Hadi Soesastro
08/01/06
Press coverage of Indonesia gives the impression that the country is wracked by tsunamis, volcanic lava, bird flu, rioting and terrorist bombings. In reality, life goes on at its usual bustling tempo in Jakarta, the center of business and government for this 3,200-mile-long archipelago. In the capital, investors and the voting populace are instead bearing the onslaught of another kind of disaster: the struggle between President Susilo Bambang Yudhoyono, elected by popular vote in 2004, and his own incompetence.
Yudhoyono garnered 62 percent of the ballots, largely because he promised to get the country’s economy roaring again. It has stagnated since the 1997 Asian financial cri-sis, which ended Indonesia’s membership in the club of emerging Asian tigers. Since then, the economy has been buffeted by a series of market surges and slumps, caused by inflated and subsequently unfulfilled expectations. But its underperformance is not a function of natural disasters or internal ethnic tensions, nor any fundamental economic flaw. Indonesia has a large labor force, abundant natural resources and a proven ability to harness its assets to produce double-digit growth. It is the world’s third-most-populous democracy (after India and the United States). It should be a model of how a predominantly Muslim nation can sustain a secular democracy, and its economy should rival those of India, China, Vietnam and other Asian powers.
| With the right leadership, Indonesia could be leading the region, rather than riding the coattails of its neighbors. |
Yudhoyono came into office promising to tackle the country’s unemployment problem. To do this, he said, he would make the reforms necessary to propel the economy to an average annual growth rate of 6.6 percent until 2009; investment and exports would be the main drivers. The stock market rallied after his election and the economy grew at a rate of 5.6 percent in 2005. But he has since shown himself to be a very cautious and indecisive leader. The fact that his political party holds less than 10 percent of the seats in parliament exacerbates his problems. He was forced to form a coalition cabinet in order to co-opt several rival parties. This alliance, which includes some rather fundamentalist Islamic parties, lacks a clear platform, and Yudhoyono is too weak to control his own cabinet.
The few bright spots in the cabinet are its economic technocrats: the coordinating minister for Economic Affairs, Boediono (he uses only one name, as do many Indonesians); the minister of finance, Sri Mulyani Indrawati; and the minister of trade, Mari Elka Pangestu. They are all U.S.-trained economists of high academic standing and personal integrity, and they have worked hard to assure investors that the economy will be managed responsibly. Sri Mulyani, for example, showed strong resolve last spring when, just two weeks after World Bank President Paul Wolfowitz visited and called corruption one of the biggest threats to development, she replaced the two powerful but allegedly corrupt directors-general of the tax and customs offices. Whether they will continue to succeed depends on the president’s ability to protect and insulate them from political pressures.
This policymaking uncertainty has weighed on the financial markets this year. The stock market enjoyed record gains in the spring, but its upward trajectory was cut short by the sudden exit of foreign portfolio investors, which sent stocks lower and caused the rupiah to descend to a five-year low. The main culprit seems to have been an ill-conceived move to increase government-set fuel prices by more than 100 percent. The government wanted to put the billions of dollars that had been flowing into fuel subsidies to better use; instead, it spurred inflation and dampened growth. Gradually increasing prices by 20 to 30 percent each quarter would have been the smarter move, but the government admits that it wanted to make a sweeping change rather than waste time dealing with protests every three months.
Inconsistent Policies
Moreover, the government must also resolve a number of outstanding high-profile disputes with international investors, which have made others leery of committing capital to the country. It is aware of this problem, and made a breakthrough in March when the state-owned oil company, Pertamina, finally resolved a four-year dispute with ExxonMobil over who should oversee development of the Cepu oil region between east and central Java. The parties agreed that ExxonMobil will lead the operations, but Pertamina will participate as a junior partner. This satisfied nationalists’ desires to ensure that the exploitation of these resources was not entirely left to foreigners. Pertamina’s role in the development might be nominal, but it hopes to learn from its partner in order to develop its own oil-producing capacity.
Another well-publicized dispute has given pause to foreign investors considering opportunities in the archipelago. During the Asian financial crisis, Indonesia decided to privatize its cement industry, and sold Mexican powerhouse Cemex a minority stake in Semen Gresik, the country’s largest cement producer. In 2001, under then-President BJ Habibie, the government reneged on its pledge to offer Cemex additional equity, which would have given it a majority stake, after protests in neighborhoods with Semen Gresik plants. In 2003, Cemex filed suit in an international arbitration court.
| TOP VIEW The world’s third-most-populous democracy, Indonesia apparently possesses the workers and resources to become one of Asia’s leading economic engines. But although there are some glimmers of light, the country remains burdened by ineffectual leaders who are unable or unwilling to institute investment, labor and legal reforms demanded by many foreign investors. |
Investors shuddered at a similar situation in late 2005, when the government hinted that it wanted to buy back the shares in telecommunications giant Indosat, which had been sold by the previous administration to Singapore Technology Media (ST Telemedia). The government argued that the strategic importance of the telecommunications industry required it to be under the control of the state. ST Telemedia refused to sell its stake.
Clearly, the government must adhere to the privatization policies and agreements set by earlier administrations. Indonesia should emulate the United States by making it clear to investors from the outset that certain sectors or companies cannot be acquired by foreign interests. In the U.S., free traders and protectionists have long argued over such deals. They squabbled when China National Offshore Oil Corp. bid to acquire Unocal. But the situation in the United States seems much clearer: Debate usually takes place before a sale is approved, whereas on countless occasions, Indonesia has changed its policy after a deal has been set in motion or closed.
Another problem for foreign investors is the Indonesians’ nationalistic opposition to foreigners owning the country’s natural resources. Multinationals such as ExxonMobil, Newmont Mining and Freeport McMoRan have run up against Indonesian hostility toward the exploitation of natural resources by foreigners, particularly when these multinationals appear to endanger the environment or local communities.
State of Stasis
Yudhoyono’s popularity has dwindled since his election; he has only about two years to institute the necessary reforms before the country becomes preoccupied with the 2009 elections. In their fourth and fifth years, Indonesian administrations become immersed in election preparations and campaigns. The process climaxes with a long, disruptive election season: parliamentary elections are followed by two-stage presidential elections that unfold over approximately six months.
If Yudhoyono cannot make good on his campaign promise to improve the economy well before the elections, he will lack the support necessary to stay in office. But the measures he needs to enact to create a hospitable investment climate for foreign investors, especially labor reforms, will most likely upset voters.
| Unfortunately, it seems unlikely that Indonesia will produce a strong president in the foreseeable future. The economy will muddle along for years to come unless the country's various regions strengthen their local governments to counteract the persistently weak center. |
Yudhoyono wants to appease labor to maintain his popularity, rather than taking the harder road and explaining to them why Indonesia’s laws must change. Vice President Yusuf Kalla, a more proactive and decisive leader, takes a much firmer position on the issue. He has championed other unpopular but important reforms. For example, Kalla pressured the president to reduce fuel subsidies. He cannot, however, continue to strong-arm Yudhoyono over every measure without damaging his relationship with the head of state.
The growth in the Asia-Pacific region overall will provide some boost to Indonesia’s economy. But with the right leadership, Indonesia could be leading the region, rather than riding the coattails of its neighbors. Unfortunately, it seems unlikely that Indonesia will produce a strong president in the foreseeable future. The economy will muddle along for years to come unless the country’s various regions strengthen their local governments to counteract the persistently weak center.
Hadi Soesastro is the executive director of the Centre for Strategic
and International Studies, a private, nonprofit research organization based in Jakarta.