent of all Indonesian
investment during this period.

     There are two ways of interpreting this phenomenon. One could conclude
that the oil sector has not grown as rapidly as other sectors in real terms
and, therefore, that the share of mining in GDP for 1980 should be calculated
in constant 1973 prices-at least 10 percent of the total. One also might argue
that such large price increases-although imposed from the
outside-qualitatively changed the structure of the economy. This perspective
suggests using current prices to evaluate the share of mining at nearly 27
percent of GDP in 1980. There is no doubt, however, that oil has become the
essential ingredient to the success of the Indonesian economy since the advent
of the Soeharto government.

     Evidence points to fundamental differences in the performance of the
economy between the Soeharto and Sukarno periods. As concluded by Anne Booth
and Peter McCawley, Australian economists who closely follow Indonesian
developments, Soeharto's policies generally achieved better results.

     Changes in official attitudes and priorities, macroeconomic management,
economic institutions, technological infrastructure, and external constraints
to development made these successes possible.

     Compared with the Sukarno era, when the emphasis was on revolutionary
strategies to eradicate the vestiges of colonialism and to transform the
economy into one reflecting the goals of Indonesian socialism, the government
has concentrated on pragmatic approaches to increase production and income.
Radical policies, such as land reform and the nationalization of foreign
enterprises, have taken a backseat to technical programs-often with foreign
assistance-to develop agriculture and industry. There has been more of a
willingness to accept private foreign investment and to rely on private, as
well as public, enterprise. With each year's budget and every new development
plan, the yardstick for government policy has been economic achievement.

     The economic imperatives of the Soeharto government gave rise to a group
of influential and technocratic economic managers who, recalling the excesses
of the late Sukarno years when inflation was over 600 percent per year, valued
economic stability highly. Budgets have generally been conservative, and the
government has checked carefully the domestic and foreign resources available
before launching ambitious projects and programs. At the same time, the
government strove to ensure the profitability of private and public
enterprises, while arranging effective incentives for investment in priority
industries. In contrast with the Sukarno years, the government's investment
targets have usually been achieved, and the technocrats have systematized
economic decisionmaking.

     The government has further attempted to strengthen the nation's economic
institutions. The administration of agricultural extension programs and
marketing, for example, became rationalized in the 1970s. After excessive
controls and inefficiencies produced chaos in 1972 and 1973, private
distributors were allowed to complement the work of government agencies, while
the rural farm cooperatives were completely reorganized. Despite the
proliferation of state agencies and enterprises, there has been a healthy
respect for the efficiency of the private markets. This was particularly true
in the labor market, where the government has tightly controlled labor unions,
in turn, keeping wages flexible. In the countryside, mobile teams of wage
laborers contributed to profitability and productivity.

     Much of this mobility and productivity was the result of improvements in
the technological infrastructure, especially on Java. New products and
processes have been used with greater frequency by agricultural producers,
small-scale traders, and large factories alike. The improved transportation
and communications network has enabled migration and trade between far-flung
areas.

     Improved prices for petroleum have ameliorated the balance of payments
constraints that afflicted the economy under Sukarno. Although the economy
depended more and more on foreign technologies, the revenues from petroleum
sales went a long way toward financing their purchase.

     These generally positive developments during the Soeharto period have not
been without their negative aspects, and many problematic economic issues
remained at the start of the 1980s. Much of the development of modern industry
has been either concentrated in a narrow, urban stratum of the economy or
segregated from the local structure of production. Outside of Jakarta and even
more so, outside of Java, imported complexes of modern plant and machinery
were isolated from the local populace-mostly farmers and small-scale traders.
The result was a form of economic dualism characteristic of many developing
countries.

     The government's strategy to protect domestic manufacturers from foreign
competition by restricting imports has tended to promote capital-intensive
rather than labor-intensive enterprises. Not only do these policies further
diminish the links between the modern and the traditional sectors, but foreign
business interests also have complained that the policies belie the
government's commitment to open trade relations and free markets. They argue
that restrictive policies only hurt the chances for creating more domestic
employment and technological sophistication. The government, however, has been
concerned with protecting the interests of an incipient class of domestic
entrepreneurs-many of them with connections to the military and government
bureaucracies. More broadly, the government has felt the need to show a
concern for Indonesian nationalism, not only to this small business elite but
also to the political opposition and the general public for whom nationalistic
feeling has become important.

