International | Jun 19 2006
By Greg Peel
Indonesia is ranked behind only China, India and the US in world population and boasts an abundance of mineral and agricultural resources. Until the mid-nineties Asian crisis Indonesia was shaping up as the next big investment story amongst the Asian "tigers". Even beyond the crisis, Indonesia surpassed China as the largest destination for Japanese direct foreign investment until 2003.
More recently, foreign investment has slumped and the BRICs (Brazil, Russia, India, China) have stolen the limelight as the emerging market stories of the millennium. Indonesia is still wallowing.
Since the first ever direct presidential election in Indonesia which brought Susilo Bambang Yudhoyono to power in 2004, however, there have been signs of improvement. Yudhoyono had a lot to tackle.
Firstly, Indonesia is the world’s largest Muslim nation. Not a great incentive for Western investment in the current climate. Indonesia has been at pains to show the US that it is an important ally in the War on Terror and the US has recognised Indonesian efforts to that end. While the US is grateful for such support, it is only now considering renewing military ties with the country. Ties were severed after Indonesia’s despicable scorched earth withdrawal from East Timor in 1999 when independence was secured.
There is definite incentive for the US to implement military ties, given Indonesia is one of three countries (Malaysia, Singapore) laying sovereign claim to the Straits of Malacca, a longstanding hotbed of piracy, through which half the world’s oil and one third of its commerce passes. It doesn’t help that 222 people, including Americans and American allies (Australia obviously) died in Bali bombings, and that the alleged head of al-Qaida-linked terrorist organisation Jemaah Islamiyah has been released from prison before completing his sentence.
That’s just the beginning of Indonesia’s problems. Despite having enough oil reserves for the next 10-20 years, Indonesia became an importer of petroleum in 2004, and has long maintained a policy of subsidising fuel prices. Such subsidies were put in place long ago when oil prices were unsubstantial, but since the oil price has risen it has become even more problematic to attempt to abolish or reduce subsidies.
President Suharto tried it in 1998 and this led to major rioting which ultimately brought down his regime. Oil at the time was US$15/bbl and heading lower. President Megawati tried it 2003 when the price breached US$30/bbl, but large scale demonstrations forced a back-down. Clearly, the oil price is very important to the Indonesian people, which puts the government between a big rock and a very hard place.
However, to the surprise of most observers Yudhoyono was able to implement an effective oil price hike last October far larger than the previous two attempts which resulted in only a minor disturbance that was quickly quelled. Hirokazu Hiratsuka, senior economist with the Mizuho Research Institute, believes this "underscores the stability and executive ability of the Yudhoyono administration".
Ability or no ability, the Yudhoyono administration has had to deal with a string of natural disasters recently that would test the mettle of any government. First came the tsunami, then a follow-up earthquake off Aceh province. Recently Java has suffered another devastating earthquake, and the Merapi volcano has been threatening to do a Krakatoa. This is what you get when your country sits at the meeting place of two tectonic plates, and Indonesia is considering a nuclear power industry!
While on Aceh, the Yudhoyono government has had to find means to tackle the perennial oppression and genocide of the Christian population by the military and more recently deal with the West Papuan secessionist movement, which has resulted in the Australian government attempting to effectively shut off its borders to anyone, anywhere, in order to not upset the Muslim hordes to the north. The East Timor situation has not exactly gone away either.
Then there is corruption. Corruption watchdog Transparency International rates Indonesia as 137th amongst 159 countries (on a lowest is worst basis). By comparison the US is 17th. Jon Quah, professor of political science at the University of Singapore, notes that graft became endemic under 32 years of the Suharto regime in which the family is estimated to have pocketed some US$15 billion. Only Marcos of the Philippines could top that.
Asian countries have suffered longstanding problems with corruption – which Quah defines as the abuse of public power through bribery, extortion, influence peddling, nepotism, fraud or embezzlement – for both sinister and slightly more innocent reasons. Quah cites five separate reasons for Asian corruption, the least sinister being the ancient Asian tradition of gift-giving that dominates culture and makes the distinction between a bribe and a gift of gratitude difficult for all levels of society. Add to that seriously poorly paid civil servants, the expansive role of governments in national development (absolute power corrupts absolutely) as well as low risk of detection and punishment and a lack of political will to do anything about it, and you have a climate rife with corrupt influences.
Since Suharto, Indonesia has been ruled by Abdurrahman Wahid who himself was accused of corruption, and Megawati Sukarnoputri who delayed the establishment of an anti-corruption commission for two years. Nothing here has enticed foreign investors to try their luck by handing over money to Indonesians.
Part of Yudhoyono’s platform was to attack the corruption problem, but Hiratsuka suggests that while the new administration has made inroads, it is still "woefully short" of elimination. Quah notes Yudhoyono actually made matters worse by setting up a second corruption task force to work alongside the first, which now simply competes.
Corruption, it seems, will long cast a pall over Indonesia. Extremely important to foreign confidence is reform of the legal system, which Hiratsuka suggests is long behind schedule. (The feeling in Australia is that if Schapelle Corby had only bribed the right people she would be walking free today. Whether or not this is true, it says something about foreign perceptions).
An overhang of failure to reform the legal system is evident in Indonesia’s lack of infrastructure projects. While the rest of Asia is building like there’s no tomorrow, only 15 of 91 Indonesian infrastructure projects drawing on private capital, set forth in early 2005, have resulted in successful bids. Hiratsuka blames a lack of confidence in government guarantees.
Nevertheless, there has still been a level of foreign investment flow into Indonesia. Hiratsuko notes the deficit in Indonesia’s capital account, which had persisted since the Asian currency crisis, finally reverted to surplus in 2004 reflecting the rise of inward securities flows and the recovery of inward direct investment. Such confidence was "stimulated by the stabilisation of Indonesia’s socio-political landscape under the Yudhoyono administration and the progress of its policy measures, as well as the rise of consumer spending within Indonesia".
The Jakarta Composite Index of stocks rose from the time of the election in mid-2004 to reach a new high in August 2005. Then it collapsed again, driven by a loss of confidence that Yudhoyono was not moving fast enough on the oil subsidy problem and not attacking inflation with monetary policy tightening. The rupiah subsequently collapsed as well.
However, Yudhoyono took note, and acted swiftly with policy measures that highlighted, as Hiratsuko puts it, the President’s "keen awareness and ability to respond to risks and crises".
So the Indonesian story trundles on with ups and downs and ups again. The Yudhoyono administration faces numerous tasks, and Hiratsuko suggests the lack of solid results in the second year of presidency has meant the third will need to show signs of improvement to avoid losing the confidence of businesses and investors once more. Indonesia is at a critical stage, Hiratsuko believes.
