President Suharto has earned plaudits for deregulating various aspects of Indonesia's economy. But he can't complete the job without challenging some powerful vested interests.

John McBeth, Jakarta &150; Among the troubled Southeast Asian economies, Indonesia has done much to embrace the globalizing, deregulatory spirit of the age. Since 1990, Jakarta has cut tariffs and dismantled a slew of monopolies&150;the sort of thing that's supposed to promote competition and lower prices.

But if Indonesia is such an avid reformer, why do Indonesians pay 58% above world prices for sugar? Because sugar, like other politicized sectors of the economy, remains immune to the forces of deregulation. The National Logistics Agency, or Bulog, has a monopoly on imports of sugar, wheat and other commodities. More than any other commodity, sugar is a source of patronage funds for Indonesia's civilian and military leadership, and, just as important, a means of subsidizing the price of rice, the country's most politically sensitive crop.

In short, when the forces of reform hit up against the immovable object of political interests, reform makes a detour. Today, that sort of politics is the last line of resistance to the reforms Indonesia needs if it is to compete in a global economy. While many observers praise Indonesia's response to Southeast Asia's currency crisis&150;it has scrapped foreign-ownership limits on shares, cut key tariffs and delayed capital-intensive projects&150;President Suharto has yet to tackle the even more urgent tasks of deregulation. They include busting remaining monopolies, unravelling red tape and introducing more transparency and competition into major development projects. Without such change, warns Sumitro Djojohadikusumo, a trusted former economics minister and preside ntial adviser, the battle against inflation and the current-account deficit will be a losing one.

The reason for the foot-dragging is that reform has reached the point where the only interests left unchallenged are those close to the hearts of some very powerful people. "I think what has happened," says a prominent banker, "is that they've run up against the hard stuff."

The hard stuff includes the business activities of the Suharto children, which now blanket everything from cars, telecoms, petrochemicals and toll roads to power plants, television, shipping, airlines, taxi cabs&150;and even birds' nests. Not long ago analysts agreed that rapid GDP growth would contain public resentment over the extent of the family tentacles, whose impact on such a large and growing economy was in any event minimal. Now, they're not so sure, noting how a single Suharto-family project can distort an entire industry&150;as with Tommy Suharto's controversial Timor national car.

"The growth in family-connected activities has become so broad that one small plant owned by one person can easily derail systematic reform," says a senior banking source who has studied the issue. Referring to Suharto's children, he adds: "As the kids get a little bit of a lot of things, it makes it more difficult for the good guys to make changes."

The family interests are already hard to avoid. Aside from Tommy's car project, there are the duties Indonesia imposed a year ago to protect the giant Chandra Asri petrochemical complex, owned by Suharto son Bambang Trihatmodjo and a group of powerful businessmen. Sometimes Suharto interests align with those of other powerful people. Bulog's cosy relationship with the Salim group's Bogasari Flour Mills illustrates how cartels, price controls and exclusive licensing arrangements blur the boundary between public and private sectors. Bulog sells wheat to Bogasari at prices heavily subsidized by the government. Bogasari mills the wheat into flour and sells it back to Bulog, adding a 30% margin. The higher prices are passed on to consumers and downstream industries. In addition, Salim gets to dominate one of the world's fastest-growing instant-noodle markets.

Insiders say wheat was placed on the deregulation agenda earlier this year. Salim founder Liem Sioe Liong, a close friend of Suharto, claimed to have no objection when senior officials informed him of their reform plans, but he did point out that the president's eldest daughter, Siti Hardijanti "Tutut" Rukmana, also owned a flour mill. By the time the next deregulation package was announced in early July, wheat was off the agenda.

Also gumming up the works is the absence of a genuine deregulation culture. "The bureaucracy hasn't caught up with this yet," says a government adviser. "It hasn't tackled the idea that things can't be run the way they were. The Ministry of Trade and Industry, for example, shouldn't be handing out licences and doing stuff like that." But in a country where regulation allows civil servants to supplement their incomes, even cabinet ministers are divided over reform.

For economist Djisman Simandjuntak, Indonesia is still fighting a legacy of the past. "If we could, we would prefer to live without competition," he muses. "The chaotic nature of globalization is not well understood by our top officials, by the business elite, even by people in academia. Our founding fathers fought against colonialism and liberalism, and there was always this dream of big government and enough natural resources to make Indonesia self-sufficient."

The dream lives on, and it's easy to see why. Through the 1970s, state patronage produced a whole class of rent seekers who grew rich from import monopolies, export cartels and distribution rights. All that only began to unravel with the early-1980s oil bust, which forced the government to build a non-oil-export base. "There were so many export controls, not even the ministers knew how many," recalls former finance adviser James Van Zorge. "There were all these regulations and no one was keeping track."

