Esther Indayani Yusuf was still shuddering on Sept. 2 as she told of an encounter at her law office on the outskirts of Jakarta. Two days earlier, a truckload of machete-wielding militants calling themselves the Commandos Against Communism showed up and vowed to burn down Yusuf's office and murder her and her staff if they didn't move out. "I have Muslim fundamentalist blood in my veins," said the leader. "It would be no problem to kill you." Two weeks later, Yusuf returned from an overseas trip. She found that her building had been burned down by arsonists.
The act, Yusuf suspects, has more to do with politics than religion. She is one of 6 million ethnic Chinese in Indonesia, and her staff has been investigating atrocities against her community. The threat came soon after she started probing a mass grave in Luweng, Central Java, that dated to 1965, when the army slaughtered hundreds of thousands of Chinese-Indonesians who they suspected were communists. She believes the militants were summoned by military officers.
SOWING CHAOS. Two years ago, stories like Yusuf's were chillingly common in Indonesia. After the fall of Suharto in May, 1998, goon squads backed by army officers loyal to the former dictator orchestrated a wave of violence against Indonesian Chinese, who have traditionally dominated the economy but make up just 3% of the population. The terror, apparently intended to sow chaos that would lead to Suharto's return, included gang rapes and the torching of Chinese-owned businesses and homes. It was a tragedy not only for that minority but also for the economy: By the time the riots abated, thousands of professionals--from factory managers and bankers to doctors--fled the country, taking billions of dollars with them.
Economically and psychologically, Indonesia still has not recovered. Although Indonesia should grow about 4% this year, that's a small bounce considering the 13% contraction since 1997. To employ the 36 million who lack a steady job and the millions who enter the workforce each year, economists figure Indonesia needs to expand at a 10% clip.
It's hard to imagine that Indonesia can achieve that without convincing the Chinese--whether they be small merchants or tycoons who once controlled multibillion-dollar conglomerates--that it's safe for them to return with their money. Government efforts to replace them with indigenous Muslims, known as pribumis, have flopped. The Chinese ran most of the country's 220 banks and virtually all major corporations. Investor confidence disappeared with them in industries from cellular telecommunications to rice trading. The ethnic Chinese owned most village general stores and sold on credit to farmers. So their departure brought the rural economy to a halt. And since the Chinese business class was Indonesia's bridge to overseas corporations and portfolio managers, it also will be difficult to lure new foreign investment.
Yet, disturbingly, the terror continues--even though Indonesia now is a democracy that seemingly has taken heroic strides to eradicate Suharto's legacy of oppression and corruption. Some of the same women who were raped in gang attacks during the May, 1998, riots have recently been threatened by anonymous phone callers not to testify in court against Indonesian soldiers. Many small businesspeople who lost everything two years ago are now hiding in Jakarta, where the Chinese community is periodically threatened with "extinction" in leaflets. Businesses, homes, and offices belonging to Chinese get regular visits from plainclothes paramilitary thugs.
Since taking office a year ago, the response of President Wahid's government has been feeble. During a recent visit to New York, Economic Affairs Coordinating Minister Rizal Ramli insisted that the climate for ethnic Chinese right now is "very positive," and attributed attacks to the general wave of violence waged by "rogue" military factions trying to disrupt the corruption trial of Suharto, which has included bombings of the Jakarta Stock Exchange and the Attorney General's Office. Indeed, Wahid has publicly decried harassment against ethnic Chinese, and he included several prominent Chinese in his first cabinet. Early this year, senior officials even discussed offering a financial amnesty of sorts for the wealthiest Chinese-Indonesian tycoons. The idea: If they admit to embezzlement and return money kept offshore, they could avoid prosecution.
But for many ethnic Chinese, the fear and mistrust run too deep. While pro-Suharto officers are part of the problem, they see a much broader pattern of anti-Chinese sentiment. For one thing, public resentment of their immense economic power remains high. Many of the minority's most prominent tycoons, such as the Salim and Riady families, profited enormously from Suharto. There's little sympathy when the government moves to strip assets from such Suharto cronies as Mohamad "Bob" Hasan, who was arraigned on Sept. 20 on charges of defrauding the government and forestry industry of $240 million.
