The recovery in investment – both domestic and foreign – during the post-crisis period has been sluggish, partly explaining the relatively low economic growth rates in Indonesia since 2001. The consequences of this low-growth period have been slow employment creation in the formal/modern sector and rapid expansion in the informal/traditional sector. Higher rates of investment are required to shift Indonesia to a higher growth path. This chapter reviews recent trends in investment and discusses the factors that explain the sluggish recovery in foreign direct investment (FDI) in particular.

The next section reviews recent trends and the changing pattern of FDI. The third section touches briefly on the consequences of the slow recovery in investment, and the fourth discusses the obstacles to a recovery. This is followed by a brief discussion of the government's investment and employment strategy as outlined in its White Paper.

TRENDS IN INVESTMENT DURING THE POST-CRISIS PERIOD

As mentioned above, the recovery in both domestic and foreign investment has been sluggish during the post-crisis period. As demonstrated in Figure 6.1, real aggregate investment in the economy collapsed in 1998 and bottomed out in the second quarter of 1999 at half the pre-crisis peak investment levels. There was a sharp rebound in 2000, with investment climbing to 70 per cent of pre-crisis levels, but the recovery stagnated in 2001 and 2002. Investment picked up slightly at the end of 2002 and continued its modest recovery in the first semester of 2003. Consistent with aggregate investment in the economy, new FDI remains at historically low levels. Some foreign firms have closed their subsidiaries in Indonesia during the last few years, especially in footwear and other labour-intensive sectors.

It has been argued that the Asian economic crisis of 1997–98 can be attributed to the vulnerability of the corporate sector in Asian countries, especially the poor system of corporate governance that shielded corporations from market discipline (World Bank 1998). A series of papers generated by a research project supported by the World Bank has revealed that East Asian corporations were characterised by high leverage, concentrated ownership, a high level of ultimate control by a few families and expropriation of minority shareholders, and argued that these characteristics contributed to weak corporate governance and poor corporate performance (Claessens, Djankov and Lang 1999, 2000; Claessens, Djankov, Fan and Lang 1999a, 1999b).

Empirical and theoretical study of corporate ownership and governance has evolved rapidly in recent years, coincidentally in the post-Asian crisis period after 1997.1 For example, La Porta, Lopez-de-Silanes and Shleifer (1999) provided evidence that concentrated ownership is common in modern corporations in developed countries around the world. Widely dispersed ownership, which some have taken as a modern standard in company organisation, is prevalent only in the United States and the United Kingdom. This suggests that concentrated corporate ownership does not necessarily imply weak corporate governance.

This chapter re-examines the thesis that concentrated ownership and family control over management characterises Indonesian corporations. It also discusses whether corporate ownership and management patterns have changed since the crisis and whether they have affected corporate performance. I begin by explaining the data and classifications used in the study. Next, I examine ownership and management patterns and analyse how they affected corporate performance before and after the crisis. Finally, I summarise the findings of the study.

DATA AND CLASSIFICATION OF OWNERSHIP

This study uses data for public companies listed on the Jakarta Stock Exchange (JSE) and data compiled and published by the Institute for Economics and Financial Research (ECFIN). The JSE company data are the only published data that contain both financial statements and lists of shareholders and board members. This permits analysis of ownership and management structures and how they relate to the financial performance of the companies concerned. The database I used comprises two time-series data sets: a database of all publicly listed companies, and a database containing the top 100 publicly listed firms.

Can Al-Qaeda and its affiliates, including Jemaah Islamiyah (JI), still launch major attacks? Since the terrorist strikes on the US in 2001, many Al-Qaeda leaders have been captured and the organization's financial system, communications networks and training camps in Afghanistan disrupted. Over 3,000 organizers, operatives and supporters in at least 90 countries have been arrested or killed. Since September 11, an informal counter-terrorism coalition of nearly 70 nations has been working together in law enforcement, informationsharing, transportation and cyber security, and financial asset seizure. US officials say that nearly two-thirds of Al-Qaeda's senior leaders, operational managers and key facilitators have been captured or killed, while the rest are on the run.

