INTRODUCTION

With regional autonomy now established in Indonesia, the implications of decentralisation for conservation of the land and water resources that are essential for human survival are frequently overlooked. This is particularly so in Java, where there is an urgent need to preserve the environment in such a way as to ensure a sustainable habitat for almost 60 per cent of the country's population. With some 130 million people living in Java in 2004 by comparison with 76 million in 1971, the prediction made by prominent economist Sumitro Djojohadikusumo more than a quarter of a century ago that Java would become an ‘island city’ is approaching reality (Djojohadikusumo 1977: 102). As pressure on sources of livelihood in the agricultural sector increases and more land is needed every year for expansion in housing and infrastructure in urban and rural areas alike, the rate of environmental deterioration is accelerating. To these factors can be added the demands of city residents for recreational facilities outside urban areas and the relatively recent efforts by local governments to derive more revenue from sources within their own administrative districts.

As human activities expand and intensify, environmental conservation becomes a question of appropriate decisions in situations where several land use options exist and the interests of quite different groups of people are involved. While environmental problems exist throughout Java (Hardjono 1994), they are particularly evident in the province of West Java, where there are extensive uplands and where plantation agriculture still plays a role in land use systems.

INTRODUCTION

Decentralisation has changed the fiscal relationship between the centre and the regions, a relationship in which natural resource revenue-sharing plays a significant role. Resource-rich regions are now receiving a fairer share of the revenue generated by their natural resources, fulfilling a longstanding demand of those regions.

However, three years after decentralisation, there are concerns about how the present arrangements for sharing natural resource revenue are affecting interregional fiscal disparity. I approach this question by comparing fiscal disparity across regions before and after decentralisation, taking into account all sources of regional revenue, not just natural resource revenue. A related issue is how the present arrangements are affecting regional development in the resource-producing and non-producing regions. Although it is too early to reach firm conclusions at this stage, some differences in regional expenditure patterns are emerging between the two types of regions. A final issue is whether the current share of natural resource revenue given to the producing regions is fair and appropriate. I consider whether a greater share would be warranted given the existing fiscal relationship between the centre and the regions and the varying fiscal conditions of the regions.

In addressing the above issues, I try to shed light on whether Indonesia has the balance right in its approach to natural resource revenue-sharing, and identify the issues that warrant immediate attention. The discussion is preceded by an examination of how decentralisation has changed the role of natural resource revenue in central and regional budgets.

Introduction

Although the Philippines achieved independence in 1946, it was the growth of regionalism in Southeast Asia in the 1960s and 1970s that prompted New Zealand to develop closer relations with Manila. As the war in Vietnam drew to a close, nations in and outside Southeast Asia began seeking alternatives to the military alliances remaining from earlier wars, including alternatives to the South-East Asian Treaty Organization (SEATO) created under the Manila Pact in 1954. There was also a perceived need to draw Japan away from its post-WWII isolation and to engage it peacefully in the economic and regional development of Southeast Asia. Thus SEATO, ECAFE (Economic Commission for Asia and Far East), and the Colombo Plan were augmented by new regional and intra-regional organizations. From 1966 to 1973 ASPAC (the Asian and Pacific Council) brought together Japan, (South) Korea, China (“Nationalist”), (South) Vietnam, Malaysia, Singapore, Thailand, the Philippines, New Zealand, and Australia, with Laos as an observer. In parallel a host of smaller organizations were begun to develop intraregional habits of consultation and cooperation.

The Association of Southeast Asian Nations (ASEAN) followed in 1967, with Indonesia, Malaysia, Singapore, Thailand, and the Philippines seeking to develop cooperation within the region, not in security and defence, but rather on economic progress, political stability, and regional issues. As New Zealand sought to develop an enduring relationship with ASEAN, it was increasingly anomalous that New Zealand had a resident embassy, available for day by day consultations at a working level, in the other four ASEAN capitals, but not in Manila.

