Why Indonesia Matters
After three decades of authoritarian rule, President Suharto has resigned amidst Indonesia’s worst political and economic upheaval in 30 years. Since the 76-year-old former general ousted President Sukarno in 1966 and was elected president in 1968, President Suharto has ruled with his own brand of crooked capitalism. Companies owned by Mr. Suharto and his family are now being reviewed for their business dealings. It was through these companies that the Suharto family amassed a fortune worth an estimated $40 billion, almost exactly the amount of the $43 billion Indonesian bailout arranged with the International Monetary Fund (IMF).
Bailout or Ruination?
What fruits resulted from the IMF’s recommendations for stabilizing Indonesia? The May 19 Wall Street Journal (WSJ) said, “The IMF has been undermining currencies and spreading confusion. It has not been fighting financial fires, but dousing them with gasoline.” Indonesia’s currency, the rupiah, has plummeted in value from about 2,500 rupiah to one U.S. dollar in August 1997, before the IMF intervention, to a low of 14,000 in early 1998, where it has virtually stagnated through the year. Analysts expect a new round of devaluation to hit the rupiah soon.
The inflation resulting from the rupiah’s fall prompted prices in Indonesia to soar overnight last May. The cost of electricity rose 60 percent, bus fares jumped 66 percent and train fares skyrocketed 100 percent, along with oil and gasoline prices leaping 71 percent. The government simultaneously cut fuel subsidies by $2 billion, hitting the poor the hardest, which sparked widespread rioting and burning. More than 500 people lost their lives, including soldiers and some of Indonesia’s much-hated wealthy Chinese merchants. Many foreign businessmen and other well-to-do residents fled Indonesia, thus weakening the economy even further.
Instead of stabilizing Indonesia, the IMF intervention, coupled with the nepotism and corruption of Suharto’s regime, has caused mass death and bloodshed, an estimated $1 billion in riot damage in the capital of Jakarta alone, untold billions of dollars of damage to the local and global economy, and now has culminated in the resignation of President Suharto. And, in all likelihood, the damage will continue to mount.
Global Tremors
Indonesia is an oil-rich group of islands stretching across Southeast Asia and Oceania. Notice what the May 18 WSJ reported: “Global commodity markets gyrated last week at the prospect of a top producer of resources such as coffee and tin shutting down; shaky Korean and Japanese banks trembled at the thought of further delays in restructuring the massive debts owed them by Indonesian companies; the Australian dollar sank to a 12-year low, and Thailand’s Finance Minister warned that the unrest in Indonesia could spark a fresh wave of selling in markets across the region. On Friday [May 15], Standard & Poor’s downgraded the credit rating on an Indonesian bond rating to triple C-plus, a rating that implies a default [or failure of the government to pay] is possible, from a more stable single B-minus.
“While the Indonesian unrest rocked global commodities markets, sending prices for resources such as coffee, tin, palm oil and gold sharply higher on worries that supply from Indonesia would be cut off…a bigger worry is that the collapse of the nation’s economic infrastructure—and the exodus of the ethnic Chinese who dominate Southeast Asia’s economies—could make shipment and financing more difficult.”
The May 11 WSJ shed more light on Indonesia’s importance to the world when it reported, “The stakes are huge, not only for Indonesia, but also for global commodity supplies…. In 1997, Indonesia was Asia’s largest producer of natural gas, the world’s second-largest producer of crude palm oil, and among the top five producers of coffee. It is also a major exporter of gold, tin, copper, cocoa and vanilla, with the world’s largest single copper and gold mine operating on the island of Irian Jaya.”
On top of the major impact to world commodity markets, a severe food shortage in Indonesia threatens world food supplies as well. The International Herald Tribune of April 4 wrote, “Self-sufficient in rice for most of the past decade, Indonesia may have to import 4 million to 5 million tons this year—more than 30 percent of the rice on the world market—at a cost of at least $1 billion. The country’s worst drought in 50 years has deepened the prospects of a severe food shortage in this nation of 200 million people.”
World Trade at Risk
The map below confirms an interesting perception presented in the May 19 WSJ, which stated, “A tanker bound for Vietnam with $1.5 million in diesel fuel disappears just outside Singaporean waters. It is found two weeks later off China’s southern coast with 12 Indonesian pirates aboard, who want to sell the fuel.
“Security and shipping experts worry that this scenario, which took place earlier this month [May 1998], may become increasingly common if Indonesia continues on its current trajectory. The possibility of the archipelago descending into worsening recession, widespread chaos or even civil war alarms military analysts and shipping executives. For good reason: The archipelago of 17,000 islands forms a lattice of sea lanes through which roughly one-third of the world’s commerce—including the oil that powers the Japanese, Korean and, to a lesser extent, the Chinese economies—must pass.
“The worst-case scenario includes greater threats than attacks by cash-hungry pirates. The Indonesian island of Sumatra forms one side of the Malacca Straits, which funnels sea traffic from Europe and the Middle East to northern Asian destinations such as China, South Korea and Japan.”
A spokesman for the Japan Shipowners Association said, “The Malacca Straits, and another narrow passage between the islands of Bali and Lombok, are a ‘life line’ that delivers about 80 percent of Japan’s oil.”
