(FORTUNE Magazine) – IN A LISTLESS world economy, nothing excites global managers more than big emerging countries like India and China. Add another: Indonesia. Want consumers? Nearly 200 million, including a growing middle class. Production workers? All you can use at hourly wages below those of South China. Raw materials? Indonesia is the world's largest exporter of liquefied natural gas, the biggest tin producer, and a major supplier of wood products. Political stability? A former army general who in the Javanese tradition bears the single name of Suharto has kept the lid on for 25 years -- though at 72 he has, like most strongmen, designated no heir apparent. The country is huge -- 3,000 miles from tip to steaming tip -- and disparate. In cities, business suits abound, while in Irian Jaya, the easternmost province, well-dressed men wear little more than leather penis sheaths. In Borneo there are still reports -- but no recent sightings -- of headhunters. Though the population is concentrated on a few islands, especially Sumatra (more than 1,000 miles long), Java (the most populous), and Bali (a once unspoiled island whose beaches are now lined with high-rise hotels), the country sprawls over 13,000 islands spread along the equator. If the map of Indonesia were superimposed on that of the U.S. it would reach from New York to San Francisco and from Chicago to south of New Orleans. Compared with Europe, it would start in Dublin and end up in the Urals, way beyond Moscow. Jakarta is a capital city of charm and inefficiency, embodying both the country's great promise and its enormous problems. Its financial district is nearly as imposing as Singapore's. But work inside the soaring buildings comes to a stop during the city's frequent power failures. Phoning anyone can take hours. Finding bureaucrats at work is a challenge; their day officially ends at 3 P.M., when many rush off to second jobs to stretch their meager salaries. The roads are jammed with shiny cars -- and with beggars and ragged children peddling cigarettes, candy, and newspapers. With a population of 8.2 million, nearly three times that of Singapore, the city has the sprawl and the stark contrasts between rich and poor of Bangkok or Calcutta. Jakarta smells of sweat, clove-flavored cigarettes called kretek, and the fetid canals that lace the city. Yet everyone always smiles. The rewards to investors have been exceptional. Mobil's Indonesian oil and gas production last year earned an estimated $370 million, 25% of the U.S. corporation's total profits. American companies, which have put $4 billion into Indonesia, get a far better than average return on investment -- nearly 48% in 1991, the latest year covered by U.S. Commerce Department surveys. No wonder General Electric is leading a consortium to invest nearly $2 billion in the country's first private electric power station. Goodyear's most cost- effective tire factory in the whole world is in Indonesia. President Edward J. Higham says, ''This is an excellent place to do business.''

If you can handle a tricky web of Third World risks. Companies must deal with a bloated bureaucracy, corruption, and a complex society where business depends heavily on personal relationships. Says a high U.S. executive there: ''We must stay away from politics and payoffs, which sometimes means losing business.'' The most aggressive local business powers include several of President Suharto's children. The government assigned AT&T, among others, a member of the First Family as its joint venture partner. General Motors is teamed up with Suharto's half brother. The first step toward business success is understanding the people. Inward- looking, very polite, and soft-spoken, they live in a world of their own. Most claim to be Muslim (the country has the world's largest Islamic population: 160 million), but they exhibit none of the fanaticism of Islamic fundamentalists in the Mideast. Mysticism remains a potent force. Ancient myths provide models for behavior and are kept alive in popular Javanese wayang, or shadow-play performances, which employ wooden puppets and can last seven to eight hours at a stretch. Avoiding confrontation is so essential to the culture that Indonesians veil their feelings in amiable ambiguity. In offices and factories, maintaining harmony is far more important than getting something done quickly and efficiently. The lengthy