Frequent visits to Manila were made by New Zealand ministers and officials to attend international and regional meetings as Manila became a conference centre of the region. This made the absence of a resident embassy all the more conspicuous. Moreover from 1970 onwards, the Philippines began buying 5 per cent of all New Zealand's dairy exports — a significant amount of trade for the New Zealand economy at the time as it was narrowly based in terms of export markets and commodities. When the New Zealand Dairy Board added its considerable weight to the political and security concerns of the then New Zealand Department of External Affairs to take a more pro-active part in regional affairs, a momentum developed to strengthen the bilateral relationship tangibly through full diplomatic representation.

Introduction

Myanmar gained its independence from colonial rule in 1948. After a brief period of parliamentary democracy, the armed forces took control of the country in 1962, setting up a one-party state under military control. When this system threatened to collapse under popular pressure in 1988, the military reasserted direct control. The new regime, the State Law and Order Restoration Council (SLORC), annulled an election process in 1990 that was to instigate a new democratic constitution. Myanmar was accepted as a member of the Association of Southeast Asian Nations (ASEAN) in July 1997. Today, Myanmar has a population of about 50 million, in a country approximately 2.5 times the size of New Zealand in land area. Ethnic Burmans account for around 65 per cent of the population with minority ethnic groups including Karen, Shan, Kayin, Chin, Rhakine, Kaya, Mon, and Arakan.

On 6 May 2002 the opposition and pro-democracy leader, Aung San Suu Kyi, was freed by the State Peace and Development Council (SPDC — there was a name change from the SLORC in 1997), the military rulers of Myanmar, after nineteen months of house arrest. The release of this Nobel Peace Prize winner, in and out of house arrest since 1989, was greeted by overwhelming relief by the international media. Press reports noted her “fragile femininity” and “steely determination”, how she was “delicate and serene”, and, again, how her “femininity” belied her “extraordinary determination”. While the media were effusive and curiously personalizing in their observations, New Zealand's Minister of Foreign Affairs, Phil Goff, was more restrained. He welcomed Suu Kyi's release, describing her as a “champion of democracy”, and called on the State Peace and Development Council (SPDC) to release other political prisoners. Goff also noted that if “her release proves to be unconditional, and provided positive change continues in Myanmar, New Zealand will look at joining international efforts to assist the people of Myanmar and support economic and political progress”.

Goff was not, however, explicit as to what those international efforts were and this is central to understanding New Zealand's relationship with Myanmar. An editorial in the Dominion argued that “there is room to ease sanctions if the steps toward democracy continue”.

It is often assumed that an abundance of natural resources such as oil and gas will increase the potential for success of the development process in developing countries. However, the experience of Indonesia over the past five decades does not support such an assumption – indeed, many would argue that the reverse has occurred (Karl 1997; Ross 1999; Sangkoyo 2003). Hence the main questions posed in this chapter are as follows. First, why is Indonesia still a poor country despite its abundance of natural resources? Second, what has happened to the revenues generated from oil and gas – in particular, to what extent have they been used for development? And third, why have the majority of Indonesians not been able to enjoy a trickle-down effect from the revenues generated by Indonesia's vast oil and gas reserves?

In answering the above questions, this chapter describes the politics of oil and gas extraction in Indonesia, as well as the politics of development strategy. Attention is focused on the state oil company, Pertamina, as the main institution responsible for the oil and gas industry, as well as on former President Soeharto, his cronies and the military, who were the dominant players in Indonesian politics during the New Order period.

The fall of President Soeharto provided the impetus for the transformation from an authoritarian society to a more democratic one in Indonesia, and for the move from a highly centralised towards a much more decentralised system of government. These transformations offered the prospect that Indonesia would be able to manage its natural resources better, and achieve a long-term development path that embraced both resource sustainability and equity.