     In order to promote Indonesian entrepreneurship, the government has
promoted a variety of state enterprises and agencies. Arguing that the private
supply of entrepreneurship and capital was still limited (or dominated by the
nation's Chinese ethnic minority), the nation's economic planners have relied
on civil servants and state capitalism. Direct price controls were declining
in importance, but a whole set of government-dominated institutional
structures having indirect control over the economy were coming into
existence. The increasing scope of government enterprise contradicted the
ideological commitment toward private business.

     Indonesia's unemployment and poverty problems have remained enormous.
Despite the obvious signs of economic development, much of the population
continued to live at the bare subsistence level, especially in rural Java.
Employment prospects for these often landless farmers depended upon a vast
array of programs and projects. Although sizable public works programs have
helped alleviate some problems, aspects of industrial policy that favored
capital-intensive industry did little to help the poor.

     It was not at all certain that Indonesia's endowment of natural resources
would bring the nation permanent economic buoyance. Not only would the
nation's resources become increasingly expensive to mine and process, but
fluctuations in international prices could also jeopardize the government's
investment programs. In late 1982 the price of oil was coming down as energy
conservation measures progressed in the industrial countries. Price
fluctuations were frequent for the nation's non-oil exports, such as natural
rubber and coffee. In such an environment of dependency on the international
economic system, it was all the more important for Indonesia's economic
planners to promote the development of industries that were competitive and
efficient in the long run and that could give rise to continuous employment.

Employment and Income

     In absolute terms Indonesia's employment problem is staggering; during
the 1970s an average 1.3 million people entered the labor force each year, and
in the 1980s this was expected to rise to 1.9 million new workers per year.
Even if the economy performed as well as it did previously, the rate of
unemployment was likely to increase from about 4 percent to over 7 percent by
1990. Because it was generally assumed that these statistics failed to account
for a large number of individuals who were either discouraged from seeking
employment at all or who had only marginally productive jobs, the rates of
open and disguised unemployment (see Glossary) were demonstrably causes for
official concern.

     Despite the poor quality of labor force statistics, some trends were
discernible in the composition and growth of the work force. There has been a
decline in the participation rate (see Glossary) for men-from about 80 percent
of all age-groups in 1961 to about 70 percent in 1980-chiefly as the result of
a declining rate of participation by men under 24 years of age and those over
55 years old. For women there has been an increasing trend-from less than 30
percent to about 36 percent of all age-groups. Overall, the economically
active proportion of the population ages 10 years and over declined from about
80 percent in the early 1960s to about 70 percent in the 1970s. Behind these
trends were social phenomena, such as expanding education and social services
for the young and the elderly and changing roles for women (see Social System,
ch. 2).

     With respect to employment, the fastest growing sectors in the 1970s were
construction, where employment expanded by 7.8 percent per year on the
average, and the social and personal services sector, where employment grew at
a 7.2 percent annual rate. Agriculture, forestry, and fishing employment, by
contrast, increased by only 0.7 percent per year-less than half the rate of
growth of the agricultural population. Industry as a whole created new
employment at a rate of about 5 percent per year, as did the trade,
transportation, and financial services sectors. Manufacturing employment,
however, grew by less than 4 percent per year.

     The implication of these trends was that the labor displaced from the
agricultural sector was finding employment not in manufacturing, where over
one-third of investment was taking place during the 1970s, but rather in
services and construction, where capital costs per laborer were lower.
Especially on Java, the service sector has become the employer of last resort,
where families seek to bolster their meager incomes from agriculture by
engaging in part-time service work for low wages. Government programs have
been responsible for the expansion of construction employment. A system of
grants to local governments and agencies, Presidential Instruction (Inpres),
accounted for as much as 40 percent of new construction employment in 1980,
and the ripple effects of these expenditures on other sectors were also
important (see Fiscal Policy, this ch.).