TEFLON MAGNATES. The idea of transferring the nation's wealth to indigenous pribumis has growing appeal. In 1975, Malaysia forbade ethnic Chinese-controlled companies from expanding or going public unless native Malays owned at least 30%. Observers contend it's no coincidence that while Jakarta has prosecuted ethnic Chinese tycoons and dismantled their debt-laden empires since the 1997 crash, it has taken no serious action against pribumi magnates who also grew rich under Suharto. "All these Indonesians are getting off scot-free," complains Hartojo Wignjowijoto, a Javanese economist who is close to the current government.
Religious factions also come into play. Some hard-line Islamic clerics publicly implicated in the violence by Wahid also are linked to influential opposition politicians. One prominent Islamic intellectual, Adi Sasono, calls for the formation of a "people's economy." Sasono insists his only agenda is "to reduce the degree of social tension." But ethnic Chinese businesspeople view it as a call to strip away their assets.
The trouble is, there is still no way to fill the hole left in Indonesia's economy by the Chinese. Estimates of damage vary wildly. The Indonesian immigration department's claim that $100 billion left the country in May, 1998, is no doubt inflated. But leaders of the Chinese-Indonesian expatriate communities in the U.S. and Australia estimate that 10,000 men emigrated with their families and life savings in 1998. They say that half of them return to Jakarta often for short visits to try to salvage what remains of their businesses. Says David Cohen, senior economist at Standard & Poor's Money Market Services in Singapore: "The fact that the business community fled in terror is a structural problem in the economy."
The impact on the economy is most immediately visible in the Javanese countryside. For generations, ethnic Chinese have served as village bankers, propping up the economy at its most basic level. Squatting on rice sacks with scales dangling from the ceiling, they sold to all the local farmers on credit--and knew how much each farmer was worth based on his usual harvest.
But the rural credit system collapsed in early 1998, when army-linked Islamic militants led mobs on an ethnic-cleansing rampage--burning, looting, and pillaging Chinese-Indonesian homes and stores. In July, 1998, BUSINESS WEEK interviewed Veronica Suryati Tanujaya, a shopkeeper from Jatiwangi, 10 hours by train from Jakarta. Tanujaya's neighbors torched her shop, chanting "Chinese pigs" while she, her husband, and 9-year-old son were trapped inside. They escaped by jumping out a rear window into a river below.
Tanujaya now lives on the outskirts of Jakarta, where she has built up a small catering business with a loan from a friend and has given birth to a second child. Tanujaya occasionally visits Jatiwangi to try to sell her scorched plot of land. Her former neighbors gather around and ask her to come back and rebuild her store. They complain that Jatiwangi has become a "dead town" without any ethnic Chinese shopkeepers selling on credit. But she won't allow herself to forget that they tried to burn her and her family alive and tells them she'll never return. "I lost everything, and they hurt everybody," she says.
Perhaps the most severe damage done to the rural economy occurred in Solo, the agricultural commodities distribution center of Central Java. In a week of rioting in May, 1998, traders say, 90% of the warehouse district was razed and looted, and several ethnic Chinese women were raped. Many traders refused to take the risk of rebuilding and restocking until the end of 1999. Now, they're operating at less than half capacity. That's hurting trade across Java, where 60% of Indonesia's 220 million people live, because Solo serves as an overland entrepot between the seaports of Jakarta and Surabaya. Tio Lie Hwa, a trader from Solo who stayed in her house for a month after hearing about the rapes, says she has rebuilt and restocked only two of the five dried-fish warehouses she owns.
SOFT LOANS. The central government's plan to put pribumis in charge of the sector has been a fiasco. Islamic activist Sasono, who was appointed Minister of Cooperatives by then President B.J. Habibie, saw the destruction of Solo's warehouse district as an opening to replace the Chinese, who handled 70% of the commodities trade until the riots. In October, 1998, Sasono initiated the Indonesian Cooperative Distribution program, under which $18 million in soft loans went to new companies run by pribumis. But it didn't work. "They were not businesspeople. They were bureaucrats. They didn't have connections," says Gunawan Tjokrosetio, vice-president of PT Hasil Kasih, a Solo-based trading company that dealt with the pribumis.
Instead of repaying their loans, they bought refrigerators, TVs, and other luxuries for their personal use, Tjokrosetio recalls. Unable to fill orders for rice, sugar, and other foods, the pribumis paid ethnic Chinese distributors to do it for them. Sasono admits to some abuses, but insists the program was a success--and denies it was anti-Chinese. "The goal was to create a level playing field for everybody to exist in the free market," he says.