Thus far, however, the radical changes that have taken place in Indonesia have created an environment of political uncertainty, inconsistent laws and regulations, weak law enforcement, a weak governmental system and insecurity of land tenure. The immediate effects have been to increase the number of conflicts between various levels of government, local communities and companies carrying out natural resource extraction activities, increase the level of corruption in local areas, and increase the number of local taxes and local natural resource extraction licences. The management of natural resources in the country may not have worsened, but neither has it improved.

BACKGROUND

Indonesia is a massive archipelago stretching between the Indian and Pacific oceans and linking the continents of Asia and Australia. It is a diversified country both in terms of its population and in terms of its natural resources. In 2004 Indonesia had a population of approximately 230 million consisting of around 350 ethnic groups. Most of these groups have their own language and customary (adat) laws, regulations and norms. The two largest ethnic groups are the Javanese (45 per cent of the population) and the Sundanese (14 per cent). The population is growing at an annual rate of about 1.5 per cent.

Introduction

During the course of the twentieth century New Zealand's defence relationship with Southeast Asia varied considerably in form and importance. From a situation of being virtually ignored, the region moved for a time to the centre of New Zealand's defence effort before again becoming relatively insignificant. Both perceptions and realities depended on a colonial status shared at first by both New Zealand and most territories of the region and from which they all eventually moved to independence.

For the first half of the century Southeast Asia, so far as New Zealand gave it any attention at all, was a means to an end. New Zealanders perceived the region through the lens of imperial security. The various territories, mainly under the sway of Western powers, aroused no sense of threat. Nonetheless Southeast Asia came to occupy a key position in New Zealand defence preparations. It did so because of its importance to imperial strategy for the protection of Australia, New Zealand, and other British territories in the Pacific. Later, the region was seen as a barrier to the southward movement of forces potentially hostile to Australia and New Zealand, an area in which a national defence effort was demanded. Southeast Asia seemed potentially threatening because of the perceived danger that it might succumb to these forces or join them.

In the latter stages of the century New Zealand engaged with Southeast Asia in its own right. It was a very different region, composed of independent countries that emerged from the wave of decolonization that reshaped the post–World War II world. There was a change of attitude from seeing Asia as a threat — a perception of the region that was generally pessimistic and unfavourable, focusing on the poverty and susceptibility to outside influences of the local populations — to one of economic opportunity. But as the century ended the rise of Muslim extremist movements began to cause a new concern, presenting a threat that clearly could not be met merely by resort to traditional military responses.

Singapore Strategy

Southeast Asia first aroused New Zealand's security attention after World War I. The focus was narrow, for it encompassed little more than the island of Singapore at first, though eventually the security of Singapore demanded a widening of the scope of British defence planning to encompass the surrounding territories, especially on the Malayan peninsula.

INTRODUCTION

Indonesia is undergoing an unprecedented and transformative period of change. From the perspective of coastal and marine resources management in Indonesia, two very notable changes are already in effect: the introduction of laws relating to regional autonomy and the establishment of a Ministry of Marine Affairs and Fisheries. The former changed the regulatory framework for management by creating a wide range of decentralised authority. The latter elevated coastal and marine management to a new level and enables fisheries-related marine issues to be considered in an integrated manner for the first time in the history of Indonesia (Dahuri 2001). In combination, the innovations have set the stage for improved coastal and marine resources management.

The Food and Agriculture Organization has estimated that Indonesia has 6.7 million marine and freshwater fishers and dependants in 7,000 coastal villages (FAO 2000). From this perspective, the management changes outlined above have occurred against a backdrop of increased conflict and contrasting fortunes. The conflict is due to increased competition between local and outside fishers for fish stocks. It is symptomatic of the lack of effective regulatory systems to control access to fisheries stocks, and of the lack of strategic guidance to balance fisheries development with other marine resource uses such as coastal reclamation and settlement, oil and gas extraction, tourism and conservation.

