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The French Fry Connection

Richard Read

Photos by Kathryn Osker
The Oregonian   October 21, 1998, Part 4

Strands in a Broken Web

The Asian financial collapse tore an intricate trade network to tatters, but the global economy endures

The day Jakarta burned, Angus Karoll struggled to keep 550 tons of french fries out of the fire.

Karoll, 27, a lean, wry Australian who heads potato processor J.R. Simplot Co.’s Indonesian distribution, had no time to ponder the irony of the situation. As the world’s fourth most-populous country lurched toward revolution May 14, Karoll worked to save a stash of frozen potatoes.

Karoll needed someone courageous, foolhardy or greedy enough to drive 800 gallons of gasoline through riots and fire to the french fry warehouse. The fuel would power an emergency generator to keep the spuds at 8 degrees below zero until power was restored.

Karoll found his improbable hero. He met the wide-eyed driver at the storage building and paid him generously in cash.

The potatoes were saved. But the riots took a toll far more serious than a warehouse full of french fries. More than 500 people died in Jakarta that day.

While Jakarta burned, tourists in Singapore, 550 miles away, strolled calmly along Orchard Road. There, schoolchildren munched happily on McDonald’s french fries produced in the Pacific Northwest by members of the Hutterite sect and diverted from riot-torn Indonesia.

Singapore’s serenity so close to Indonesia’s chaos highlighted the differing fortunes of nations caught in the “Asian crisis,” which is actually several converging crises. The differences between countries, which persist as the turmoil goes global, suggest that any recovery of the world economy will also come not all at once, but in stages. Japan’s advanced economy, for example, might recover sooner than Indonesia’s, where terrorized ethnic Chinese businesspeople could take years to return.

Sixteen months after the economic blaze ignited in Thailand, Asia’s fires still smolder, flaring unexpectedly as far away as Russia and Latin America, still threatening to cause a world conflagration.

But the global economy is so new, so unchecked and so crudely understood that the world’s leading economists can’t agree on how to douse the flames. Jittery investors dash for the exits with each new sign of smoke, upsetting stock markets and compounding uncertainty.

The example of the Northwest french fry illustrates one sure truth: The global economy is ubiquitous to the point that there’s no going back. Countries and regions can no more shut it out than rebuild the Berlin Wall or resurrect the Soviet Union.

When something as prosaic as a french fry can reach far-flung Indonesian islands, consider how far dollars, yen and euros can go. When merchants risk their lives to save a stash of potatoes, consider how readily global economic forces can topple governments and build or destroy nations and regions.

Singapore and other nations could still succumb to the global crisis. Protesters are taking to the streets in neighboring Malaysia. They probably will turn out again when President Clinton and other Pacific Rim leaders meet in the recession-bound Southeast Asian nation next month.

The leaders could agree on economic checks and balances that would help guide the world toward recovery. But the wide sweep of the humble french fry suggests that no one can claim immunity to swings of the global economy.

After saving Simplot’s french fries May 14, Karoll retreated to his 10th-floor office in central Jakarta. He gazed in awe as the city lit up in flames.

Directly below, rioters threw rocks at the front of a Hero supermarket, smashing windows. They entered and began looting.

Karoll was safe, his office building protected by an electric fence hastily erected at the entryway. He watched as the three-story supermarket below him burned to the ground. So did one-third of the restaurants that bought fries from Simplot, including about 10 McDonald’s.

Suharto, Indonesia’s president, resigned May 21. After decades of ordering soldiers to hunt down guerrillas and leftists, the dictator was toppled by markets and globalization.

*   *   *

In Singapore the same month, software salesman Ernest Enver pocketed his cell phone one evening, loosened his starched white collar and strode into McDonald’s.

Enver was relieved to leave the office. Asia’s economic woes were hurting business.

Enver, a descendant of Russian Jews, scanned the restaurant. He spotted his wife, Becky, a trilingual Chinese mom, doling out french fries to the couple’s three children with Singaporean efficiency.

