Dec 15, 2015

Indonesia - Indonesia’s fateful choices

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It was Indonesia that led its ASEAN partners down the path towards the ambitious ASEAN Economic Community (AEC). The AEC was signed onto in Kuala Lumpur at the ASEAN leaders meeting in November.

This was the year of delivery. Well, perhaps but not exactly — and that is probably an apt descriptor of where Indonesia is at on many fronts after the first year of the Joko Widodo (Jokowi) presidency. Not quite there yet, but still relied upon to deliver.

The AEC is a major enterprise to realise a single market and production base, allowing the free flow of goods, services, investment and skilled labour, and the freer movement of capital across Southeast Asia. If ASEAN were one integrated economy, it would be seventh largest in the world with a combined GDP of US$2.6 trillion in 2013. It could be fourth largest by 2030 given recent growth trends. With over 625 million people, ASEAN’s potential market is larger than the European Union or North America. Next to China and India, ASEAN has the world’s third largest work force and, unlike China, it is young and the demographic is favourable.

ASEAN is also among the most open economic regions in the world, with total merchandise exports of over US$1.2 trillion — nearly 54 per cent of total ASEAN GDP and 7 per cent of global exports. Yet, intra-ASEAN trade is still only around 25 per cent (ranging from 14 per cent for Vietnam to 65 per cent for Laos).

The AEC has four objectives: creating a single market and production base; increasing competitiveness; promoting equitable economic development; and the further integration of ASEAN into the global economy. On its 40th anniversary in 2007, ASEAN adopted the ASEAN Economic Community Blueprint, and advanced the completion target to 2015 from 2020.

While ASEAN leaders duly signed on to the AEC in Kuala Lumpur last month, to avoid missing the deadline they had set themselves, the agreement is expected to have very little immediate practical effect. ASEAN citizens will be allowed to work in other ASEAN countries but in only eight sectors, including engineering, accountancy and tourism. These sectors comprise only 1.5 per cent of regional jobs. As this year’s chair of ASEAN, Prime Minister Najib Razik of Malaysia said, while tariff barriers are low within the region, the work of building the institutional frameworks that will ensure freer movement of people and capital, and remove the barriers that hinder growth and investment has yet to be fully embraced.

The major question mark that hangs over the AEC, of course, is about where Indonesia, its largest and most important member, is now going on these issues that are at the core of its economic and diplomatic rationale.

In this week’s lead essay — which begins our annual Year in Review series analysing developments around the region over the past year and the forces that will shape them in the year ahead — David Nellor observes that the Indonesian government is yet to convince the international economic jury that it has turned the corner towards more constructive economic policy and that it has the political leadership and capacity to implement that policy. While Indonesian economic policy remains in limbo, the whole ASEAN enterprise remains uncertain, along with the potential of Indonesia itself to return to more respectable rates of growth and break through to middle income status. Growth has dived towards 4 per cent from rates over 6 per cent in recent years.

‘Over the past few years a plethora of regulatory interventions have discouraged investment and widened the infrastructure gap. The government’s loss of policy credibility, owing to a lacklustre track record and difficult external environment, magnifies the challenge’, says Nellor. ‘The jury is undecided on whether the Jokowi government’s reform efforts are sufficient to tackle the challenge’.

What reform there has been so far has focused on areas that reflect wariness about taking on the vested interests that resist exposure to competition and use political power to protect their monopoly rents. Liam Gammon explains that proposals that aim at market reform ‘are politically toxic in Indonesia — and at odds with Jokowi’s own track record. His ministers spent much of this year re-capitalising state-owned enterprises with taxpayers’ money, raising tariffs and promoting the misguided goal of “food self-sufficiency”’.

‘The defining blunder of Jokowi’s presidency came in February when he nominated a venal but politically-connected officer as the new police chief after intense lobbying from party bosses. The ensuing public outrage saw the appointment cancelled but Jokowi’s anticorruption credentials have never recovered’, writes Gammon.

Nellor sees some signs that fundamental reform is re-entering the policy debate in the past few months. Gammon identifies presidential rhetoric that has been prepared to acknowledge the interests of foreign investors as evidence that Jokowi has taken some criticisms seriously. But there is still a long way to go in confronting the politics that infect Indonesia’s investment climate and scare long-term investors away.
The conflicts that bedevil a reliable investment environment are partly about entrenched ideological attitudes but they are more about access to rents, says Eve Warburton. ‘Contract extensions for large-scale projects are a feeding frenzy for Indonesia’s rent-seeking elites. Different factions within the politico-business class vie for influence over the terms of lucrative contracts, trying to gain preferential access to service contracts or cheap company shares’.

Certainly the times require some fateful choices. The international environment has delivered a blow to Indonesian growth based as it was in recent times on the easy takings from the bull run for resource exports. Actual growth has no chance of reaching potential growth of 7 per cent or more unless Jokowi takes on the hard politics of deep structural reform. Without a proactive economic agenda, Indonesia’s diplomatic leadership in ASEAN and more broadly in the region will continue to ebb away. This is the theatre in which Indonesia will need all the diplomatic leverage it can muster to support a national reform agenda — not to be found in the ludicrous aspiration to join the TPP. There are signs that serious technocratic players both understand this and are trying to energise the politics to deliver. But time is running out for Indonesia and perhaps for ASEAN.

Peter Drysdale

Peter Drysdale is the editor of the East Asia Forum.

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Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. 

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