I would like to acknowledge the strong support that this project has received from the New Zealand Institute of International Affairs (NZIIA), especially its former research committee chair, Bruce Brown, who played a leading role in guiding this project through. I am grateful too for the support given to this volume by the Institute's Director, Brian Lynch, and the current research committee chair, Associate Professor Rod Alley. I would also like to thank Historical Research Grants Advisory Group of the New Zealand Ministry of Foreign Affairs and Trade (MFAT), particularly its successive chairs, Ian Kennedy and James Kember, for the necessary funding for aspects of this project. Appreciation also goes to John Mills at MFAT for his efforts in locating primary archives for the authors in this volume. Thanks also go to Triena Ong, Head of the Publications Unit at the Institute of Southeast Asian Studies, for the publication of this project.

The various authors that have contributed to this volume have done so in their personal capacities. The views expressed in each chapter are the personal judgements of the authors, and, in the case of those in government employment, do not represent any official government views.

The chapters in this volume are written from New Zealand's point of view. Most chapters have made extensive use of archival files kept by the New Zealand Ministry of Foreign Affairs and Trade. Unless otherwise noted, file numbers found in the notation refer to these archives. It should be noted that MFAT has undergone several name changes over the years: Department of External Affairs, 1949 to 1969; Ministry of Foreign Affairs, 1970 to 1987; Ministry of External Relations and Trade, 1988 to 1991; and Ministry of Foreign Affairs and Trade, 1992 to the present time. All figures given in this volume are in New Zealand dollars unless otherwise stated. Some earlier figures are given in New Zealand pounds as New Zealand did not adopt the decimal currency system until 10 July 1967.

INTRODUCTION

Indonesia faces a number of important challenges both in the short run and in the longer run. The world economy is currently growing robustly but a number of uncertainties cloud the economic outlook. A strong global economy is being challenged by higher oil prices. The emergence of significant trade imbalances between East Asia and the United States will undoubtedly put pressure on economic and political relations between the major regions of global growth. At the same time as the global economy is providing short-term economic stimulus to Indonesia, there are a number of serious environmental problems that Indonesia needs to face. Key among these are depletion of natural resources, particularly the degradation of forests, and rising greenhouse gas emissions. Global policies to reduce greenhouse gas emissions will directly affect Indonesia, a major fossil fuel producer.

This chapter gives an overview of the current state of the global economy, with a focus on the three most important risks currently facing world growth: the impact of rising oil prices on the global economy, the resolution of trans-Pacific trade imbalances and, related to this, surprisingly low long-term real interest rates throughout the world. The chapter then focuses on two sets of longer-term issues currently facing Indonesia. The first concerns rising energy use, rising greenhouse emissions and the implications for Indonesia of serious global climate change policy. The second concerns the serious depletion of natural resources, particularly forests. I also suggest how we can deal with these two longer-term issues within a single framework that focuses on creating property rights and clear incentives to manage forests and greenhouse gas emissions.

INTRODUCTION

Sustainable development requires the integration of economic, social and environmental dimensions, also known as the ‘ESE triangle’ (WCED 1987; Azis and Roland-Holst 1999). Sustainability may be thought of as strong or weak. Weak sustainability requires that aggregate resources do not decline over time; strong sustainability requires that individual resources do not decline over time. In this chapter, we review the Indonesian development experience in the context of sustainable development and describe some future scenarios that would be more consistent with the goal of a balance between the economic, social and environmental dimensions of development. We focus on the interconnection between sustainable development and utilisation of natural resources.

It is generally agreed that sustainable development requires the prioritisation of resource investment rather than resource depletion. This is relatively obvious for renewable resources, but we argue that it is not reflected in Indonesia's policy record. In the case of non-renewable resources, the government apparently felt that depletion was inevitable and that therefore mining resources should simply be used as needed to support public expenditure. We develop scenarios of alternative rates of resource depletion, analyse the consequences of each and derive some policy implications.