The Oil Threat
One of the distressing facts of history is that oil, or the absence thereof, can be a powerful player in the politics of war. Interrupting a country’s oil supply can have dire consequences: witness Japan prior to its entry into the Second World War. To accomplish its empire-building vision of “Greater East Asia,” in the 1930s Japan embarked upon imperialistic adventures by going to war with China. Only the United States stood between Japan and the conquest of China. After Japan signed the Three Power Treaty in September of 1940 with Nazi Germany and Fascist Italy, it became clear that America had to act to save China.
According to A History of Civilization by Arthur J. May, “Companies in the United States kept selling scrap iron and oil to Nippon [Japan], until [a U.S. presidential] order in the summer of 1941 stopped that traffic. Without supplies of oil the Japanese economy must surely have been paralyzed, and that prospect seems to have inspired the final decision to fight…. The two countries deliberated in Washington on the prevailing antagonisms…. Conversations ended abruptly on December 7, 1941, when Nipponese airmen unloosed their deadly bombs upon Pearl Harbor” (Vol. II, p. 729).
In a tense reality check for world powers, it cannot help but be noticed that the present unrest in Indonesia is once again threatening the “life line” of Asian nations: their oil supply. Is it possible that this seemingly insignificant regional unrest has the potential to turn into another globe-spanning conflict?
Indonesia is a major producer of oil, with an OPEC production quota of 1.456 million barrels per day, a large percentage of which goes to Japan. If anarchy collapses Indonesia into total chaos, you can bet that Indonesia’s flow of oil to the world will cease. Of more concern, however, is the potential disruption of oil from the Middle East brought about by control of the Indonesian shipping lanes.
Strategic Location
Admiral Joseph Prueher, commander of the U.S. Pacific Command, said this before a U.S. Senate hearing in May 1998: “In addition to having a geo-strategic location along the Malacca Straits—through which about 400 ships a week pass to go up to north Asia—[Indonesia] is the linchpin of…the Southeast Asian nations.”
Bilveer Singh, senior lecturer at the National University of Singapore, said, “In the present economic circumstances, there’s every temptation to interception [piracy] in the hope of making your millions. Oil tankers are protectionless. And if there are rogue elements from the [Indonesian] military involved, then it’s a whole different story.”
Indonesian society is in danger of completely unraveling, and that could potentially mean heavily armed “rogue elements” breaking off from the Indonesian military to threaten international shipping in the world’s busiest waterway, lying between Malaysia and Indonesia. In that event, a large portion of world trade is at risk. In fact, over half of all international shipping travels through Indonesian waters. U.S. warships in the Pacific even needed permission to cross Indonesian waters to get to the Persian Gulf.
Add to that the fact that Indonesia is the world’s largest Islamic country and the fourth most populated nation.
Islam: A Key Factor
After 30 years of relative peace and stability under Suharto, and in spite of the appointment of another president and promised new elections within a year, Indonesia is still floundering in an abyss of economic disaster, chaos and social unrest. In Suharto’s absence and newly appointed President B.J. Habibie’s perceived weakness, power-grabbing in Indonesia is the name of the game, and radical Islam may be closing in for a slam dunk!
The Economist of May 16 clearly explained the situation: “Indonesia is the world’s biggest Muslim nation, but Islam came to its shores through commerce, not conquest, and has flourished largely because it has accommodated itself to local customs in all their diversity. The Islam professed by most Indonesians is a gentle and undogmatic faith that could happily find its place beside a secular, democratic form of government. Perhaps it still can, but upheavals such as the present one are likely to play into the hands of the ever-more vociferous Islamic militants….”
Since its independence in 1945, Indonesia has had only one change in leadership: when Suharto wrested control from President Sukarno. That upheaval in 1965 and 1966 claimed as many as 500,000 lives. “The question now,” the May 19 WSJ asks, “is whether the anti-Suharto movement, sparked by the discontent caused by the country’s economic crisis, will trigger a similar convulsion…. The stage is set for a sharp new political confrontation in Indonesia.”
Time magazine of May 25 soberly stated, “It is a sad testament to the nature of power in Indonesia that the country must again be brought to the brink of disaster before leadership can be transferred.”
Even after Suharto’s resignation, enormous forces of anarchy, especially radical Islam, remain active in the streets of Indonesia, only awaiting a spark to re-ignite them. As witnessed in the mid-1960s, Indonesian-style violence can be devastatingly destructive when it occurs. If Islamic fundamentalists succeed in stirring up more trouble in Indonesia, the present volatility may lead to a global conflagration.
Enter the King of the South?
Social unrest of the kind recently incited in Indonesia can quickly lead to a change-over in leadership. The unseating of Suharto may well have been only the first step in eventually empowering a leader steeped in Islamic fundamentalism. Time will tell if, in the absence of Suharto, a close relationship forms between Indonesian leaders and Islamic militants. If it does, the world could be in for real trouble! (see sidebar, “King of the South,” p.23).
Indonesia is like a ripe plum, just waiting to be picked and added to the radical Islamic camp. The economic problems and social unrest are the perfect vehicle to vault a new leader into power. The same thing happened to Germany in the 1930s. Hitler came to power through promises of social and economic reform. Germany of the 1930s and Indonesia of the 1990s have many parallels: high unemployment, a vastly devalued currency and violent social unrest aimed at wealthy minorities, to name a few.
In the case of the king of the south, oil and water do mix: meaning, in part, control of the Indonesian waterways through which perhaps one-half of the world’s commerce flows, and especially meaning the flow of Middle East oil through those perilous waters! Surely, Indonesia must have the cross-hairs of radical Islam aimed squarely at it!
Watch Indonesia and the world of radical Islam! Great change is on the horizon!