Southeast Asia

In Southeast Asia, JI has been hounded by tougher law enforcement and better intelligence-sharing among countries in the region and between them and counterpart agencies in the US, Australia and elsewhere. Over 130 JI members have been arrested in five Southeast Asian countries since late 2001, including Hambali, the senior Al-Qaeda operational planner in Southeast Asia.

Yet the JI — described by the Singapore minister in charge of internal security as “Al-Qaeda's closest ally in Southeast Asia” — is said to be planning more terrorist attacks in the region. Both Al-Qaeda and the JI appear to have been able either to maintain an effective command and operational structure or to renew it in a different form.

Networking

Moreover, there is a web of relationships that link the various militant Muslim groups within Southeast Asia and also connect them to Al-Qaeda. These links were forged over the last two decades, starting with those Southeast Asian Muslims who went to Afghanistan in the 1980s to fight with other mujahidin and who experienced firsthand the glory of jihad and its eventual victory over the Soviet Union. These international connections give the Southeast Asian militants greater reach and resilience.

The militants include hardline elements in the separatist Moro Islamic Liberation Front (MILF) in the Philippines, and a small breakaway faction of Filipino Muslim separatists, the Abu Sayyaf Group, which kidnaps for ransom. Al-Qaeda provided funds and training to the Abu Sayyaf and the much larger MILF through a network of front organizations and legitimate Muslim bodies. Al-Qaeda forged similar links with several militant Islamic groups in Indonesia in addition to the JI which has members spread over Southeast Asia.

A terrorist alert in October 2003 triggered yet another search in the worldwide hunt for one of the ships and some of the crew that have been widely reported to be part of Al-Qaeda's undercover shipping line. Following an intelligence tip-off — said to be from the US — that some of the crew were linked to Al-Qaeda, New Zealand authorities raided a Greek-owned cargo ship, the Athena, in Lyttelton, the port of Christchurch in New Zealand. The freighter regularly carries logs, fertilizer and cement between New Zealand and Asia. It had arrived in Lyttelton on 2 October and was due to leave for South Korea two days later when customs officials gave it an unusually thorough inspection, including checks on the identities of all crew and a full search of the vessel. Nothing of concern was found, according to a customs spokeswoman.

When the 17,000-ton Athena and its cargo of logs reached the port of Kunsan on the southwest coast of South Korea on 30 October, it was checked again by Korean authorities. They searched for weapons and forged passports but found nothing unusual on board. Some 37,000 US troops are based in South Korea and there are many American military facilities in Kunsan, including an airbase.

Many Searches

There have been many such searches for Al-Qaeda-connected ships and crew since the terrorist attacks on the US in September 2001 made the US and many other countries aware of just how vulnerable the largely unregulated and secretive global maritime industry is to abuse by terrorists. These concerns were underscored on 21 December 2001, just a few weeks after the attacks on New York and Washington, when British anti-terrorist officers and naval commandos intercepted and boarded the Nisha, an Indian-owned bulk carrier, in the English Channel. The vessel was carrying raw sugar to a refinery on the Thames, near London's Canary Wharf financial and residential district. British authorities said they were acting on an intelligence tip-off that the ship was carrying “terrorist material”. But three days of searching found nothing suspicious and the Nisha was allowed to dock and unload at the Thames terminal in early January.

It is against this background of significant crime and lax regulation in international shipping — and the industry's vulnerability to abuse by terrorists — that US President George Bush launched the Proliferation Security Initiative (PSI) on 31 May 2003. Variously referred to as a compact or political arrangement, it is a programme of pre-emptive interdiction designed to intercept illicit exports related to weapons of mass destruction (WMD) anywhere in the world, whether by sea, air or land.

The definition of WMD encompasses nuclear, chemical and biological arms, related materials and associated delivery systems. The latter would evidently include a ballistic missile linked to a WMD warhead, but not a missile to carry a conventional explosive charge. The PSI is a response to the growing concern that countries or criminal organizations hostile to America will pass WMD-related materials to terrorists who may use them to attack the US, its allies or friendly countries around the world.