ASSESSING PAST PERFORMANCE

Plant a stick into Indonesian soil and it will grow into a tree’ is the usual perception of Indonesia’s rich base of natural resources. Situated on the equator, Indonesia ranks near the top of the list for global flora and fauna diversity. In second for mammals (behind Brazil) and oceanic fisheries, fourth for primates fifth for birds generally, and sixth for amphibians.

The relationship between political and economic power, timber markets and the sustainability of the forests in Indonesia, after decades of relative certainty, has been in a period of change and uncertainty since 1998. This chapter reviews the domestic and international political and economic alliances that supported oligarchic power in the timber sector during the New Order period (Robison and Hadiz 2004). Oligarchy in the timber sector was part of a more general phenomenon in the Indonesian political economy – of concentrated benefits from economic growth (Winters 1996). However, the social and environmental costs of such growth have been dispersed. In the case of timber, these costs have been concentrated in the resource-rich regions of extraction in Sumatra, Kalimantan and, increasingly, eastern Indonesia.

The reformasi period since 1998 and the specific International Monetary Fund (IMF) conditionalities that dismantled the marketing power of the Indonesian Plywood Producers'Association (Apkindo) have altered longstanding relations in the timber sector. Globalisation of markets and changes in regional markets, notably the emergence of China as a key importer, further challenge the old forces. Signs of the enduring power of the old oligarchy have also emerged, however. They include the re-implementation of the log export ban, the formation of a new industry organisation, the Wood Industry Revitalisation Agency (BRIK), and the lack of resolve within the Indonesian Bank Restructuring Agency (IBRA) to use its authority over financially troubled industries to reduce excess industrial capacity in the timber sector. The persistence of the old oligarchic powers, in conjunction and competition with decentralised state forces (including the military) and market forces, both legal and illegal, poses an increasing threat to the sustainability of Indonesia's timber resources.

Introduction

In 1950, Southeast Asia was still an exotic place for New Zealanders. It was to the north of Australia and was not on either of the two major routes of passenger ships between New Zealand and the United Kingdom. It had played a role in the war against Japan, not one to be remembered with great pride since there were no major New Zealand victories but only the rapid fall of the Singapore fortress and the loss of the battleships which were at the core of the naval guarantee. Young New Zealanders had played a minor role in the land and air battles through which territory was recovered in the Pacific, but they had been overshadowed by the United States. Southeast Asia had not been central anyway. It did subsequently emerge as one of the borderlands between the opposed camps in the Cold War. Southeast Asia was therefore at mid-century on the agenda of security concerns, but it was somewhat hidden, almost disreputable.

By 2000, Southeast Asia was at the heart of an institution, the Asia Pacific Economic Co-operation (APEC) community, which was once described by a New Zealand Foreign Minister as New Zealand's most important economic relationship. (He spoke rather loosely, and probably intended to exclude genuinely multilateral institutions like the World Trade Organization.) The gloss of East Asian economic success and the participation in it of Southeast Asia, had been somewhat reduced by the Asian crisis of 1997, and the confident rhetoric of the “Pacific century” which had been so prominent a few years earlier was muted. New Zealand was engaged in continual debate about its relationship with “Asia”, and participants often looked past Southeast Asia to the giants of China, Korea, and Japan. Some even looked to the potentially emerging India which still benefited from an old habit inherited from Britain of being identified with “Asia” even though it was marginal to the concept of “Asia Pacific” which had emerged in the second half of the twentieth century. Nevertheless, there was an enormous change in the half century. New Zealand's economic relationship with Southeast Asia had changed from “insignificant” to “significant, albeit over-shadowed”.

Introduction

The bulk of the New Zealand relationship with Thailand, in the post– World War II (WWII) era, revolved around a series of concerns about security in Southeast Asia, including New Zealand's South-East Asia Treaty Organization (SEATO) commitments, the Vietnam War and Vietnam's invasion of Cambodia. The relationship waxed and waned over the years, but was largely based on the fact that Bangkok and Wellington shared a number of common interests. Indonesia, Singapore, and Malaysia were viewed by Wellington as the most important countries of Southeast Asia for strategic and economic reasons. Relations with Thailand were subordinate to that — notably the protection of Malaysia's northern border.