J.R. Simplot’s fries—grown in Washington by Hutterites, sanctified by Muslims and transported by Protestants—had reached the dinner table of a Roman Catholic family in a multi-ethnic Asian city state.

After narrowly escaping economic and political meltdown and traveling halfway across the globe, the cooked fries had seven minutes—according to McDonald’s rules—to cross the counter.

Enver joined his family and dug in. “McDonald’s has the best french fries in Singapore,” said Enver, a fast-food connoisseur. “Australian McDonald’s are OK. In the U.S., they’re very dry. I like Burger King better there.”

It was the classic Singaporean scene: Cosmopolitan, professional couple eat in Western restaurant with well-schooled, well-behaved kids. They discuss his workday, her plans for the new apartment. They decide on the Asian restaurant where they’ll dine once the kids are in bed.

But Enver felt vulnerable last May as Singapore wavered in the eye of a worsening economic storm that ripped through neighboring countries.

“Were a small island,” Enver said. “Any of them that goes under would pull us down.”

*   *   *

The carnage in Indonesia took its toll on a key segment of the nation’s population. The middle class, which flowered in Indonesia and across Asia during the region’s economic rise, faces extinction.

Jakarta’s middle class included Indonesians such as Jimmy Lubis, whose house in a pleasant suburb has many of the trappings of a middle-class home in the West. His family of four has a television, a stereo and a desktop computer.

But by May, Lubis, 35, a former futures commodities broker trained as a lawyer, could no longer afford to take his daughter, Savina, then 5, to McDonald’s.

“She loved those french fries,” said his wife, Emma, 32. “Now we don’t go out at all.”

Indonesia’s middle class was never large. An estimated 18 percent of households earned more than $400 a month in late 1996.

Members of the middle class looked forward to buying new homes, founding businesses and sending their children to college. They were the people who ate french fries and consumed other Western products.

Westerners awed by Asia’s rise saw the emerging middle class as the new hope of the world economy.

“They are increasingly regarded as the economic dynamisers of the 21st Century,” wrote Richard Robison and David Goodman in a 1996 study, “The New Rich in Asia: Mobile Phones, McDonald’s and Middle-Class Revolution.”

After the economic crash, half of Indonesia’s 200 million people are expected to descend this year below the poverty line of $5 a month.

Children are among the main victims.

Authorities estimate that more than 6 million Indonesian elementary school students are in danger of dropping out. More than 250,000 Thai students have already left school for lack of money. The exodus could stunt future economic growth, limiting the supply of productive, skilled workers.

The demise of much of Asia’s middle class fuels nationalism, as unemployed workers lash out at foreigners or local ethnic groups. Mobs in Indonesia target ethnic Chinese, who control the nations economy, for rapes, muggings and murder.

Lubis worked briefly for a Western firm and for a home remodeler after his brokerage went bankrupt. He sold the family car to start his own remodeling business. By May, he scrounged occasional work repairing air conditioners or installing wiring.

The Lubis family, with a baby and no health insurance, was exhausting its savings as prices rose.

In its heyday in the 1980s and early 1990s, Asia’s new middle class drove the economic growth of nations. The middle class in places such as South Korea and Taiwan reached the critical mass necessary to fuel political reforms, converting authoritarian regimes into democratic governments.

The question now is how Asia and its once and future middle class will reinvent themselves.

*   *   *

Back on the farm, conditions are bleak. Hutterite farmer Albert Wollman, who helped plant the crop that Simplot sent to Singapore this year, stared glumly from his tractor during the potato harvest this month.

Potato processors agreed this year to pay farmers just over $80 a ton for russet Burbank spuds. That’s down more than $10 from 1996.

The Hutterites won’t make up the difference on crops they rotate through the potato fields. Depressed prices meant they lost money on every bushel of wheat they harvested this year.