The PSI is intended to build on and reinforce existing arms control treaties and multilateral arrangements, as well as national export controls on sensitive materials, including “dual use” items that can be used for legitimate civilian industrial purposes or for WMDs. The PSI aims to stop trafficking in WMD-related materials between “rogue” states and terrorist groups that its members feel pose the most immediate threat to global and regional security. North Korea and Iran are primary sources of proliferation concern to PSI members, according to US officials.

The Nuclear Nonproliferation Treaty

There are five countries that are accorded international legitimacy as nuclear-weapon states under the Nuclear Nonproliferation Treaty (NPT), that entered into force in 1970. They are the US, Britain, France, Russia and China. Three of the five — the US, Britain and France — are founder members of the PSI. The other two — China and Russia — are more ambiguous in their attitude to the PSI. But neither opposes the programme and each is prepared to give it some support. These five nuclear weapon states are important because they are also the five permanent members of the United Nations Security Council with the right to veto Council decisions.

The new security measures for maritime trade are both multilateral and bilateral. A new international regime for port and ship security mandated by the IMO will take effect from July, 2004. Checks on seafarers are also being tightened. The ILO adopted a convention in June 2003 that provides for new seafarer identification documents with a biometric imprint.

In addition, various measures are being implemented by a wide range of countries outside the framework of the United Nations. Many are driven by initiatives put in place by the US to guard against terrorist strikes. Concerned at America's vulnerability to a catastrophic terrorist attack from the sea, the US government has turned its attention to securing seaborne trade and the interlocking global supply chain. The aim of all these anti-terrorist measures is to “retrofit” the global system of commerce to make it more secure while not unnecessarily impeding the flow of goods.

IMO Regime

In the wake of the terrorist attacks on the US in September 2001, the IMO reviewed the state of maritime security. The IMO Conference of Contracting Governments to the International Convention for the Safety of Life at Sea, held from 9 to 13 December 2002, adopted a number of amendments to the 1974 Safety of Life at Sea Convention (SOLAS). The most far-reaching are encompassed in the new International Ship and Port Facility Code (ISPS).

The Code contains detailed security-related requirements for governments, port authorities and shipping companies in a mandatory section (Part A), together with a series of guidelines on how to meet these requirements in a second, non-mandatory section (Part B). The IMO Conference in December 2002 also adopted a series of resolutions designed to add weight to the amendments, encourage the application of the measures to ships and port facilities not covered by the Code and pave the way for future work on the subject.

The mandatory measures include:

1. • installation of satellite-based automatic tracking and identity systems, including security alert signals to the nearest shorebased authorities in case a vessel is threatened, on all ships of 500 gross tons and above on international voyages.

Are sea container shipping and its land links in the global supply chain vulnerable to a major terrorist attack? Many officials in the United States, Asia and Europe believe so. Here are some samples:

What's at Stake and Why?

Given the vast scale of the global shipping and cargo container industry and its vulnerability to acts of terrorism, better security is vital when the risk of weapons of mass destruction reaching international terrorists is rising.

This timely book by Michael Richardson provides a useful overview of the current issues and trends in the field of maritime security; he also provides some practical recommendations to strengthen overall security and to rectify some grave weaknesses in the system. Both practitioners and the public will find his book an interesting and timely warning of the potential dangers of mass-casualty maritime terrorism. Richardson clearly highlights some linkages between piracy and maritime terrorism. With land-based targets harder to get at, the attention of terrorist groups could turn to the maritime sector.

Mega-hub ports and major container terminals, such as Singapore, are vulnerable to trade disruptions and blockages of access to sealanes. Such disruptions caused by maritime terrorism will be very damaging to their economies and to the global economy. The example of the impact of maritime terrorism on the Port of Aden, in the aftermath of the terrorist attack on the French tanker Limburg, demonstrates that even a failed attack can devastate a port economy. Fully alerted to the dangers, Singapore and some other ports in the region have adopted strong security measures to increase port security. These include the rule that large cargo vessels and passenger ships must be fitted with automatic identification systems that can transmit data to port authorities. Singapore has gone further in requiring all vessels, including small harbour crafts, to be fitted with such transponders. Thus, Singapore will be one of the first countries to be classified by the IMO as a secure port, which means that ships sailing from here will have no problems going to another port.