Official New Zealand documents from the mid-1970s made constant reference in the post-SEATO era to a more well-rounded relationship, or a broadening of ties. The one consistent strand of the relationship remained official development assistance (ODA), which netted a lot of goodwill for New Zealand. Vietnam's invasion of Cambodia reinvigorated the relationship as Thailand sought New Zealand's support against Hanoi's actions. The end of the Cold War meant a mellowing of the relationship, which occurred at the same time as New Zealand's desire to tap an expanding Thai economy — a potential that New Zealand officials had identified as early as the 1960s.

Contact Prior to SEATO

Prior to New Zealand's decision to become involved in SEATO, Thailand was not a country given much attention from decision-makers in Wellington. In fact, post-war relations had an awkward start. When Thailand (or Siam as it was then referred to in Commonwealth circles) opted to side with Japan during WWII with a transit agreement, the allies promptly declared war on Thailand. A fact not found in background papers or publicity releases from the New Zealand Ministry of Foreign Affairs and Trade is that, at 5 p.m. on 25 January 1942 (New Zealand Standard Time), New Zealand declared war on the government of Thailand in accordance with New Zealand's allies, and a state of war existed until 8.30 p.m. on 11 January 1946 when it “ceased”. Subsequent to this, any interaction with Thailand was done on New Zealand's behalf by the United Kingdom. The New Zealand government decided that it would be best if the British government handled the claims of any “wrongs done to New Zealanders” during WWII.

INTRODUCTION

The prologue to the first Law on Local Government (Law 22/1999) resoundingly announces its intention to (1) underscore the principles of democracy, social participation, equity and justice and (2) give emphasis to local potentialities and diversity. The prologue to the companion Law on Fiscal Balancing between the Central Government and Regional Governments (Law 25/1999) is equally forthright in its intention to (1) provide the opportunity to increase democracy and local capacities, (2) enhance social prosperity and create a civil society free of corruption, collusion and nepotism and (3) increase social participation, openness and responsibility. These laws by their stated objectives and identifiable phrasing stand out as key components of a period of intensive legislative reform initiated by President B.J. Habibie. The effect of these critically important laws on decentralisation, and more particularly on the subsequent management of natural resources, cannot be disentangled from a whole range of related laws and decrees that have carried forward the process of reform since the fall of President Soeharto's New Order. Contrary to their proclaimed rhetoric, however, these laws have not led to the establishment of more effective means for the management of local resources, or to greater openness and responsibility in the use of such resources. In giving the widest possible authority to hundreds of regional governments, they have created a diversity of systems of management and mismanagement with no mechanism for supporting one or discouraging the other.

What is the important fact about Indonesian development in the last 30 years? The fact is that it has not followed a path that leads to sustainable development. Indonesia's development has been heavily dependent on natural resource extractions. Renewable resources such as water, forests, fisheries and other biological resources have been exploited beyond their ability to regenerate and will continue to diminish in the years ahead. Reliance on non-renewable resources and such activities as mining, minerals and fossil fuels cannot be sustained for ever. Clearly, the whole process of national development has not been sustainable. The question is: why and how has this situation occurred?

Let me go back to the situation 30 years ago. When we Indonesians started to formulate our development policies in 1966–67, there was little mention of environmental issues anywhere in the world; in particular, there was little mention of the links between development and the environment. Accordingly, when we began to draw up a national development plan in 1968, our focus was solely on economic development.

Up till the early 1970s, international development conferences tended to focus on single-track economic development involving infrastructure, agriculture and other primary sectors – so-called ‘normal’ economic development. In 1972, the United Nations held a Conference on the Human Environment in Stockholm. At the Stockholm conference, something new emerged: the environment. Most developing country delegations to the conference were economists who knew a lot about economics but nothing about the environment.