prelude to accomplishing anything is making friends. Moreover, all decisions are made at the top level by a boss always respectfully called bapak, literally ''father''. For the whole nation, Suharto is the big daddy, and no Western investor or manager should forget that. SINCE TAKING command of a bankrupt country in 1967, the Suharto regime has expanded the economy an average of nearly 7% a year, putting it among the ten fastest-growing in the world, reports the World Bank. Per capita income has climbed from a miserable $50 a year to a middling $730. That's roughly on par with Egypt but only half the level of Thailand. By the end of the decade Suharto, with the help of a team of economic advisers popularly known as the ''Berkeley mafia'' because many studied at the University of California, hopes to raise the average income to $1,000 annually. At that point, millions of Indonesians will be able to trade up from bicycles to motorcycles and cars. The government also needs to find some way to create 2.3 million jobs a year for new entrants into the labor market. Indonesia's only hope for that is enticing private investors, especially since the country has some $85 billion in foreign debt. Until recently most foreign capital went into developing energy and mineral resources. Now Indonesia is becoming a center for export manufacturing. Companies from Japan, South Korea, and Taiwan, plus a few from the U.S., are producing garments, sports shoes, and radios for the world. Mattel finds Indonesia, where its factory workers get $50 a month, a good place for making Barbie dolls -- and plans to do one-third of its worldwide production there by 1995. Actively seeking foreign investment is a new experience for Indonesia. Says Eugene K. Galbraith, president of the brokerage HG Asia Indonesia: ''The Indonesians used to think their country was so attractive that nothing would keep investors away. Now they see that companies won't come here if China and others are offering more incentives.'' A sudden slump in foreign investment has the government worried. Jakarta expects foreign companies to sign contracts for projects totaling $6 billion to $7 billion this year, down from $10.3 billion in 1992, and little more than half the dollar value of government-approved investments ever materializes because companies strangle in red tape. Investors are deterred by a potent strain of economic nationalism and the tyranny of bureaucracy. As an American banker there puts it, ''Indonesians somehow suspect that foreign companies are trying to take something away from the country. Investing here is still a big hassle.'' Every potential investor must get a letter of approval signed by President Suharto -- which takes about nine months. And that is only the start of a paper chase for up to a dozen other permits, which usually require paying off working-level bureaucrats. Selling most products to the government demands a local agent, a system that breeds corrupt practices and, remarks a U.S. corporate executive, ''creates an elite that makes millions.'' Prickly Indonesian pride is holding up a $40 billion Exxon natural gas project that would be an export bonanza for the country well into the next century. The U.S. company has discovered huge gas reserves off the Natuna Islands, 685 miles north of Jakarta in the South China Sea. But the deal has bogged down over such details as Exxon's request for the right to sue the Indonesian government for damages or losses from political upheaval. WHILE supposedly embracing market forces, the government is sinking untold billions into inefficient state enterprises, including the largest steel mill and the only aircraft factory in Southeast Asia. A nationalistic breed of presidential advisers, who call themselves ''technologists,'' maintain that Indonesia can leap into high-tech export industries. To do so, they want government subsidies and tariff protection. Says a leading Indonesian economist who long served in the Cabinet: ''President Suharto is always looking for a shortcut to modernity, so you have to keep putting out fires.'' Equally worrisome to international creditors is the festering Indonesian equivalent of the U.S. savings and loan disaster. Government-owned banks, which control about half of domestic lending, tend to make loans on the basis of political influence rather than creditworthiness. The result is a mountain