Indonesia: An archipelago of opportunities

Statistics don’t always tell us the full reality, but they still speak louder than words, especially when it comes to large and populous countries such as Indonesia. The Indonesian economy was, according to the McKinsey Global Report 2009, the sixteenth largest in the world - which explains the presence of Indonesia in the G-20.

Other ‘statistics’ put the country on the 27th place of the world largest economies. In a 2012 report titled «The Archipelago Economy: Unleashing Indonesia’s Potential», McKinsey expected that Indonesia would be the seventh economy by 2030.

In any case, the reality tells us that Indonesia doubled its gross national product (GNP) in the last decade, that 53 percent of the 250 million Indonesians are urban, half of the population is younger than thirty and millions joined recently the «consuming class». McKinsey puts the total on 45 million of potential consumers, other sources estimate a more modest 30 million.

A major reason for the recent growth has been the surge in domestic consumption, accounting for 60 to 70 percent of GDP. The real estate industry is flourishing, and sales of motorcycles and cars grew dramatically over the last decade. Due to very cheap loans, more than 7 million motorbikes are sold every year, bringing the total of those noisy two wheelers at 65 million.

In 2010, the country had already 220 million registered mobile phones, and it ranks among the top five countries in terms of social media, along with India, Mexico, Brazil and the United States. This consumption boom was made possible by a strong increase in labor productivity, low inflation and the increase in purchasing power of a predominantly young population.

The Achilles heel

Although the economy is strongly supported by its own consumers, the economy falls more and more into the hands of foreigners. At a public secret that many local business people have their bank accounts abroad, especially in neighboring Singapore, a well know tax haven. At the same time, also foreign investments are on the rise.

In 2013, ASEAN overtook China as the main destination for foreign direct investment (FDI), and Indonesia took a big share of those investments. It’s appalling how quickly things are changing, until 2011, the lion share of FDIs in the region went to China, 2 years later, China is investing massively in the region.

This growing economic dependency on foreign capital largely explains macroeconomic difficulties in 2013. Economic growth rose less than expected, the rupiah lost 20 percent of its value against the dollar and the stock market declined with 17% between May and December.

One of the main reasons was the fact that many international investors moved out their investments from emerging countries out of for fear for tapering policies issued by the U.S. Federal Reserve. On top of that, stagnant export earnings added pressure on the balance of payments. The falling market prices for some strategic resources like coal and palm oil, were too blame, as both account for a quarter of the total exports of the country.

This concern exposed another weak point of the economy, the heavy dependency on the extraction and export of natural resources such as ores, minerals and tropical forest. Since 2007, Indonesia is the largest producer of palm oil and the mining sector boomed. However, both sectors are prime examples of growth which is accompanied by a particularly negative impact on environment and climate.

Despite a moratorium on new concessions in protected rainforests, the rate of deforestation remains worrying, and the country does not succeed in bringing its GHG-emissions due to land use conversion. This brought Indonesia on third place of global emitters, after China and the United States.

From the moment it allowed the conversion of peatlands into plantations, emissions exploded, and even with exceptional efforts in the coming years, it will be very hard to meet the reduction, 26 percent by 2020, the president promised in 2009.

Asian tiger

The economic success of Indonesia has followed a particular path. It started in the 1980s under the authoritarian rule of Suharto, when the country was presented as one of the Asian tigers where economic growth was achieved based on completely different values and social infrastructure, compared to the West.

In 1997, the economy imploded, when Indonesia got sucked into the Asian crisis, which also lead to the end of Suharto’s “New Order”. However, the economy recovered quite fast which proved that the multi-party democracy was able to deliver growth at the same level than before, under autocratic governance.
 
The GDP of Indonesia in 1970 was at $ 90 billion. By 1997, it had grown to $ 200 billion. However, in 1999 - after the crisis - which was again fallen to $ 90 billion, while in 2014, GDP exceeded the milestone of $ 1 trillion.

Increasing inequality

The excellent macroeconomic reports and amazing statistics hide the fact that half of the households live on $ 2 a day or less. Fabby Tumiwa of the Institute for Essential Services Reform, “Almost half of Indonesia’s GDP is accounted for by companies registered abroad . The result is that a huge proportion of our wealth does not remain in the country. Moreover, 70 percent of economic activity is located in and around Jakarta, and you have to conclude that the vast majority of Indonesians are still excluded from the economic boom. “

This analysis is supported by the Human Development Index of the United Nations Development Programme (UNDP). In the most recent report,  Indonesia is on position 121, a slight increase compared to previous years, but below the level of the neighboring countries Malaysia, Thailand and Philippines. The increase in prosperity was not yet translated into an improvement of the social standards. The gini-coefficient which measures the degree of income inequality, is moving into the wrong direction.

Budget doesn’t bridge the gaps

One important tool to address this is the national budget, and more specific, subsidize social services and essential products. The Constitution orders the central and regional governments to spend at least 20 % on education. Although Indonesia has 3,700 universities, the quality of education is generally weak, and there’s great inequality in terms of access to education.