Other farmers whose potatoes ended up in the batch that went to Singapore are also hurting.

Glen and Diane Roundy, who farm 2,500 acres outside Pasco, Wash., stored potatoes this month that were too deformed from last summers heat to make french fries. “I don’t know how long were going to be able to hold on,” Diane Roundy says.

Dale Lathim, who represents farmers in negotiations with processors, expects some of the Columbia Basin’s 320 processed-potato growers to give up. “It’s going to be survival of the fittest,” Lathim says.

The fittest will get bigger. Big farms buy big machines and equipment but employ fewer people.

Wollman drove slowly recently as he moved his potato harvester along a county road. Not so long ago, he would have seen a farm house every two miles. Now it’s more like every 10 or 15 miles.

“Sometimes out in the field you get to somewhere where you see old auto parts, the debris of what used to be a human life. You often wonder: Who were the people, where did they come from, where did they go?”

*   *   *

The Northwest hangs in the balance, caught between the resilient U.S. economy and teetering Asian countries.

If Japan fiddles as Asia burns, missing its chance at economic recovery, Americans could lose many more jobs and savings.

If Asia recovers, the Northwest could again capitalize on its unique position as a gateway to the Far East.

But the Northwest will have to get smarter about Asia.

In the 1980s and early 1990s, Asia was easy. Change the tax system—as Oregon did in 1984, leading the nation—and Japanese companies would build huge factories in your state.

Ramp up your exports to Asia—as Oregon did, leading the nation in export growth—and jobs would blossom. Promote tourism, and Asians would ride Delta Air Lines nonstop to Portland.

Now things get tough. Komatsu Silicon America lays off more than half of its 220 employees and suspends production at two of its three Hillsboro plants. Oki Semiconductor and Willamette Industries Inc. lay off workers as Asian markets dry up. Delta postpones the launch of daily nonstop flights from Portland to Osaka, Japan.

One response could be to switch to other markets, exporting goods to Latin America or recruiting investment from Europe.

But Latin America has its own economic problems and lacks Asia’s massive purchasing power. Europe will continue to be an important and growing trade partner, but it’s not on the Northwest’s doorstep.

Another strategy is to target Asian markets selectively.

Follow the french fry, and a revealing picture of Asia emerges. Simplot’s sales are down 30 percent, year-on-year, to Indonesia, Malaysia, Thailand and South Korea, the worst victims of Asia’s decline. McDonald’s in Indonesia sells the Rice Egg, a soggy alternative to fries.

French fry sales are flat to Singapore and Hong Kong, which escaped the worst of Asia’s turmoil. But fry sales are strong in Japan, even as the economy enters a dangerous, deflationary cycle.

While a McDonald’s meal was a treat for members of Indonesia’s middle class, it remains an economizer for the Japanese, who keep buying fries. McDonald’s reported Monday that its third-quarter sales rose 5 percent to $9.25 billion.

For french fries, Asia’s economic storm clouds carry a silver lining. Several nations are slashing tariffs charged for fries under mandates from the IMF, which lends money on condition of reforms.

One of the forces behind the reductions is a group called the American Potato Trade Alliance, formed in Portland in June 1997. Assembling the links of the international french fry chain for the first time, the group includes growers, processors, marketers, freight forwarders and fast-food executives.

Indonesia will cut its tariff on imported fries from 25 percent to 5 percent. Thailand will cut its rate from 54 percent to 48 percent initially. The Philippines might reduce its import tax from 30 percent to 10 percent.

“It’ll sure mitigate the tailspin,” says Will Wise, chief executive officer of the Oregon Potato Commission.

Tariffs are falling for other products as Asian nations open their economies further to imports and expose business practices to greater scrutiny. Japan, for example, has opened its financial sector, allowing Citibank and others to sell shares to the Japanese public.

But the widening economic fallout has sparked a backlash. Some Asian countries, which were only too eager to open for investment during good times, are trying to limit capital flows.

