13 December 2018
Indonesia (Bali)

Indonesia in the Asian Century

Indonesia has great potential, but it is burdened by an oligarchic democracy, and other political and social hurdles, which makes it very difficult to realize this potential writes John West.

When the corrupt, authoritarian regime of President Suharto crumbled under the weight of the 1997–1998 Asian financial crisis, Indonesia’s future looked problematic. But it is now a democracy, which has achieved a solid economic performance, and which rapidly implemented a bold decentralization of government. However, the next phase of Indonesia’s economic development could be rather challenging.

Indonesia’s economy recovered quickly from the Asian financial crisis, thanks in part to reforms imposed by the International Monetary Fund . It then hitched its wings to the 2001–2010 commodity price boom, driven by rapid growth in China and India. Indonesia is a commodity-rich country, and it benefited greatly from the threefold increase in prices for coal, crude palm oil and rubber, all of which it has in abundance.

Indonesia’s economic growth rate has been in the 5–6% range since 2000. It now has the world’s eighth largest economy in purchasing power parity terms, thanks in large part to its population of 260 million, the world’s fourth largest. Indonesia has achieved an impressive reduction in poverty, with the share of the population living under $3.10 a day falling from 85% in 1990 to 42% in 2012. But the middle class is miniscule with only 5% living on more than $10 a day. In 2013, some 36% of all children under the age of five (8.4 million) were stunted, a condition which delays motor development, impairs cognitive function, and results in lower IQ and poor school performance. Inequality grew sharply during the commodity boom, as high-income households benefited much more than did low-income households. And GDP per capita remains only one-fifth of that of the US.

The Indonesian government squandered the sharp rise in public revenues during this boom period, with much of the windfall being consumed via fuel subsidies which benefited higher-income families disproportionately. At the same time, public investment in infrastructure lagged economic growth, with the result that Indonesia’s terrible infrastructure deficit is now worse than ever, thereby cutting the potential for growing productivity.

Overreliance on commodity exports, which account for over two-thirds of total, has also harmed Indonesia’s longer-term development prospects. Manufactured exports have slipped back in importance, and Indonesia has experienced deindustrialization. Commodity-driven growth was also accompanied by further environmental degradation and rapid deforestation, along with illegal logging and fishing.

The Indonesian economy now stands at a critical juncture, as commodity prices have fallen back again since 2011, and its oil and gas production is in long-term structural decline. Indonesia has also been hit by China’s economic slowdown.

The 2014 election victory of Indonesia’s new president, Joko Widido (“Jokowi”), over ex-general Prabowo Subianto, and the smooth transition of power, was a testimony to the growing maturity of Indonesia’s democracy. But Jokowi faces a daunting agenda to keep the Indonesian economy on a path of solid growth.

Like India, Indonesia is a difficult country in which to do business, being ranked only 91st out of 190 countries surveyed by the World Bank, much worse than its neighbors Malaysia (23rd) and Thailand (46th). Its policies toward inward FDI are very restrictive, especially in the mining sector, and corruption is endemic. Symptoms of Indonesia’s poor infrastructure are Jakarta’s reputation for having the worst traffic in the world, and logistics bottlenecks which are preventing better integration into Asia’s GVCs .

If only Indonesia could improve its business and investment climate, it has great opportunity to unleash the productive potential of the economy, and become an industrial power, especially in light of China’s declining attractiveness as an investment destination. And also like India, Indonesia has a large youthful population entering the workforce over the coming years, who requires employment opportunities.

But to convert Indonesia’s youth bulge into a demographic dividend will require a massive improvement in its education. Some 70% of Indonesian manufacturers indicate that it is very difficult to fill skilled positions. In this context, Indonesia was ranked near the bottom of the 72 countries surveyed in the OECD PISA education survey of 15-year-old students. Regrettably, Indonesia Corruption Watch reports that one-third of Indonesia’s education budget is misappropriated, and some 20% of Indonesian teachers are absent from the classrooms every day.