The government should invest more in social development, but is faced with a serious legacy of the past, heavily subsidized fuel. It dates from the period when the country was still exporting crude oil, but in the meantime it became a net importer.

With skyrocketing oil prices, the share of these subsidies increased to 15% of the national budget, while the main benefit goes to the middle class. The government reduced the subsidy in 2013, but not enough to change the tune.

Imagine the government would invest a similar amount in social development or, if we stick to the same “sector” - in renewable energy projects and public transport. It could bring a very strong impetus towards the development of a more sustainable economy, and moreover, connect people to electricity in the more remote areas of the archipelago.

It’s the law!

However, the main concern of the rural population today is not so much subsidies, but more judicial certainty, for example regarding access to land, quality of education, access to energy and better opportunities to bring their products to the market. Corruption remains a daily concern for the people and a huge drag on the economy. According to Transparency International’s Corruption Perception Index (2012) Indonesia is ranked 118th out of 183 countries, not really an impressive score.

In 2002, the government established the anti-corruption commission (KPK). Despite attempts by parliament to curb the power of the KPK, the commission has an impressive list of achievements.

The recent arrest of a Chief Judge of the Constitutional Court, Akil Mochtar, stirred a lot of commotion. He was in charge of monitoring the legal process of local elections and allegedly “sold” the district and gubernatorial elections to the highest bidder.

The price varied according to the economic opportunities and could amount to more than half a million euro to become the head of district. The Constitutional Court was a highly trusted institution because its judging was considered independent and free from government interference.

Despite, or perhaps because of the extremely active KPK, many corruption scandals keep on erupting. This feeds the general belief that companies and politicians, who are often closely interconnected, are still trying to make secret deals. More and more NGOs are collaborating with the KPK because it is one of the few government agencies which they trust.

Proud of democracy

The overthrow of dictator Suharto during the 1998 revolution known as ‘Reformasi’, did not only result in a multiparty democracy, but also a high level of decentralization of public administration with directly elected governors and bupatis, or district heads. All these districts and provinces were given a limited budget, which were deemed insufficient by the local elite to cover their ambitious plans of local leaders.

This partly explains the explosion of new concessions, mainly for mining and palm oil plantations which resulted in copious  cases of land grabbing and numerous conflicts between the new elite and the population, who often felt that democracy just brought a decentralization of corruption. BY NC 2

Still, the democratic credentials of Indonesia are strong. The Constitution guarantees the freedom of press, and a vibrant civil society is able to play its role of critical voices in society. The fact that Indonesia is the largest Muslim country in the world, makes this achievement even more interesting - and it’s a source of great pride for many Indonesians.

“Indonesia is not an Islamic state,” said Azyumardi Azra, director of the Syarif Hidayatullah State Islamic University, “It is a country with a very lively and active Muslim society, which nourishes our sense of citizenship, and strengthens social cohesion.”

According to Azra, experts from Middle East countries that are currently in transition are visiting Indonesia to learn from its expertise as it serves as a model how to build up a society after toppling corrupt autocrats.

Yet there’s still the threat of an intolerant Islamism at the very heart of the Indonesian state, which is bad news for both the secular state, religious minorities and indigenous peoples. Nego Tarigan of Walhi, the National Forum for Environment, suggests that the latter are moreover particularly threatened by the “development state” which is generally praised for the current growth: “It is extremely urgent that policymakers finally address the agenda of people who do not want to be part of that consumer driven society.

Last year, the Constitutional Court restored the land rights of indigenous people, a major victory that should protect them from land grabbing. They are entitled to follow their own rhythm of development. “

Growing protectionism?

Finally, Indonesia is not only important for the size of its economy, also its location is very strategic for global trade. Edy Prasetyono, vice-rector of the Faculty of Political and Social Sciences at the University of Indonesia estimates that « Annually, more than $ 400 billion of traded goods are passing through our waters ».

Analysts are pointing out that this explains the significant increase in the defense budget in recent years, from $ 5.45 billion in 2011 to $ 8 billion in 2013. However, this is still less than 1 percent of GDP, and lower than the defense budget of Singapore.

The biggest concern from the European Commission and other multilateral organizations such as the World Bank is that Indonesia will not follow the international trend of more open economies and liberalization, and makes moves to protect its economy.

Foreign mining companies should gradually be taken over by Indonesian partners. In 2012, divestment requirement to Indonesian interests were increased to 51% ten years after starting up commercial production.  

According to the 2009 Law on Mining and Minerals, the export of unprocessed raw materials would be banned. “From now on, nickel, bauxite (the raw material for aluminum), chrome, gold, silver and tin have to processed before they can be exported,” explains R. Sukhyar director general of the Indonesian Ministry of Energy and Mineral Raw Materials.

‘The government wants to upgrade the national industry by forcing the extractive sector to process their commodities in Indonesia. This hurts the smaller companies in particular. An exception was made for mining giants like Freeport-McMoRan and Newmont Mining, they can continue their exports after renewing their promise to build more smelters.’