of nonperforming loans (using strict accounting standards) that probably totals some $10 billion, more than the net worth of all the state banks together. Warns an American financier: ''The Indonesians will have to remedy this situation slowly, or else the state banks will fail.'' With characteristic Indonesian indirection, J. Soedrajad Djiwandono, an economist with a Ph.D. from Boston University and now a central bank governor, acknowledges ''cases of overlooking things and mismanagement.'' Lending money in Indonesia, which has no system of credit reporting, is a special challenge for foreign bankers. As one seasoned Westerner puts it, ''This is the country where you'd better know whom you're dealing with. Mortgages are not worth the paper they are written on, and the same inventory can be pledged to a dozen creditors.'' Bank Summa, a private Indonesian institution with over $1 billion in assets, folded late last year under the weight of nonperforming loans. All those troubling trends raise a crucial question: Is Indonesia a great business opportunity or a quagmire? It depends on how well companies grasp the peculiarities of a country where managing the risks can deliver handsome returns. Despite the obvious land mines, Indonesia is too big a prospect for most companies to ignore. General Electric, for example, is expanding. Ram K. Sharma, who heads GE's Indonesian operations, started 14 years ago with a filing cabinet in his Jakarta hotel room. GE now sells around $400 million a year of power- generating equipment, aircraft engines, locomotives, and plastics. Says Sharma: ''If you have the relationships and play by the rules, this place can be profitable. Our experience has been very happy.'' GE has begun investing in Indonesian businesses, including an auto finance firm and a plant to assemble medical equipment, and is considering taking a stake in a local light bulb maker. In addition, GE has formed a venture with Mission Energy of the U.S., the Japanese trading company Mitsui, and an Indonesian coal-mining company to build a $1.8 billion plant that would sell electric power to the state utility. Indonesia's investment board has approved the plan, but the deal isn't sealed yet. Says Sharma: ''This is the first project of its kind here, so we have to negotiate the ticklish matter of the price at which the government purchases power over a 20-year period.'' Indonesia sorely needs more electricity, so GE expects to complete the haggling this year. An acute shortage of phone lines makes Indonesia a choice market for AT&T, but not an easy one. AT&T Network Systems has invested $25 million in a new plant 18 miles east of Jakarta to assemble the company's flagship 5ESS digital switching system for phone exchanges. The factory employs about 125, mostly bolting together components imported from the U.S. and Europe. The plant exists for only one reason: Indonesia made it a condition for giving AT&T a $100 million contract, the first of many orders that the U.S. company expects. Still, AT&T had to jump through other incredible hoops to sell telephone switches, long the monopoly of a state-owned manufacturer. In 1989 the government agreed to open bids to other companies. NEC of Japan looked like the sure winner, but George Bush appealed to Suharto for fair play. Ultimately both AT&T and NEC got big orders -- provided that they set up joint ventures with Indonesians. AT&T's partner, assigned by the Indonesian government, is Citra Telekomunikasi, a newcomer to the telephone industry. Citra is controlled by a daughter of President Suharto's, Mrs. Siti Hardijanti Rukmana, whose nickname is Tutut. Her brother Bambang Trihatmodjo is NEC's government- assigned partner. (According to another Javanese custom, children usually take names different from their father's.) Avon has pioneered direct sales in Indonesia via a $30 million joint venture. Linking up five years ago with a local pharmaceutical producer opened two vital windows of opportunity: Avon could make its cosmetics in Indonesia, avoiding high taxes on luxury imports, and could do its own distribution, an activity usually off limits to foreign companies. Some 40,000 Indonesians, primarily housewives, write nearly $1 million in sales a month of such products as Fifth Avenue perfume and Wild Country after-shave. Those Western- style brands sell well because they're pushed in a gentle Indonesian