     The government was expected to continue expenditures on Inpres projects
and to encourage the development of essential service industries in both the
public and the private sectors, while giving priority to increasing employment
opportunities in other branches of the economy. Its expressed purpose has been
to develop labor-intensive industries as well as those taking advantage of the
nation's natural resources. Some policies and programs actively promoted
small-scale and cottage industries, or gave economic protection to already
functioning firms. In the early 1980s, however, the overall structure of
economic incentives, including taxes, subsidies, interest rates, and pricing
policies, continued to favor the development of large, capital-intensive
firms, where labor, though productive, was less in demand (see Industry, this
ch.).

     Although there were obvious structural differences between labor markets
in urban and rural areas, fragmentary data on wages suggested that the labor
market functioned freely and efficiently in both areas. The premium on
skilled, as opposed to unskilled, laborers in both markets was about the same.
Wages paid to unskilled workers were only slightly higher in urban than in
rural areas generally, but this could vary significantly from one part of
Indonesia to another. Wages in the capital-intensive industries, such as
mining, were four or five times those of other industries but by and large
reflected higher skill requirements. Fragmentary data suggested that real wage
levels held fairly constant during the 1970s and that wages paid in large and
small firms in the same industry were comparable.

     The government conducts a periodic wage survey among a small sample of
major enterprises. The survey gives some idea of the range of wages in the
economy, but no data are supplied on the number of wage earners. A few
examples from the survey for the first half of 1981 give a general indication
of monthly wage levels: plantations, the equivalent of US$28 to US$320;
mining, US$151 to US$1,267; manufacturing, US$66 to US$635; construction,
US$45 to US$482; commerce and finance, US$103 to US$863; and other services,
US$57 to US$540.

     The reasons for the relatively free-working labor market were a
combination of government nonintervention and the weakness of the labor
movement. Few labor laws have been enacted since the mid-1960s, and many have
gone unenforced. A 1964 law requiring government approval for the dismissal of
regular employees did not prevent employers from discharging employees who
were unreliable or were no longer required. The government, however,
discourages massive layoffs. Another law regulating work hours for women and
prohibiting their nighttime employment has seldom been enforced. More
importantly, there was no general minimum wage, although the government had
set up regional wage councils to approve wage and benefit agreements in the
larger enterprises. The wage councils were conducting surveys to determine
suggested minimum wage levels in the various regions. Their findings could be
the basis for future minimum wages, but as of 1982 they were used mainly to
set wages in public construction projects. Since 1978 there has been a modest
social security and insurance plan for workers.

     The labor movement has become essentially powerless since the end of the
Sukarno period. The Soeharto government reorganized most of the labor unions
into the government-dominated All-Indonesian Labor Federation (FBSI) in 1973,
and leadership of this organization was dominated by members of the government
party (see Golkar, ch. 4). In mid-1980 FBSI claimed to have 2.7 million
members, organized into 21 industrial unions and 9,635 locals. The Department
of Manpower and Transmigration, the main governmental agency responsible for
implementing labor policy, has encouraged collective bargaining agreements in
medium- and large-scale industry; their number increased from only 40 in 1976
to almost 1,200 in mid-1980.

     Household expenditure data reported in sample surveys taken by the
government in 1970 and 1976 have provided researchers with a weak basis for
deducing trends in income distribution. The data suggested, nonetheless,
that most Indonesians were better off in the 1970s than in the previous
decade. At the same time, rising incomes among the wealthiest groups were
widening the gap between them and the majority.

     One study suggested that whereas 57 percent of all households could be
classified as poor in 1970, this proportion dropped to 48 percent by 1976.
The decline was particularly apparent in urban areas. In per capita terms,
the improvement was even more substantial; only 43 percent of the population
could be considered poor in 1976. Another study estimated that about 45
percent of all household spent less than Rp3,000 (for value of the rupiah-see
Glossary) per person per month in 1976; but the average was over 50 percent in
the rural areas and less than 19 percent in the cities. The incidence of rural
poverty by this standard was especially high in the central and eastern
provinces of Java and in the provinces of Maluku, Southeast Sulawesi, and East
Nusa Tenggara. The incidence of poverty was above the national urban average
outside Jakarta on Java and in the provinces of Lampung, East Nusa Tenggara,
West Kalimantan, North Sulawesi, and Maluku.