Even some of Indonesia's harshest critics acknowledge it has come a long way since then. In the past seven years, the number of non-tariff barriers has fallen from 1,000 to fewer than 200, while average tariffs have shrunk below 12% from 22%. But even with commitments to the World Trade Organization, the Asean Free Trade Area and Asia-Pacific Economic Cooperation forum, key sectors remain untouched.

The myriad restrictions on domestic competition range from so-called essential commodities like cement and fertilizer, whose distribution is considered too important to leave to market mechanisms, to products like plywood, where a powerful international cartel headed by Suharto's closest confidant, Mohamad "Bob" Hasan, exploits Indonesia's leading position in the world market. In addition, there are growing concerns about what the World Bank calls "reregulation." This is most apparent in transport, where shippers are complaining about a resurgence in port delays. In fact, they were complaining even before Indonesian customs resumed control over preshipment inspections that for several years were contracted out to a private Swiss firm, Societe Generale de Surveillance, in an attempt to induce efficiency.

Earlier this year, despite the much-touted 1994 deregulation of direct foreign investment, the government imposed a freeze on new foreign investment in a palm-oil industry already dominated by Salim and three other domestic groups.

The fishing industry is also being reregulated. A year ago, the government ended a ban on the import of fishing boats. Recently however, it issued licensing and local-content guidelines that have the same effect as the old ban. They prohibit the import of ships more than 10 years old&150;the only sort of vessel many companies can afford&150;and imply that fishery operators must buy a certain number of local vessels for each one imported.

"Because the new regulations haven't been clearly done, everyone has a different interpretation," says Indonesian Fishery Club Vice-Chairman Irwan Hariandja, echoing a complaint heard in other corners of the economy.

The case also illustrates another common problem: little interdepartmental coordination. Irwan notes that while firms may now import boats newer than 10 years, that doesn't mean they will get a fishing licence from the director-general of fisheries.

Ship imports were banned in the late 1980s in an effort to foster capital-intensive local shipbuilding, a pet project of Research and Technology Minister B.J. Habibie. Apart from increasing inter-island shipping costs, the ban was a disaster for the country's cash-strapped fishing industry: Without enough boats to maximize capacity, the industry was catching only one-fourth the volume of fish the government considers sustainable and leaving much of Indonesia's fishing grounds to foreign poachers.

Even in areas substantially deregulated, corruption remains hard to wipe out. A good example is the garment and textile sector, the country's largest foreign-exchange earner after oil and gas. Attempting to limit opportunities for graft, the government last year reduced to about six from 35 the number of steps exporters must go through. But Djafri Chamroel, senior adviser to the Indonesian Textile Association, says there's still some way to go, and that low-ranking officials, especially, remain vulnerable to temptation. "At the head office it's all right," he acknowledges, "but at local level it's not perfect. Living expenses for the lowest-ranking officials aren't enough."

Djisman says now that the government is relying more on private capital for infrastructure projects it should be putting more resources into government salaries and general education, where massive investment is required to improve the skills of Indonesian workers. He and other analysts warn that unless officials are paid more, they will find ways to impose spurious charges.

Indeed, a byproduct of decentralization is the growth of local fiefdoms in which officials have become adept at creating new sources of revenue. In two localities in South Sumatra and Kalimantan, for example, a land tax has been slapped on . . . fishing boats. "The further you go from Jakarta, the more the local governments intervene," says a researcher. "In some cases the government doesn't have full knowledge of what's going on. In other cases, it's a way of keeping allegiances."

The World Bank's main criticism is directed at retribusi, or retribution taxes imposed by local governments on a wide range of goods and services moving within Indonesia. It says levies on specific commodities, such as garlic, interfere with trade between regions, fragmenting markets and distorting both production and consumption decisions. Then there's livestock. Although the industry is one of the more viable for many of Indonesia's outer islands, high shipping costs and quantitative controls imposed by the central government have severely limited its potential.

While Indonesia gets high marks for freeing up trade, many sectors remain protected by high tariffs&150;among them chemicals, metal products, cars and selected agricultural products. "Without cuts in their protection," says a World Bank report, "there is a danger of encouraging high-cost production in these sectors." The reductions would directly affect the national car and, of course, Bambang's Chandra Asri petrochemical complex.

"In some senses the government has done fine, but the whole deregulation of the economy to remove monopolies and to get reasonably competitive behaviour just hasn't happened&150;and frankly I can't see where the energy for change is going to come from," says a ministerial adviser. "The president is increasingly surrounded by sycophants, which wasn't true 10 years ago. But the real problem is that the economy has done so well the president has been able to say 'Why do we need to make changes?'"

Maybe the economy's recent troubles will provide an answer to that question. "Accelerating the process of deregulation will have to be the main agenda for action in the coming three or four years," says former adviser Sumitro. "We are long past the point of no return."