Much of the world's oil exports and trade pass through the Straits of Malacca and Singapore. The littoral states, and the international community at large, are acutely aware of the dangers of both these waterways becoming choke-points to maritime trade in the event of terrorist actions undertaken at sea.

Under international law, every ship must sail under the flag of a sovereign state to gain the protection of a government while on the high seas. A key lesson from the So San affair and other terrorism or WMD-related trafficking in international waters is that those trying to shut the trade down by pursuing suspect ships wherever they are need to get cooperation from the government whose flag the ships are flying. At present, only if the flag state expressly consents, can foreign warships legally halt and inspect a ship flying its flag on the high seas — except in a few specific cases, among them “universal crimes” such as piracy, slavery and unauthorized broadcasting. Because nearly half the world's fleet by tonnage is now on foreign registers, this means that, in many cases, permission to halt and inspect in international waters must be sought from a “flag-of-convenience” state.

As noted at the end of Chapter 8, the US and Britain have asked countries that operate or sanction foreign flag registers to cooperate in allowing boarding and search to take place when it is reasonably suspected that the ship involved is carrying WMD-related cargo to or from states or non-state actors of proliferation concern.

IMO and Reform

The International Maritime Organization's motto is: “safer shipping, cleaner seas”. But the IMO shies away from using the term “flag of convenience”, talking instead of sub-standard shipping. It has for some time been developing a voluntary model flag state audit that could be used to improve the regulation of global shipping and the fight against terrorism.

Progress was frustratingly slow until late 2002. It now appears that a voluntary scheme could be in place by mid-2005, followed by a mandatory one later. The new IMO Secretary-General Efthimios Mitropoulos has said he is determined to ensure that the audit scheme is a success and has placed it under his direct supervision.

The IMO has been slow in the past to improve its regulation of sub-standard shipping in part because leading operators of open registers — including Panama, Liberia, the Bahamas, Malta and Cyprus — are among the largest contributors to the IMO's regular budget. These countries are among the 29 that the ITF has listed as flag of convenience providers.

So how secure is global maritime trade and the inter-linked supply chain on land? It is clear that before the September 11 terrorist attacks on the US, there were gaping vulnerabilities not just in aviation security but in maritime and land transport security as well.

Since then, the international community has started to take action to improve the situation, especially for ships and ports that are major players in global trade. But progress has been patchy. Some companies and countries are moving faster and more effectively than others. And some of the laggards complain that they cannot afford the new security measures. Steps are being taken by the international community, spurred by the US, to ensure the integrity of containerized cargo at sea and on land. But given the scale of maritime trade and the even vaster scale of commerce moving through the global supply chain using cargo containers, the task is far from complete.

The US Customs and Border Protection Commissioner Raymond Bonner admitted as much when he told a US Senate Committee in September 2003 that although good progress had been made in implementing the Container Security Initiative in major international ports in Asia, Europe and Canada, “we still have much work to do to get CSI fully operational”.

Accurate and timely intelligence of any terrorist threat is the key to success. Those looking for signs of weapons of mass destruction or radiological substances among the many millions of containers moving around the world carrying legitimate cargo are checking for the proverbial needle in the haystack. And they are under pressure to do so without unnecessarily slowing global trade or increasing its cost.

The ABC Affair

The good news is that there has not been a terrorist attack involving the movement of cargo containers around the world, on sea or on land. But in September 2003, ABC News claimed to have exposed a crucial weakness in America's port security system by shipping depleted uranium to Los Angeles in a container from Jakarta in late July — a week before the terrorist bombing of the Marriott Hotel in the Indonesian capital that killed 12 people and wounded scores more. Depleted uranium metal is used in armour-piercing anti-tank rockets. But it cannot be used to make a nuclear weapon.