President “Jokowi” made an impressive start to his presidency since he took office in October 2014. His decision to abolish most fuel subsidies was courageous, even if it was facilitated by the sharp fall in world oil prices. He is pushing hard to improve infrastructure. And he has launched a multitude of reform programs, though implementation is lagging greatly. But Jokowi faces very difficult political opposition in the parliament to advance his reform agenda.

However, Jokowi’s greatest opponents are Indonesia’s oligarchs, the vested interests of rich business and military elites. Indonesia is perhaps the classic case of an oligarchy—government of the “few”, by the few and for the few, the very antithesis of the ideals of Abraham Lincoln. Indonesia’s government has always been dominated by a small group who seek to distort government decision-making to favor or protect their financial and other interests—at the expense of the general population. I am reliably informed that nothing less than murder often occurs when an oligarch’s privileged business position is threatened by an outsider.

Indonesia’s oligarchy is reflected in the very high concentration of material wealth power, according to Jeffrey Winters. The total wealth of Indonesia’s 40 wealthiest citizens, $71.3 billion, is very much higher than those of Malaysia ($51.3 billion), Singapore ($45.7 billion) or Thailand ($36.5 billion), even though the GDPs per capita of these latter countries are much higher. Indeed, the combined wealth of this handful of Indonesian oligarchs equals some 10% of GDP. A majority of Indonesia’s oligarchs live semi-permanently in Singapore, where much of their wealth is also stashed away.

Most of today’s Indonesian oligarchs grew up under President Suharto, through the corruption, licenses and privileges of his regime. As a practitioner of “sultanistic oligarchy”, Suharto limited their influence and kept his oligarchy under control. But with the demise of the Suharto regime in 1997, Indonesia’s oligarchs proceeded to buy up the political system.

Indonesia’s oligarchs now finance all the major political parties, and have large influence over all decision-making. Both candidates in Indonesia’s 2014 presidential elections had their election campaigns bankrolled by oligarchs, with the winner incurring immense post-election political debts. America’s emerging oligarchy pales into insignificance with Indonesia’s.

Indonesia has an immense policy agenda for it to continue a path of strong economic growth and poverty reduction, and to exploit the opportunities of the ASEAN Economic Community. Investments in infrastructure, education, health and social security all require public revenues for financing. But government spending represents a paltry 15% of GDP, and must be increased by raising more government revenues. But oligarchs and many others are reluctant to pay their taxes.

The Indonesian government’s tax amnesty program to encourage Indonesians to bring back money stashed overseas is a promising initiative to cure the country of its tax cheats. But the results so far are a mere drop in the bucket of this massive problem.

Looking ahead, another factor which will likely weigh on Indonesia is the prospective Islamization of the nation’s politics. The April 2017 election for the position of Jakarta governor pitted Basuki Tjahaja Purnama (known as “Ahok”), a Chinese Christian, against Anies Baswedan, a Muslim who won the election. The turbulent campaign featured mass rallies led by a hardline Islamist movement, which has strengthened in recent years in a country which had been long dominated by a moderate form of Islam (more than 80% of Indonesia’s population professes Islam).

In a clear sign that religious pluralism and tolerance is now under threat in Indonesia, in May 2017 Ahok was sentenced to two years in prison for blasphemy. His crime was to say that Muslim clerics had used a Koranic verse to mislead voters by telling them that Muslims were not allowed to vote for a Christian. This mood will likely spill over to national politics, as the Jakarta governor election traditionally sets the tone for the country. Jokowi, Indonesia’s President, was previously Jakarta’s Governor. And politics in Indonesia and its neighbor the Philippines are now being destabilized by a growing presence of the Islamic State group (ISIS).

Indonesia has great potential to succeed in its development challenge. But for a country burdened by an oligarchic democracy, and many other political and social hurdles, it will be very difficult to realize this potential.
Tags: asean, indonesia, jokowi

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