Growth too slow for comfort in
Indonesia By Bill Guerin
JAKARTA - As Indonesian President Susilo
Bambang Yudhoyono enters his third year in office,
the world's most populous Muslim country is widely
viewed simultaneously as one of the region's most
stable democracies yet one of its most
unpredictable economies.
Yudhoyono's
pro-business government has successfully
stabilized the country's macroeconomy. The
Indonesian rupiah has gained almost 7% against the
US dollar so far this year, inflation is now
hovering at a manageable 7%, foreign-exchange
reserves are up around
US$42.3 billion, and the government is set to
repay the final $3.2 billion installment it owes
to the International Monetary Fund about three
years ahead of schedule. At the same time,
economic growth has failed to keep pace with the
improving macroeconomic fundamentals because of
lingering foreign and local investor concerns
about the country's overall direction. Consider:
this year foreign direct investment in the nine
months to September plunged by 43.85% year on year
to $4.29 billion compared with $7.64 billion over
the same period in 2005, according to data
released by the state-run Investment Coordinating
Board (BKPM).
The decline indicates a
precipitous drop in both the value of new projects
and expansions of ongoing business concerns. The
falling figures, some analysts say, can be chalked
up to a lingering lack of confidence in the
microeconomic environment, including encumbrances
to doing business such as endemic red tape, the
marriage of relatively high wages to the low
productivity levels of Indonesian workers,
inadequate infrastructure - especially in terms of
electricity supply - and legal uncertainty
surrounding the protection of foreign investments.
William Wallace, the World Bank's lead
economist for Indonesia, contends that overall
business optimism has improved but that investors
are still waiting for policy certainty on tax and
customs, labor rules and administrative
simplification. "The key issue now is the revival
of investment," he said.
An Indonesian
Survey Institute (ISI) poll in September found
that 51% of the country's eligible voters would
vote for Yudhoyono for president if elections were
held this year (the next polls are scheduled for
2009). However, the survey also rated his
government's performance as "bad" on economic
issues such as poverty and unemployment reduction.
Unemployment is a growing problem with
serious social-stability implications. As of June,
unemployment was 10.6%, or 11.6 million of the
106-million-strong national labor force. That's a
significant 2% increase on the 9.5 million people
recorded at the end of 2005. Moreover, there are
more than 43 million workers classified as
underemployed, defined as working less than 35
hours a week. According to the Central Statistics
Agency (BPS), almost 40 million people live below
the poverty line of about 60 US cents per day.
Need for speed Economic reforms
unveiled this year have so far failed to stimulate
a new cycle of investment-driven growth. Nor has
progress been made in passing crucial tax reforms
designed to simplify tax laws and reduce tax
rates. Even if eventually enacted by the
legislature, a proposed cut in the corporate-tax
rate would not take effect until 2010.
Yudhoyono's proposed business-friendly
amendments to the 2003 labor law, which he later
shied away from after rambunctious labor unions
took to the streets in protest, remain a
hot-button issue for investors. Haryo Aswicahyono,
of the Center for Strategic and International
Studies (CSIS), told the Indonesian commentary and analysis publication, Van Zorge Report, that: "The labor situation has
swung from being oppressed by the government to
workers having too much power."
The
business community contends that wages have risen
too fast, and that with highly generous
severance-pay requirements and strict regulations
on contracting and outsourcing, that they are
reluctant to expand their operations and payrolls.
US Agency for International Development (USAID)
figures show that severance pay in Indonesia is
three to five times as high as in China, India,
South Korea and Malaysia.
John A Prasetio,
vice president of the Indonesian Chamber of
Commerce and Industry (KADIN), says the hard
economic reality is that "mainstream Indonesian
elites seem not to be too concerned about catching
up with our competitors. Without more flexible
labor laws, many jobless youths trying desperately
to move out of poverty are denied entrance to the
formal [economy]." Vice President Jusuf Kalla,
a strong supporter of the proposed labor-law
revisions, told members of the US-ASEAN Business
Council in Washington last month that Indonesia's
investment and labor laws were in the process of
being "re-engineered". He said he was confident
that a number of pro-business reforms would be
finalized by early 2007.
Economists
estimate that for the country to absorb new
workers entering the labor pool each year while
keeping unemployment levels steady requires annual
economic growth of about 6%. Yet last year's 5.6%
growth rate was the highest the country had
recorded since the 1997-98 Asian financial crisis
ravaged the local economy and pushed tens of
millions of people back into poverty.
The
Indonesian central bank estimates that the economy
will grow by just above 5.5% this year, a
respectable clip compared with other regional
economies. But that's simply not fast enough for
Indonesia, where an estimated 2.5 million people
enter the labor force every year. Meanwhile,
recent job losses in the manufacturing sector,
particularly textiles, have resulted in
near-non-existent job creation in the formal
sector. Labor-intensive industries slashed more
than a million jobs in the last three months of
2005, according to official data.
