The aim of this book is to provide an economic analysis of the performance of and policy towards the vital interisland shipping industry since Indonesia's Independence. It represents the fruits of research which began in 1973 when I became a Ph.D. student at the Australian National University with the opportunity to carry out fieldwork in Indonesia, Singapore and the Netherlands. After the thesis had been submitted I obtained a somewhat different perspective as a consultant to the World Bank. Since then I have tried to keep in touch with recent developments on periodic visits to Indonesia. The advantage of this long gestation period is that my original approach and hypotheses have had to stand the test of time. I believe that analysis of the often conflicting forces of competition and regulation still provides rich insight into the industry's continuing poor performance. While circumstances have certainly changed over the past decade, in many respects it is the case that plus ca change plus c'est la meme chose. Consultants' reports are typically ephemeral because they ignore the continuity arising from this historical dimension.

We all have our tools of trade and mine are unashamedly those of the economist. To self-styled “practical men”, economic analysis often seems “too theoretical” and the deregulatory policy implications “too impractical” or “politically unacceptable”. As has been said of History, however, so also of Economics: we ignore it at our peril. As the interisland shipping industry shows all too clearly, economic forces have an annoying tendency of asserting themselves one way or another and thwarting even the best-intentioned of regulations, By the time this happens, however, foreign advisers or bureaucrats have often moved on to greener pastures. For want of analysing the causes of the failure of past policies, their successors then often proceed to make very similar mistakes. Nevertheless, it is essential not to be too pure an economist. Through regulation and personal connections, “political” forces must also be taken into account.

On Independence the new Indonesian Government did not begin with a clean slate. In the case of interisland shipping the old slate was actually re-endorsed. Under the Round Table Agreements the new government had to concede, as a condition of Independence, the continued rights of the Dutch flag KPM which held the virtual monopoly of modern interisland shipping. Breaking that KPM monopoly thus became almost an obsession of Indonesian nationalists. The result was a protracted stalemate, not broken until the end of 1957, when an attempted nationalization threw the industry into chaos. The nature of the industry today, and the government's regulation of it, can be understood only in the light of these historical circumstances.

This chapter therefore attempts to sketch the background to the development of the industry both before and after Independence. The first section shows that, as early as 1850, a monopoly of interisland steam shipping was virtually concomitant with government contracts for the subsidized carriage of passengers and mail, In 1891 the contract was taken over by the KPM. The second section considers the impact of the KPM upon the industry. The rest of the chapter deals with the evolution of government policy after Independence in three sections: Indonesianization (1949-58), Guided Economy (1958-66) and the New Order (since 1966).

PRELUDE TO THE KPM

Three events profoundly affected die pattern of shipping and trade in the Indonesian Archipelago over the course of the nineteenth century: the foundation of Singapore in 1819, the opening of the Suez Canal in 1869 and the commencement of services by the KPM in 1891.

Geographically strategic, exempt from customs duties and secure from the depredations of Dutch and Malay rulers, Singapore acted as a catalyst on long-depressed regional trade. Preoccupied with the exploitation of Java through the Cultivation System, the Dutch were slow to develop economic interests in the Outer Islands, where, in the mid-1830s, there were still only fifteen Dutch settlements.

Changing Japanese Policies on Industrial Restructuring vis-à-vis ASEAN Countries

Japanese postures on industrial restructuring and co-operation vis-à-vis ASEAN countries have undergone significant changes over the last two decades or so. The period since 1967 when ASEAN was established can be divided into three: 1967–73; 1974–77; and 1978 and thereafter.

The Years 1967–73

While there was a steady increase in Japan's official development assistance (ODA) since 1965, especially to Southeast Asian countries, Japan did not exhibit any positive postures on economic and industrial co-operation with ASEAN. The White Paper on Economic Co-operation by the Ministry of International Trade and Industry (MITI) thus stated in 1968 that “although we recognize the necessity of expanding economic co-operation through both economic aid and trade, it is impossible to increase it rapidly because it entails a large financial burden and adverse effects on domestic related industries”.

Japan's position, however, underwent a gradual change in line with the continued expansion and upgrading of the national economy. A phrase “international division of labour” appeared for the first time in the 1969 White Paper, which considered it to be fundamentally desirable that an international division of labour between Japan and Southeast Asian countries could be realized for the long-term development of the Japanese economy and Southeast Asian countries. Japan's positive view toward the international division of labour was reinforced in the 1970s. The 1970 and 1971 White Papers were sub-titled respectively as “The Necessity for International Division of Labour” and “Promotion of Rational Division of Labour”.

The Years 1974–77

The energy crisis in October 1973 had a significant impact and revelation on the Japanese posture on an international division of labour. Japan was one of the industrial countries most adversely affected by the energy crisis. The rapidly increasing Japanese direct investment overseas since 1972 especially in developing countries therefore reflected a growing concern with the secure supply of energy and other natural resources for domestic industries.

Corporate Responses to Industrial Restructuring at Home and Abroad

All business corporations, in order to survive and expand in competitive markets, have to adjust their strategies and policies constantly to changes, both internal and external to themselves. Among the major internal factors changing perceptibly in recent years in Japanese corporations are the composition, mentality, attitude, and work ethics of the work-force; labour-management relations; and the composition and business concerns/priorities of major shareholders. Concrete examples of these are found in the ageing and an increasing female participation, particularly married women, in the labour force; a weakening in the bargaining power; and an increasingly defensive posture of labour unions vis-à-vis corporate management. There has also been a growing dominance of institutional and corporate ownership of equity shares that has had a significant impact on the priorities of top management in running corporations.