manner. Says Helmy Attamimi, an Avon director in Jakarta: ''Dealers don't knock on doors of strangers. They sell to friends.'' Avon expanded Indonesian sales too fast, however, and went into the red. Attamimi expects to break even next year. Freeport-McMoRan has taken a much longer view. The American mining company has invested $1.5 billion in a vast copper- and gold-mining operation in Irian Jaya. It had to construct an entire town, complete with a jet airport and seaport, to support open-pit mining atop a mountain. Says Louis A. Clinton, president of Freeport-McMoRan Pacific in Jakarta: ''We have the largest gold reserve of any operating mine in the world.'' Nonetheless the company took 15 years to recover its investment, for which the return over its 25-year life averages slightly more than 10% annually. Freeport plans to invest another $1.2 billion in the next few years. As Clinton puts it, ''We like Indonesia and work within its culture. A lot of consultation and discussion helps in a society that values consensus.'' SOME INDONESIANS still blame the Dutch, who colonized the territory from the 17th century until 1950 (except for the Japanese occupation during World War II), for many of their problems. The Indonesian judicial system offers no effective relief for business disputes, which American business consultant Harvey Goldstein politely describes as ''a terrible legacy of Dutch colonialism.'' As Indonesians tell it, their lackluster universities (which have educated only about 1% of the population) are another unfortunate colonial heritage. Still, this blame game is getting stale; Indonesia has been independent for nearly 44 years. Indonesians, in fact, are recovering from a terrible mess of their own making. Sukarno, a flamboyant nationalist who was the first president, dazzled his countrymen with oratory and wild dreams for 15 years while the economy slid into chaos. He launched a space program that never got off the ground, waged a futile war against neighboring Malaysia, and allowed the Indonesian Communist Party to flourish. Recalls J. Soedrajad Djiwandono, the central bank governor: ''Economic management was very bad. We just nationalized Dutch banks and treated them like government cashiers.'' In the 1960s inflation hit 639% annually. In 1965 an Indonesian Communist plot against the army touched off mass bloodletting. Two years later Suharto, then a lieutenant general, deposed Sukarno. A professional officer with little formal education, Suharto has used common sense to repair a wrecked economy. Recruiting the Berkeley mafia helped win the confidence of international aid donors. In effect, the World Bank and individual nations led by Japan have bailed out Indonesia from its past excesses. The Suharto regime always balances its budget, albeit by counting as revenues the loans and grants from the World Bank, the International Monetary Fund, and other countries. Prudent financial management has enabled the government to service its debt, which consumes 30% of export earnings. Last year Indonesia received $5.5 billion in foreign aid and paid back $4.7 billion, but still needs regular infusions of assistance. A freely convertible Indonesian rupiah has long underpinned the rescue. INITIALLY, petroleum reserves made Indonesia a good bet for creditors. Remarks Saleh Afiff, 62, Coordinating Minister for the Economy, Finance, and Development: ''When we had oil money in the 1970s -- the good old days -- we invested in schools and health clinics.'' During the past decade, though, the government also used petroleum revenues to expand its bureaucracy at twice the rate of population growth. The country wound up with a high-cost, highly protected economy dominated by state corporations. With the collapse of oil prices in the early 1980s, Indonesia finally opened up its economy. Liberalization is a word that sounds leftist to the conservative Suharto, so his regime calls it ''deregulation and debureaucratization.'' Whatever you call it, the process has weaned Indonesia from dependence on energy sales, now 31% of export revenues, vs. 56% in 1986. Jakarta acted just in time to capture a mass transfer of labor-intensive industries from Japan and other Asian countries seeking sites with lower wages. Indonesian textile workers make only $2.50 a day, about 10% of what South Koreans get and well below the $4 daily wage in booming South China.