     The findings of a complex statistical analysis of the same expenditure
data revealed that there was a significant increase in urban inequality
on Java, especially at the top end of the income distribution, where the
wealthy few enjoyed sharply higher standards of living than the middle class.
For rural Java there was a slight decline, as average expenditures evened out
among the poorer farm families. Outside of Java the same trends were apparent
only to a lesser degree. Urban-rural disparities increased on Java. Regional
disparities that previously favored the less populated provinces having
large-scale mining industries diminished.

     Public reaction to the government's employment and income policies was
difficult to measure. In 1981 and 1982 the government was increasingly
worried about the spread of strikes in the manufacturing industries, which
were about twice the level of previous years. The armed forces were called
in to control some of these demonstrations, while public security agencies
oversaw collective bargaining. Yet the public outcry was less than expected
when the government raised the prices of oil products to domestic consumers
in early 1982. Antagonisms about inequalities in wealth usually have been
absorbed into popular demonstrations against the Chinese, which occurred
periodically (see the Pursuit of Public Order, ch. 5).

Entrepreneurship

     Many Indonesians deplore what they see as the dominance of their economy
by certain ethnic minorities, in particular the Chinese (see Java, ch. 2).
There has even developed a special terminology to distinguish between these
groups and the majority of the population, the latter being termed pribumi
(see Glossary). Pribumi are sometimes referred to as the economically weak
group. The concept of pribumi became important in the economic sense as the
Chinese continued to accumulate a share of the nation's business assets, far
exceeding their proportion of the population. More than any other group, the
Chinese have been resented by many pribumi, but much resentment has been
directed at foreigners as well.

     The government showed official concern for the state of pribumi
entrepreneurs after the "Malari affair" in 1974 (see The Economy, ch. 1).
What began as a display of economic nationalism in public demonstrations
against the visiting Japanese prime minister deteriorated into another of the
nation's intermittent riots against the Chinese. Almost immediately thereafter
the government issued a series of directives designed to promote pribumi
entrepreneurship. In addition to expanding the number and role of state
enterprises and agencies to counterbalance the Chinese influence in private
industrial and commercial enterprises, the government provided preferential
credit and contract arrangements for pribumi entrepreneurs. Concern over the
development of pribumi entrepreneurship and Indonesian nationalism has also
resulted in the regulation of foreign businesses (see Foreign Economic
Relations, this ch.).

     State enterprises date back to the Sukarno era and the nationalization
of Dutch agricultural estates and business enterprises. Under the leadership
of Soeharto the number of public enterprises has increased dramatically, and
somewhat surprisingly, for a government nominally committed to free
enterprise. In 1982 the banking system was almost completely under government
control, and there were over 150 nonfinancial state enterprises having
operations in all sectors of the modern economy (see Money and Banking,
this ch.). Because the government bureaucracy was staffed almost exclusively
with pribumi, state enterprises could be considered extensions of pribumi
economic influence.

     Since 1974 the government has stipulated that 10 years after the start
of a joint venture with foreign partners-the arrangement under which most
foreign investment occurs-over half of the equity must be turned over to
Indonesian ownership. In specified industries, the regulations require that
pribumi capital predominate. In order to facilitate this transfer of
ownership, the government rehabilitated the defunct Jakarta stock exchange in
1977. Since then the market has grown slowly, and in mid-1982 there were only
13 corporations listed. Problems besetting the stock exchange included
high-asset transfer taxes, the need for high stock dividends to compete with
bank interest rates, and the almost nonexistent secondary market for the
resale of stocks and securities. Hundreds of joint ventures, however, were
nearing the end of the 10-year limit for capital dilution in the early
1980s, and there was likely to be more activity on the stock exchange. In
1982 a government-owned investment company was the major buyer on the stock
market.

