Dave Morrison sits on top of an estimated $800 million in gold but can't get his hands on any of it. The 42-year-old Australian engineer went to the tropical island of Sulawesi in Indonesia's east five years ago to open a gold mine on a palm-studded hillock outside the provincial capital, Manado. He has yet to overturn one shovel of ore. A half-built processing plant sits idly alongside a dirt track. Among the only signs of activity to be spotted are in the picturesque bay nearby, where fishermen paddle wooden canoes. The mine's operator, Perth-based Archipelago Resources, has faced delays because of a political battle that has raged from the villages outside the mine's gate to the ministries of the Indonesian capital of Jakarta. So Morrison, the project's chief operating officer, waits with as much patience as he can muster. "It is literally a gold mine," Morrison says, but "that doesn't stop social and political issues from coming up. That's Indonesia."
The story of Morrison's buried treasure and the reasons why he can't get it out of the ground says a lot about the current state of Indonesia, the world's fourth most populous country. On one level, it is actually a good-news tale of the vibrancy of the nation's democracy and the growing power of its citizens just 10 years after the fall of the dictator Suharto. (See photos of Suharto's Indonesia here). On another level, however, it is a story that explains why Indonesia has slipped in status from roaring economic tiger to chronic underachiever. Considering the country's population of 225 million, its large consumer market and the abundance of natural resources, Indonesia ought to be a rising Asian powerhouse, mentioned in the same breath as China and India. But its economic-development policies are vague and scattershot; a devolution of political power from the central government to the provinces has created an unpredictable business environment rife with corruption, competing interests and confusing regulations. This not only thwarts the plans of would-be investors like Archipelago Resources but also tends to hold back ordinary Indonesians, who can do little but look with envy upon the upwardly mobile residents of Beijing and Bangalore. The percentage of Indonesia's population living below the poverty line in 1996 was 17.1%, according to the government. There was little improvement by July 2008, when 15.4% of the population lived in poverty. "Indonesia's potential is there," says Luiz de Mello, an economist at the Organization for Economic Cooperation and Development (OECD) in Paris, "but they don't deliver on it."
In fact, it was once Indonesia that showed Asia the way out of the poorhouse. In 1980, when Deng Xiaoping was first nudging China toward the free market, Indonesia's per capita GDP was more than double China's. Throughout the 1980s and early 1990s, Indonesia's fast-growing manufacturing sector was a magnet for foreign investment, and rural development schemes were so successful that the nation became self-sufficient in rice for the first time. The government even had ambitions to build commercial jets and cars. But since the 1997 Asian financial crisis, Indonesia has been virtually marching in place while its neighbors hit their strides. Last year China's GDP was nearly 30% higher than Indonesia's on a per capita basis. While annual economic growth rates in China and India averaged 10.6% and 8.7% respectively over the past five years, Indonesia's has averaged 5.5%.
Indonesia's relatively sluggish performance can be traced to the fall of Suharto an autocrat who repressed political dissent but who, like other Asian strongmen of his era, was able to guide the country toward prosperity. After he was forced to step down in 1998 amid an economic meltdown, a new government set about erasing his dictatorial imprint; in 1999 an effort began to decentralize the once all-encompassing power of Jakarta, giving provinces and cities more influence over local affairs. Today, Indonesia's political system is more inclusive and remarkably stable. Some 34 political parties will participate in next year's parliamentary elections and, unlike in Thailand and the Philippines, where election results have been contested on the streets, Indonesians have peacefully accepted election results.
This democratic flowering has a downside: it has sparked seemingly endless turf warfare between Jakarta and the country's provincial and local governments. The sparring often results in conflicting regulations, uncertain lines of authority and onerous tax burdens. Contributing to this hostile environment are corruption, a capricious legal system and local suspicion of foreign companies, which are often viewed as carpetbaggers rather than investment partners. Not that Indonesia is a complete pariah to outside investors. Foreign direct investment (FDI) has increased in recent years as the economy has improved. But reform is required, economists say, if Indonesia is to become more competitive regionally and globally. China in 2007 attracted seven times more FDI than Indonesia, India almost twice as much. Indonesia "has to be at par with what its neighbors are doing," says Ifzal Ali, chief economist at the Asian Development Bank in Manila, "or foreign investment won't flow in."
Indonesia's failure to launch can be seen as all the more frustrating because the country appears to be missing out on an epic global commodities boom. The archipelago of 17,500 islands is rich in natural gas, copper, coal, gold and other sought-after resources. Yet while some sectors, like palm oil, have seen exports surge, others have stagnated despite soaring commodity prices. A dearth of investment combined with aging fields has reduced the country's once formidable oil industry to near insignificance. Production has plummeted by one third in the past eight years. There may be undiscovered oil still in the ground. But funding for exploration has been scared off by a 2001 law that created a confusing regulatory framework for the sector and imposed taxes on companies before the start of production, which effectively increased the financial risk of searching for new fields. In 1998, oil companies drilled 145 exploratory wells in Indonesia; in 2007, as oil prices soared, only 39 were sunk, according to the Center for Petroleum and Energy Economics Studies in Jakarta. Once a major oil exporter and East Asia's sole member of the Organization of Petroleum Exporting Countries (OPEC), today Indonesia can no longer meet domestic demand without imports; Jakarta this month suspended its membership in OPEC.