The purge also is hurting recovery of manufacturing. Factories run by ethnic Chinese have trouble finding customers because foreigners worry the facilities will be attacked by mobs. For example, Mulia Industrindo, which makes sheet glass and ceramic tiles, saw its main market in Asia collapse during the 1997 crash. Negotiators for Mulia Industrindo say the company marketed its products aggressively in Europe and the U.S., winning enough orders to stay in business. But when buyers heard of the riots, they canceled orders. Although Mulia's factory wasn't torched, its sales dropped 60% in dollar terms. And it can't make payments on its $225 million in bonds. The same goes for textile mills in Solo. They are just getting back into operation but are finding slack demand at the garment factories they supply in the Jakarta area: Overseas buyers fear more riots could delay their orders. Although non-oil exports rose 24% in the last quarter, that was from a low 1999 base. Manufacturing is still in the doldrums.
Intimidation of Chinese-Indonesians is also preventing the government from cleaning up the banking sector, where 40% of all outstanding loans are still nonperforming. Since the government's Indonesian Bank Restructuring Agency (IBRA) nationalized 13 banks and froze the operations of 48 others, the agency has tried to fill a $6 billion gap in the national budget this year by selling seized assets. But foreign investors are wary. "Even if they offered us the best asset they had, we wouldn't trust the government enough to sign a contract with them," says a banker in Singapore. It doesn't help that most of the banks' former controlling shareholders have fled the country, and that IBRA must negotiate with their layers of clerks.
Even Jakarta's plans to lure foreign investors into the telecom industry could be endangered. After the government announced in late August it was pushing ahead with privatization, several delegations of suitors visited. They also looked at 11 cellular-telephone licenses that are up for sale by inactive operators. But their interest dampened when they heard that 95% of all cellular handsets sold in Indonesia pass through ethnic Chinese-owned companies. One Western telecom executive says reports of continued anti-Chinese violence will be a factor in deciding whether or not to invest in Indonesia.
One reason foreign investors are loath to deal with the government is that they get their information from Chinese who have left the country. Their advice is usually to stay away. "If the government wants the Indonesian economy to recover, they'll need to reattract this pool of talent that has run away," says Christianto Wibisono, a Chinese-Indonesian political scientist who moved to Washington after a pribumi mob burned down his daughter's house in Jakarta.
The Indonesian government denies the Chinese have any reason to fear being in Indonesia. Defense & Security Coordinating Minister Bambang Yudhoyono insists that the army and police protect all races "without discrimination." As a gesture of good faith, the government has repealed a ban on using Chinese language in public and stopped issuing special ID numbers to ethnic Chinese citizens that were once used to establish quotas for the national university entrance examinations. It also lifted a ban on performances of Chinese dragon dance, and issued licenses to four new Chinese-language newspapers.
The Chinese are not convinced. A few who returned after fleeing two years ago say they're ready to jump at the first sign of another riot. Jonathan, a wiry, spike-haired 22-year-old who didn't want his surname used, returned from New Zealand in March to run his parents' consumer-electronics trading business after his father fled to Borneo and his mother flew to the U.S. to apply for a green card. But now he finds himself fleeing his shop in the Harco shopping mall every time a crowd of pribumis gathers at the front door chanting "Chinese pigs." He tried emigrating to New Zealand but was rejected. Says Tjhia, an ethnic Chinese tailor whose store was ransacked two years ago: "The next riot could be even worse than the one in May, 1998. Indonesia is the Wild, Wild West. There's no law enforcement."
SCORCHED EARTH. Some Chinese-Indonesians are trying to get back into business. Among the pioneers are shopkeepers who are just starting to return to their charred vacant lots in West Java. They are responding to a call from farmers who complain that they don't earn enough from their crops to pay cash for fertilizer, much less food for their families. "I have to buy from the Chinese," says Ace, a watermelon and rice farmer in the village of Kuta Gandeg, population 4,000, in West Java. "The pribumi stores don't sell on credit."
For now, Ace buys on credit from Budi Nugraha, the only ethnic Chinese shopkeeper in Kuta Gandeg. Nugraha survived by converting to Islam and making the pilgrimage to Mecca in 1998, when much of West Java was in flames. But even Nugraha's quest to survive is not a sure bet. "I can only hope the farmers have a good harvest. If they don't pay, there's nothing I can do," he says. That could be why it takes 15 minutes for Nugraha to come out to the front of his shop when a customer walks in the door. To hear his pribumi security guard tell it, he's praying.