     The government-controlled financial markets have channeled funds
exclusively to state corporations and to pribumi enterprises. Other
entrepreneurs were required to borrow from international banks or from the
small, mostly Chinese, private banks. In addition, the government has set up
a number of special credit programs to promote pribumi businesses. These
include the investment credit, Small Investment Credit (KIK), and Permanent
Working Capital Credit (KMKP) programs, as well as smaller credit
facilities designed to promote other kinds of investment. Since their
inception in 1974, the KIK and KMKP credits have increased from less than 2
percent to almost 10 percent of the total outstanding credit issued by the
banking system, excluding loans to the government and foreign exchange tied
to development projects (see table 4, Appendix). During fiscal years (FY)
1974-80 the government approved over 1.4 million loan applications for these
programs. Many borrowers were delinquent in their repayments, however, and
some made substantial profits by the illegal practice of reloaning to Chinese
entrepreneurs at higher interest rates. In 1979 the government moved further
to reserve a large number of items on its procurement list for small-scale
pribumi enterprises, but many pribumi contractors have illegally farmed out
their business to Chinese firms.

     In a useful sociological and political analysis of the business system,
Richard Robison divides the pribumi business class into four main groups
having competing interests. The first is the traditional merchant group, made
up of small traders and manufacturers, many of whom are Muslims. Second is an
alliance of technocrats, intellectuals, and students supporting the
development of state enterprises. Third is a group of bureaucratic
capitalists, mostly from the ranks of the nation's military elite (see
Participation in the Economy, ch. 5). The bureaucratic capitalists run a
variety of businesses, including state enterprises, that are less accountable
to the public than the kind favored by the technocrats. Many of their
enterprises are managed by Chinese entrepreneurs. The fourth group is made up
of pribumi capitalists dependent upon the patronage of prominent bureaucratic
capitalists and politicians.

     These groupings are not comprehensive, and it is not possible to place
every member of the business community clearly into one category or the other.
This analytical framework nevertheless demonstrates that there can often be
competition for economic power between pribumi from different groups. The
bureaucratic capitalists have become the predominant business elites during
the Soeharto era, managing powerful enterprises, such as the National Oil and
Natural Gas Mining Company (Pertamina), the state oil company, and a host of
private companies. Their ready collaboration with Chinese partners has
provoked the ire of other pribumi groups, but their preeminent position in
national politics has made them virtually unassailable. The major exception
occurred in 1975 when the mismanagement of Pertamina caused Soeharto to
replace its director, a close military associate. In 1981 the interim
technocratic Pertamina chief was replaced by another retired military
officer with close connections to the president.

     In spite of the incentives for developing pribumi entrepreneurship,
the Chinese advantage in the economy remained evident in the 1980s. According
to a survey conducted in 1981 by an Indonesian consulting firm, 10 percent of
the shares of foreign industrial joint ventures were owned by Chinese
entrepreneurs, 13 percent by pribumi interests, 9 percent by the government,
and the rest by foreign partners. In domestic industry the government owned
the majority of shares, but the Chinese had accumulated 27 percent, compared
with only 11 percent for pribumi entrepreneurs. Data were not available for
the wholesale and retail trade industry, where Chinese interests were thought
to be most influential. Even though information from an earlier period was
unavailable for comparison, it is apparent that there has been only slow
progress for pribumi entrepreneurs. Their main institutional power base,
the Chamber of Commerce and Industry in Indonesia (Kadin), has had little
leverage against the bureaucratic capitalists and has depended on them for
favors.

     One major constraint on the development of native Indonesian
entrepreneurship was the shortage of skilled manpower. Given the planned high
rate of investment in the 1980s, the supply of scientists, engineers,
agronomists, accountants, and economists produced by the nation's
universities in 1979 would be less than one-third of the estimated
requirements. Indonesia especially lacked skilled graduates at the
secondary level. Ambitious government plans to expand vocational education,
both in school and on the job, would therefore be a major prerequisite to
the development of pribumi entrepreneurship in the future (see Education, ch.
2). In 1981 the government extended tax breaks to foreign firms that provided
on-the-job training to pribumi workers.