Among the major external factors that have confronted Japanese business corporations with conspicuous changes in recent years are the level, diversity, and cost of new technologies available; the level of per capita income and the patterns of income distribution; the consumer preferences and spending patterns; the intensity of factor and product market competition at home and abroad; the range and direction of foreign exchange rate fluctuations; and government economic policies affecting the domestic and overseas markets.

Since nearly all the internal changes can be managed within the guidelines of corporate policies on personnel management, industrial relations, and financing, it is those changes due to major external factors to which business corporations would have to respond most effectively, in order to survive and expand in competitive markets. Particularly relevant among such external factors arc product market competition and governmental competition policies, since these determine the rates of economic growth, technological innovation, and productivity improvement as well as income distribution, which in turn affect most significantly the process of industrial restructuring.

Indonesia has a strong commitment to the automotive industry complementation as indicated by the activities of the Association of Automobile Sole Agents and Assemblers (GAAKINDO). The latter convened the ASEAN Automotive Federation (AAF) in 1976. GAAKINDO was subsequently renamed the Automotive Federation of Indonesia or Federasi Otomotif. Members of this federation have explored other problems to upgrade the viability of ASEAN automotive industries, such as through “software complementation” and “strategic planning”. The Indonesian Government has also assisted the private sector in promoting co-operation in the automotive industry in ASEAN and to identify the problems that have emerged and their possible solutions. Although i t is recognized that each country would like to produce its own vehicle, Indonesia has agreed to make use of the components now available in the ASEAN countries instead of importing from the principals in other countries. While Indonesian's aim is to have a national vehicle by 1987 it will still export parts for the complementation and purchase parts from ASEAN members for the other vehicles that are produced in the country.

This section tries to show how decisions have been made in Indonesia for the automotive industry complementation in ASEAN and how its industry has been affected by the decisions.

In Indonesia, the government and the private automotive associations have been the two sectors which make decisons for the automotive complementation. From the start of the complementation project, the government has been the leading sector because of its pervasive role in the Indonesian economy. The government has laid out general policies for the various economic sectors to follow, and in particular, as far as the automotive industry is concerned, the official policy is to start producing the automotive engine in 1983 and to finally produce all the parts for the whole vehicle by 1987. However, it is the automotive parts producers who must attend to the problem of how to phase their business to fit in with the objectives of the government.

As an archipelago, Indonesia is dependent upon shipping for much of its internal trade. Just how geographically fragmented the country is can readily be appreciated from the map. Population, however, is not evenly distributed. Two-thirds of the population is concentrated in the small but amazingly fertile islands of Java and Bali. Of the remaining third of the population which is located in the Outer Islands, the large proportion is accounted for by Sumatra. Eastern Indonesia, which encompasses about half the country's total area of land and sea, contains barely 10 per cent of the total population. This distribution of population is reflected in the pattern of interisland trade. Most of the food production and manufacturing is located on Java, and the largest proportion of interisland trade flows between Java and Sumatra.

Because Java is overpopulated relative to its resource base while the Outer Islands are under populated, substantial real income gains could be expected to accrue from interisland specialization and trade. An efficient interisland shipping industry is essential, however, if those gains are to be realized. Any margin of inefficiency in the cost of providing shipping services resembles an interisland tariff over and above the natural level of protection involved in providing transport services at some unavoidable minimum cost. Such inefficiency frustrates economic integration and the economy sacrifices both current and future real income from interisland trade forgone.

In the late colonial period a very efficient and extensive network of interisiand shipping services was provided by a private Dutch company known familiarly as the KPM (Koninklijke Paketvaart Maatschappij or Royal Packet Company). By establishing a firm monopoly of the whole interisland network, apart from a few lines to Singapore, the KPM was able to use profits from the main trunk lines to cross-subsidize regular scheduled services to even the most remote corners of the Archipelago. By through-shipment arrangements, these interisland services were linked with deepsea lines to all parts of the world.

Changes in Industrial Policy

Japanese industrial policy has undergone a major change since the energy crisis in 1973/74. The basic feature of the change is the shift of emphasis from “forward looking” industrial policies to strengthen the international competitiveness of basic industries to the “management-of-market-failure” industrial policies which became necessary with the increase in the number of depressed industries. The former policies tried to set the framework for new, upcoming industries so as to accelerate the introduction of new technologies, the increase in output, and the gain in international competitiveness. The forward-looking industrial policies were designed to contribute to the improvement of the living standard of the people as well as to the acceleration of economic growth.

However, partly because of the enhanced capacity of the private sector to implement their own future industrial development strategies through increased R & D expenditure and overseas investment and partly because of such external developments as the energy crises in the 1970s and the sharp appreciation of the yen in the mid-1980s, the government has been brought under pressure to shift the focus of its industrial policies to the management of declining industries and areas.

Nevertheless, it is important to note that “forward-looking” industrial policies have never been, and probably will never be, abandoned. In fact, forward-looking policies and industrial restructuring policies have always coexisted in post-war Japan. Even before the 1973/74 energy crisis, the restructuring of the coal and textile industries had been important issues for the government, and the promotion of future high-technology industries has also been an important part of the present day government policy. However, the extent of restructuring industries after the energy crisis has been most pervasive, affecting every aspect of social and economic life of the people involved as well as the industries themselves. The main thrust of industrial policies has therefore been directed at industrial restructuring. For analytical purposes, however, it is useful to look into the government policies in the pre- and post-energy crisis periods.