As Indonesia's Coordinating Minister for Finance & Economy, Dorojatun Kuntjoro-Jakti is the third-highest ranking official in the Cabinet. With a doctorate in political economy from the University of California at Berkeley, he serves as President Megawati Sukarnoputri's economic policy czar. On Aug. 6, one day after a car bomb killed more than a dozen people and injured more than 100 others at the JW Marriott Hotel in Jakarta's diplomatic enclave, BusinessWeek's Singapore Bureau Manager Michael Shari interviewed Kuntjoro-Jakti at his office in the cavernous Finance Ministry. He discussed the increasingly serious challenges to Indonesia's economy -- from the immediate threat of Islamic separatist group Jemaah Islamiyah to the long-term problem of China sucking up foreign investment for labor-intensive operations. Edited excerpts from their conversation follow:
Q: Islamic terrorists have been blamed for bomb attacks over the past three years -- on churches nationwide in December, 2000, a strip of bars and cafes in Bali in October, 2002, and the JW Marriott Hotel in Jakarta on Aug. 5. Why are these attacks becoming so frequent in Indonesia?
A:Because after [the] Bali [bombing], the government decided to really move forward to find the culprits -- and we have uncovered networks. Naturally, I don't think that we're willing to take [the attacks] just like that. We're going to do whatever it takes to retaliate. We're going to fight. Like in other parts of the world, we really have to continue until terrorism is no longer a mode of [political activity].
Q: What's your role in the war on terror?
A:I have to make sure that the police get whatever modern equipment they need. After Bali, we really moved to purchase so many things that I never imagined I would see for myself, [mostly] for surveillance. Now we have to buy new helicopters to move SWAT teams around faster. We're going to take several steps to increase security, not only in the capital city but in the major cities as well, [with] police patrols and quicker information systems, sharing of intelligence, and so on.
We're still undermanned. We have only 160,000 police for three-and-a-half time zones, 6,000 inhabited islands, and a population of 215 million. We can't [have this situation continue.] That's the reason why last year we gave the police $40 million to buy equipment.
We handled it at the Cabinet meeting yesterday [Aug. 5]. We got a report from the new police chief. And from the report, the mode [of the Marriott attack] was similar to Bali in so many ways -- it's a car bombing, and they used the perimeter despite the fact that we had really increased our vigilance.
Q: The Marriott was considered one of the hardest targets in Jakarta. Does that mean you can't prevent suicide bombings?
A:No, we're ready to do whatever it takes. We fought this kind of terrorism in the '50s, and we won. We had one of the longest-lasting Islamic rebellions in history, the Darul Islam, which started in 1948. President Sukarno managed to stop it only in 1963. It was an Algerian-type rebellion.
Q: Will the Marriott bombing have a regional impact in Southeast Asia?
A:This is really a wake-up call, an unbelievable one for Jakarta, because we have high-rise buildings like that. I think this is really going to cause security in Jakarta to be tightened. Jakarta is a cosmopolitan city like many others in Asia -- Singapore, Bangkok, Kuala Lumpur, and so on. And I think this really will be a lesson for everyone in the region. This is really new terrain that we [in Southeast Asia] have to move into -- whether we like it or not.
Q: Have you had time to think about the economic impact of the Marriott bombing on Indonesia's economy?
A:It's too early to say, but from what I've seen of the stock exchange and the exchange rate, I would say it's challenging but manageable. We have a benchmark, which was Bali. Bali resulted in a dip of about half a percentage point of our GDP [gross domestic product] growth. It was really less than a percentage point. But the problem for us was that it hit the small and medium enterprises, for example, manufacturers producing souvenirs and so on. It's really the small and medium sectors [that are hit hardest] as I see it.
Q: Are there any particular sectors of the economy that you're most worried about?
A:For me, it's tourism. When you look at the damage done to that hotel, that's really a problem. What happened in Bali was the bombing of a cafê. Now we have the facade of a hotel.
Q: You announced in late July that Indonesia planned to stop borrowing from the International Monetary Fund program. Will the impact of this attack affect that plan?
A:Well, actually, the situation on the macroeconomic side is very good -- to the extent that at the Cabinet meeting yesterday we decided to accept the general outlines of the budget plan for 2004, including the assumptions that we used. It's still embargoed, but on the 15th of this month [August], President Megawati is going to present the budget plan. It looks like, conservatively, we will be able to repay the remaining $9 billion [to the IMF].
