RISKY
BUSINESS Indonesia's economic reform
tightrope By Federico Bordonaro
President Susilo Bambang Yudhoyono is
actively wooing new foreign investment to boost
the Indonesian economy. While that newfound
openness definitely sends a positive signal
overseas, he still faces four big problems at home
that seriously hinder his ambition to speed up
economic growth.
Political instability,
growing social unrest, the threat of terrorism,
and lingering legal uncertainties continue to
undermine Indonesia's economic growth prospects,
not to mention overall competitiveness. And for
all Yudhoyono's considerable efforts, there is no
indication that these obstacles can be overcome in
the short term.
On paper, Indonesia has
all the resources to become a major
economic power. The economy is
on pace to grow by about 5% this year, but that is
just barely enough to absorb new workers entering
the labor pool. So it is significant that
Yudhoyono has acknowledged that foreign investment
is essential for achieving the country's full
economic potential.
Notably, the
soft-spoken president won his office in 2004
partially on a pro-globalization ticket at a time
when nationalistic posturing was in fashion across
the region. After the 1997-98 Asian financial
crisis, Indonesia's battered economy was driven
largely by internal consumption, while both
foreign direct investment and private domestic
investment declined.
A volatile mix of
political instability, social unrest, endemic
corruption, and fiscal austerity imposed by the
International Monetary Fund greatly undermined
Indonesia's business environment.
Many of
those problems remain today, but a measure of
optimism about the country's economic prospects
has palpably returned. Yudhoyono has worked hard
to burnish the country's image with foreign
investors. His recent intervention against the
national oil-and-gas giant Pertamina in favor of
US oil giant ExxonMobil demonstrated that he is
willing to stand up against powerful local
interest groups to achieve economic growth.
A cabinet minister during the Suharto era,
Yudhoyono has tried to establish his reform
credentials even in the face of a resurgent
nationalism emanating from certain quarters of
parliament. A recent presidential statement
acknowledged and vowed to address a
foreign-investor wish list, including better
protection against expropriation of investments,
termination of contracts, and establishing better
dispute-settlement mechanisms, among other
structural reforms.
Still, Yudhoyono walks
a political tightrope when making concessions to
foreigner investors. Labor leaders protested
loudly against a recent Presidential Instruction
to amend the 2003 national labor law, which had
acted to boost workers' bargaining power,
guarantee minimum wages and allow for peaceful
strikes.
The neo-liberal-influenced
amendments, which aim to lower minimum severance
payments to released employees and loosen
regulations for hiring and firing, were widely
viewed as favoring big business over labor. If
pushed too aggressively, the legal changes
threaten to trigger serious social conflict among
the country's well-organized and increasingly
vocal social movements.
For Yudhoyono,
Indonesia's poor historical and, some would argue,
recent human-rights record means that the resort
to brute force to put down social ferment is not
an option. This was clearly demonstrated in the
restraint security forces recently demonstrated in
tackling nationalistic protests outside of a
US-operated gold mine in Papua.
Intensified social unrest in Jakarta could
easily lead to more social instability across the
entire archipelago, particularly if nationalistic
political elements choose to mobilize grassroots
sentiment in pushing their particular agendas.
Social unrest could also potentially be
manipulated by terrorist groups, some Indonesian
officials fear.
Defense Minister Juwono
Sudarsono recently told the local press that
terror cells are still "scattered across the
Indonesian archipelago" and that "more attacks are
inevitable with the militants so entrenched in the
country". Although the authorities have recently
done a relatively good job in mopping up suspects
from the Jemaah Islamiya terror group, Sudarsono's
comments suggest a new threat of attacks from
so-called "random cells".
If so, a new
kind of decentralized and flexible militant
activity would prove even more difficult to
counter than traditional, top-down-structured
terror groups. Sudarsono's words also sound a
grave warning to Indonesia's regional partners,
which to date have worked only halfheartedly in
coordinating their counter-terrorism measures.
Obviously terror attacks are bad for
business, not just in Indonesia but regionwide. In
2002, the bombings on the resort island of Bali
that targeted foreign tourists had a devastating
impact on the entire country's tourism industry.
In the wake of September 11, 2001, and the first
Bali bombing, Jakarta came under severe US and
Australian pressure to follow their controversial
methodologies for fighting against terrorism.
Sudarsono has said, "Southeast Asian
nations must fight terrorism on their own terms or
risk being seen as lackeys of nations such as the
US and Australia." Jakarta is working quietly to
strike a balance between cooperation with
Washington and maintaining national sovereignty
over law-and-order issues. The fact that both the
United States and Australia have recently toned
down their criticism indicates that Indonesia has
recently demonstrated a tougher tack against
terror suspects.
More optimistically, the
growing global demand for oil, gas and biofuel is
opening new investment opportunities for
Indonesia. Its national energy corporation Elnusa
plans to build a US$5 billion oil-refinery project
together with a subsidiary of the National Iranian
Oil Co. Elnusa's adviser, Global Union, declared
its intention to invite Middle Eastern crude-oil
producers together with fuel buyers in Japan,
South Korea, China and Southeast Asia to join the
new refinery project. Iranian President Mahmud
Ahmadinejad's recent visit to Indonesia firmed up
bilateral business relations and promises to pave
the way for future collaborative energy deals.
Moreover, state-owned Pertamina and
ExxonMobil agreed in March to develop jointly what
is potentially Indonesia's largest untapped
oilfield, in Cepu. The $2 billion investment deal
will commence commercial activity in 2008, with
estimated output of about 165,000 barrels per day
over a 30-year horizon.
There are plenty
of other untapped natural-resource deals for the
making in Indonesia. The promotion of pro-business
policies, the push for more regional economic
integration and enhanced counter-terrorism
cooperation will form the core of Yudhoyono's
political agenda.
Whether his bold
market-oriented policies unite or further fragment
the country and effectively stymie the spread of
radical Islam into socially unstable areas will
determine how investors view and pursue the many
business opportunities to be had in one of the
world's most resource-rich Muslim nations.
Federico Bordonaro is senior
analyst with the Power and Interest News Report.
He can be contacted at
fbordonaro@pinrNOSPAM.com.
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