The Hong Kong government, known for its free-market ways during British rule, recently intervened to buy blue-chip shares in its stock market to thwart speculators.

Malaysia, which entered a recession in August, decided in September no longer to allow its currency to trade outside its borders. The strict controls follow the example of China and India, which weathered turmoil because they remained insulated from international financial markets.

Some economists now argue that while trade in goods and services should be open, controls on capital can protect developing countries from global economic pressures. Others argue that controls will discourage needed foreign investment.

In the Northwest, foreign investment has plunged.

Oregon economic development officials helped attract $173 million in investment last year. That’s one-fifteenth of the figure in 1995, when Japanese and South Korean firms announced plans to build huge semiconductor factories.

Japan stands out as the most critical country for a recovery of the global economy.

If Japan manages to rebuild its ailing banks, burdened by as much as $1 trillion in bad loans, capital could begin flowing through its economy. Japan could lead Asia back to growth.

But if Japan misses the chance, the yen, which has strengthened recently, could slide against the dollar.

A weak yen would hurt China, because it would make Chinese products more expensive in Japan, a major market. Beijing, which has steadfastly supported its currency, the renminbi, might then devalue it.

A weak renminbi could spell disaster for Southeast Asian countries. Their exports, so crucial to the recovery, would suddenly be undercut in the world market by cheaper Chinese goods.

Thailand, Malaysia and Indonesia might then have to further devalue their currencies. The vicious cycle of devaluations, bankruptcies, layoffs and social unrest, would begin all over again.

*   *   *

After a short prayer, Singapore 12-year-olds (from left) Terrence Lum, David Khoo and Augustin Boey dig into french fries from the load made from Hutterite potatoes in the Pacific Northwest. Their teacher, Lily Lee, took the boys to McDonald’s for a tutoring session as Asia’s econimic storms swirled around Singapore.

Ellsworth Culver, a humanitarian aid manager based in Portland, peered from a car this month at gutted shops and abandoned construction sites in Jakarta.

Culver had not expected to visit the once-prosperous city. Scores of hungry children approached the Mercedes at traffic signals.

“The kids have dropped out of school,” Culver said. “They’re singing songs, selling magazines to drivers, anything they can do.”

Culver, senior vice president of Mercy Corps International, is a 45-year relief worker who has seen it all. He’s used to dealing with economic basket cases from North Korea to the Balkans.

But Indonesia, the fallen economic dynamo, is different.

Mercy Corps usually distributes food and medicine in refugee camps, not urban areas. Now Culver, in an odd twist on Karoll’s work distributing french fries, must set up a chain of warehouses, trucks and workers to ward off severe hunger in Indonesia’s cities.

Eighteen months after the Hutterites planted the potatoes that ended up in Singapore, conditions have come to this: Wheat planted as an unprofitable rotation crop on their Washington farm could end up in Indonesia, the spuds’ original destination, as emergency relief from the U.S. government.

The United States will send as much as 230,000 tons of U.S. wheat, stacked up from a bumper crop, to Indonesia to be milled and sold for rupiah. Mercy Corps intends to distribute as much as $7 million of the proceeds to student groups, health and agriculture organizations and other proponents of development and reform.

The emergency program won’t do much for Indonesia’s economy. And while U.S. farmers will gain a customer, farmers in Canada and Australia who usually sell wheat to Indonesia aren’t apt to welcome the plan.

At the dawn of the Pacific Century that held so much promise, food relief has become the latest link between the Northwest and the Far East.

Food might also be the salvation of the Lubis family in Jakarta. Jimmy Lubis, still unemployed, survives by selling rice to restaurants through a connection provided by his father-in-law.

The family eats tofu instead of meat. They have managed to keep their house.

Every week or so, grandparents drop by, and—in a faint echo of better times—6-year-old Savina gets to go to McDonald’s for her favorite fries.