Hat
in hand The government desperately needs
new foreign investment to help fund a planned $150
billion national infrastructure upgrade and to
meet its annual average 6.6% economic-expansion
target for the period spanning 2004-09.
Investment in infrastructure has shrunk
from 6% of gross domestic product in the late
1990s to a paltry 2% at present partially because
of government paralysis.
The country's
first-ever infrastructure conference in January
2005 was attended by hundreds of domestic and
foreign investors who were invited to bid on 91
infrastructure projects worth a total of $145
billion. Yet since then there has been only
limited progress in actual groundbreaking, because
of regulatory and legal obstacles as well as
indecisiveness on the government's part over how
best to apportion risk-sharing for ventures.
Poor infrastructure, besides being one of
the biggest hurdles to attracting foreign
investment, now badly impairs the country's
overall economic competitiveness through
comparatively high costs to production and
distribution. Sofyan Wanandi, chairman of the
Indonesian Manufacturers Association, says the
country's faltering infrastructure, particularly
crumbling road and rail networks and sputtering
electricity plants, have significantly increased
logistics costs, which in turn leads to
higher-priced, less competitive products than
those made in neighboring countries.
KADIN
chairman M S Hidayat, while acknowledging the
progress made in macroeconomic stability, warns
that "this will be rendered useless if it does not
touch upon the microeconomic aspects". KADIN wants
the government to accelerate this year's budget
spending to kick-start major infrastructure
spending projects, including the construction of
toll roads, power plants and rural infrastructure.
Infrastructure Summit II, to be held in
Jakarta next week, will see about $4.5 billion
worth of projects on offer to potential investors,
including contracts to build new toll roads, power
stations and water-supply systems. In pre-event
marketing material, the government organizers
claim that 24 infrastructure projects worth $6
billion have already "gone under transaction"
since the January 2005 summit, including 17
toll-road projects, two gas-pipeline projects, one
power-generation project and four water-supply
projects.
However, the Asian Development
Bank in a report last month claimed that the only
contracts awarded so far have been for three gas
pipelines, one power plant and three toll roads,
reflecting, as the agency puts it, a "continuing
incapacity to follow through on policies or
regulations rather than problems with the policy
framework itself".
Previous BKPM chairman
Theo Toemion candidly admits that the Indonesian
government has never had a clear indication of
just how much is realized from the many investment
approvals the agency issues. He estimates that the
actual investment realized, where projects proceed
to fruition, is less than 40% of
foreign-investment approvals and less than 50% of
approved domestic investment.
However, the
slow take-up is not all the fault of the central
government, which at the beginning of this year
expedited budget transfers to finance regional
developments in provincial areas.
Flush
with development funds, many provincial
governments have parked that cash in Bank
Indonesia certificates (SBIs) rather than pumping
it into development schemes, whereby nearly Rp45
trillion (more than $4.9 billion) is now on
deposit, said Industry Minister Fahmi Idris during
a recent interview with local media. SBIs severely
restrict lending for domestic investment and
expansion purposes, and many provincial
authorities prefer to park their deposits at high
interest rates paid by the central bank rather
than take the risk of lending to businesses in the
real sector.
Faced with these
difficulties, Yudhoyono has struggled to meet his
earlier policy pledges to cut poverty by one-half,
keep inflation in check and create more jobs. Yet
the need for strong economic stewardship is
reaching a crucial juncture.
Growing
unemployment and poverty carry huge political
risks, not only of jeopardizing Yudhoyono's bid
for re-election in 2009, but also of broad social
stability across the crowded archipelago. Some
reforms that have underpinned macroeconomic
stability have at the same time increased economic
suffering - most notably his government's tough
decision last year to slash fuel subsidies.
The ultimate benchmark of Yudhoyono's
political success will be a return to rapid
economic growth. Increasingly it seems that won't
be unattainable within the time left in his term.
Moreover, a growing number of economic analysts
fear that the country's improving macroeconomic
fundamentals risk complacency on the
economic-reform agenda, despite government
denials. But if Yudhoyono fails to lure in more
foreign funds to stimulate a new cycle of
self-sustaining investment-led growth, the once
immensely popular premier's days could be numbered
at the 2009 democratic polls.
Bill
Guerin, a Jakarta correspondent for Asia Times
Online since 2000, has been in Indonesia for 20
years, mostly in journalism and editorial
positions. He has been published by the BBC on
East Timor and specializes in business/economic
and political analysis related to Indonesia. He
can be reached at softsell@prima.net.id.
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