Q: But you're counting on foreign investors to buy banks and other assets. If investors feel that it's not safe to sit down in a hotel coffee shop, won't that affect your plans?
A:No, because based on our experience after Bali, the war in Iraq, and SARS, the divestment of our state-owned enterprises and some assets of the Indonesian Bank Restructuring Agency continued. So far I have seen no problem. That didn't deter the speed of the sales. We have been able to recover 30% [of the book value of the assets sold]. Actually, for property it was more than 100%.
Q: What are the main drivers of Indonesia's economy right now?
A:It's still oil and gas, crude palm oil, and domestic consumption, which is slowing. It grew 4% for the first two quarters of this year. But the retail business is still vigorous. We continue to see expansion of the big outlets, such as Carrefour. More than 50% of our GNP [gross national product] is international trade. The problem is that we suffer, like everyone else in the world, from the effect of deflation. Prices [for commodities] are really on the soft side.
Q: Foreign investors complain that corruption is a serious problem in the Customs Dept. Those who use Indonesia as an export base don't like it because they feel they have to pay bribes to customs officials to get their orders out on time, and investors who distribute imported goods in Indonesia don't like it because they claim that cheaper smuggled goods are hard to compete with. Is this recognized as an issue?
A:Yes. By now we have already had six meetings with the Japan Club, which is a club of manufacters with a membership of more than 1,000. We have been able to solve more than half of the issues they have raised, not only in Customs but also in taxation, manpower, regional regulations, infrastructure, and so on.
But I cannot say this issue of corruption is solved, not totally. If you have smuggling going on in Indonesia, it's due to the fact that our economy is growing at 3% to 4% a year. Some even suggest that it might be higher, but I will stick to the official version. Indonesia is a growing market that's very attractive for these smuggled goods to come to.
Q: Priorities like tackling corruption are cited as the type of reform that Indonesia requires in order to bring back foreign investment. As President Megawati prepares for the presidential election next year, is there a concern that she might lose sight of the reform agenda?
A:I think the reverse is true because we're facing more than 140 million voters, and about 70% of them are below 25 years old. Now this generation has seen the spearhead of reforms since 1998. I don't think they will take easily the neglect of reform. Really, the pressure is to do more and more reform. We have been able to do political reform.
Q: What about economic reform?
A:We're already starting on reform of land ownership. Land use in Indonesia has changed dramatically in the last five years. We keep finding new gas fields, and a lot of the gestation period for industrial forestry is now over. We have planted hundreds of thousands of hectares of oil palms. What's disturbing for me personally is that we have approximately 80 million land parcels in Indonesia, but we have been able to issue certificates for only 20% of them. In Thailand, it's 90%. In the Philippines, it's 60%.
You cannot have an orderly market system combined with democracy unless you have a sense of private property anchored in a good process of certification.
Q: Why the urgency?
A:That's going to be more important as you try to broaden the tax base. We're not talking about increasing the rate. Because we have found out that [we have less maneuverability] on the expenditure side, like the reduction of subsidies -- you cannot force that all the time -- we really have to move toward the revenue side. We set up an office for big taxpayers in Jakarta [at the beginning of the year], and the target next year is to add 100 more big taxpayers.
Q: There's a concern that as the currency strengthens and wages rise, the country becomes less competitive. What's your game plan to compete with China, which is becoming more competitive, for foreign investment?
A:For me, the most important thing is not the strengthening of the rupiah but the reduction of inflation. In the past, inflation was strong. That's the reason why we had that pressure from labor unions [to raise minimum wages]. But now as inflation dies down, I expect that we will have less pressure because people will have more money in real terms. We have been able to reduce inflation from 13% in August, 2001, and now it's moving toward 7%. Inflation next year will be just 5%.
We have a new labor law, and now we even have a willingness among trade unions and nongovernment organizations to discuss how we can compete with this giant up north, China. But actually the long-term problem in competition with China, as we have seen, is really the exchange rate. Because China still pegs the yuan -- this is the complaint of everyone -- while we have a floating exchange rate.
Q: Is your strategy simply to wait for China to budge on its monetary policy?
A:No. I think wages are going to increase on their side. I don't think they can control that. That's our experience.