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| World Marketplace |
Pacific Doldrums
Hadi Soesastro
08/01/06
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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. |
The need to balance the interests of foreign investors with the desires of the voting public, particularly the growing Islamic fundamentalist faction that capitalizes on nationalist sentiment, is a challenge for the government. But a more pressing problem is that foreign investors’ patience may be wearing thin. Seven years after Indonesia’s first presidential election, investors are still waiting for crucial economic reforms. Indonesia has had four presidential administrations; not one of them has been strong enough to make the needed changes.
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.
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