Deregulation has unleashed Indonesian entrepreneurs. Says Sofjan Wanandi, chairman of the Gemala Group, which specializes in auto components and pharmaceuticals: ''The business community here really started to grow only ten years ago.'' His family-controlled enterprise (which claims $1.5 billion in annual sales) is expanding exports by buying into Western companies with brand names and distribution facilities. Gemala, for instance, has acquired Trailmobile, a Chicago-based maker of truck trailers, and is establishing a new plant for it in Jonesboro, Arkansas. He has bought battery makers in Britain and Australia. The most ambitious local businessmen are predominantly ethnic Chinese, though they keep a low profile. The government has long banned Chinese- language newspapers and Chinese schools. Many take Indonesian names and try to blend in. Like Overseas Chinese throughout Southeast Asia, this Indonesian minority (less than 2% of the population) has the most experience in trading and light manufacturing. They have built conglomerates that are among the largest in the region. One new tycoon who came up fast, Prajogo Pangestu, 48, chairman of Barito Pacific Timber, has assembled forest concessions totaling 7.14 million acres and is among the largest plywood producers on earth. THE BIGGEST Sino-Indonesian players also have splendid political connections. Liem Sioe Liong, founder of the diversified Salim Group, with about $8 billion in sales last year, befriended Suharto in the 1950s when the President was a regional commander in central Java. Suharto was strapped for cash to feed his troops. Liem became, in effect, his quartermaster. Suharto has never forgotten him. Before deregulation, Liem thrived on near monopolies for flour and cement. Now he is a global player in petrochemicals, the largest noodle maker on earth, and the distributor for Volvo, and he controls banks in Indonesia, Hong Kong, and California. Sinar Mas, Indonesia's second-largest conglomerate, with $2 billion in sales last year, is the leading pulp and paper producer outside Japan. Its founder, Ekta Tjipta Widjaya, 70, wears a diamond-studded belt and has a seemingly insatiable appetite for expansion. Though pulp prices are depressed, Sinar Mas keeps heaping money -- much of it borrowed -- into additional capacity. Explains Piter Korompis, a former Citibanker who is group managing director: ''We are the low-cost producer. All we need to do in a difficult time is to secure the market. Once pulp prices go up, we'll reap the profits.'' Indonesia's new manufacturing prowess, though, has sharpened government ambitions for state-owned enterprises. B.J. Habibie, 57, a German-trained aeronautical engineer who is Minister of Research and Technology, maintains that Indonesia must ''leap ahead'' into exporting aircraft and other ''Indonesian brain products.'' That seems far-fetched for a country with more rice farmers than engineers, but Habibie, as one U.S. businessman puts it, ''is not just a mad scientist.'' He worked for 18 years as a senior researcher for Messerschmitt in Germany, then came home and persuaded President Suharto -- an old family friend -- to bankroll an Indonesian aircraft factory in Bandung. Habibie plans to launch an Indonesian-designed commuter plane into the world market in a few years. He likes to tell visitors, ''I'm a visionary, not a dreamer.'' Many of his expensive visions have gained presidential support. He has formed a joint venture with GE, but little has happened yet. Habibie arranged to purchase 39 ships from the former East German navy for a nominal $12 million last year but proposes to modernize them in a state-owned Indonesian shipyard at a cost of over $1 billion. Cooler heads in the government hope to scale down that scheme. This summer he prodded Indonesia into signing up to buy 24 Hawker fighter planes from British Aerospace. Habibie's high-tech projects, however, threaten to become a tremendous drain on his country's resources. In a confidential report the World Bank warns that ''technological leapfrogging'' policies, which pump government money into targeted industries, ''have proven costly and ineffective in most countries.'' Besides, that strategy cannot provide the jobs that Indonesia needs. Keeping Indonesia on the right economic track depends, above all, on President Suharto. Says Christianto Wibisono, an outspoken U.S.-educated economist who runs a local version of Standard & Poor's: ''The weakness of our system unfortunately lies in its strongest asset, the strongman figure of Suharto.'' He's like the founder of a big corporation. Adds Wibisono: ''No one dares challenge or dispute his decisions.'' Even presidential elections are a form of guided democracy: An assembly of 1,000 delegates, two-thirds of whom are effectively appointed by the government, selects the President by consensus. The system has provided stability, but what happens after Suharto? Indonesia needs to spruce up its welcome mat for investors -- or risk losing them to China, Vietnam, and other Asian suitors. A good start would be paying bureaucrats a living wage and finally ending a promiscuous system of bribes. Says the senior U.S. executive in Jakarta: ''The triple-A companies won't go through all that crap. Indonesia must have a process that is transparent, and now it's far from transparent.'' The best way for Indonesia to attract more job-creating corporations is by simply getting the government off their backs.