Wednesday, February 23, 2011

Indonesia: Dreams of Indonesia’s Future - Beyond the Knight in Shining Armor

Source International Relations and Security Network (ISN)

Widely held hopes that Indonesia will join the four dynamic and rapidly developing ‘BRIC’ countries, expanding the informal grouping to ‘BRIIC’, will continue to drive ambitious policies and government initiatives in the coming years. Although these aspirations are substantively serious, a measure of realism is in order in the face of serious structural deficiencies, growing social inequality and an uncertain political future.

By John Sidel for ISN Security Watch

Indonesia's Coordinating Economic Minister Hatta Rajasa recently presented a government strategy for Indonesia to become the world's 10th largest economy, with average annual per capita income of $10,000, by 2025. To achieve this goal, real GDP growth is supposed to rise above seven percent per annum. Alongside overall economic expansion and wealth creation, regional imbalances, social inequalities and levels of poverty are also expected to diminish under this plan.

Beyond pipe dreams

These hopes rest on something more than mere dreams. Indonesia, after all, is the world's fourth most populous country and already its 19th largest economy. The sprawling archipelago is rich in natural resources - particularly oil, gas, coal, tin, copper, lumber, rubber, palm oil and various other mineral and agricultural commodities - and in human capital, with its population of 230 million. Exports are strong, estimated at $150 billion in 2010, and investment in the country in 2011 is expected to rise by 15 percent, with real GDP growth exceeding six percent. Inflation and budget deficits at the governmental level have also been kept under control in the past years.

These seemingly healthy macroeconomic indicators are also embedded within broadly stable and supportive political and social conditions. After more than 30 years of centralized authoritarian rule under Suharto, from 1966-1998, Indonesia is now a fully consolidated democracy, with genuinely competitive popular elections for parliament held in 1999, 2004 and 2009 and for the presidency in 2004 and 2009. Decentralization since 1999 has devolved considerable fiscal and regulatory powers to officials reporting to locally elected executives and assemblies. This shift from centralized authoritarianism to decentralized democracy has also reconfigured the connection between business and politics. Instead of monopolies and cartels in the hands of Suharto's children and close cronies, a broader oligarchy of politically connected businessmen now compete locally and nationally for access to state power and for concessions, contracts, franchises and regulatory and tax breaks. These increasingly influential business elites also share a broad interest in continuing economic growth.

A maturing democracy

Meanwhile, democratization and decentralization have brought peace and stability to the country, despite fears of a breakdown in social order and national unity following Suharto's overthrow in 1998. The inter-religious violence that scarred some localities in 1999-2001 has disappeared from view, and Islamist terrorism has remained extremely limited, with single annual bombings in 2002-2005 and again in 2009. The armed separatist movement in Aceh has been demobilized and incorporated into parliamentary politics under conditions of special autonomy. Further, the ethnic-Chinese community, long segregated and stigmatized as a classic 'pariah entrepreneur' minority, has been freed from various forms of discrimination, regulatory restriction, and even violence. The relatively young democratic system in the country is notable for its ecumenicism and inclusiveness, with ethnic, regional, and religious diversity and conflict effectively absorbed into the workings of parliamentary democracy. Indeed by most measures, the country today compares quite favorably with the original members of the 'BRIC' group.

Facing formidable obstacles

That said, as Indonesia enters a new decade and gears up for a new stage in its economic development, the obstacles in its path remain imposing, if not insurmountable. Few analysts expect GDP growth to reach the levels of seven-to-eight percent needed for the economy to meet its 2025 targets, and, by most accounts, both regional and social inequalities are growing more, not less, pronounced. More importantly, perhaps, as Indonesia continues to test the environmental and demographic limits of natural resource exploitation, and as China and other economies continue to compete for both foreign investment and export markets, the structural basis for accelerated and sustained 'growth with equity' is challenging.

Alongside natural resource exploitation, economic growth in Indonesia has depended on export manufacturing for a quarter of a century, and as the country has become a net importer of oil, rice and other commodities, its future depends on industrial deepening and movement 'upstream' into higher value-added forms of production and increased domestic content in export products themselves.

Here the limits of the Indonesian growth model become apparent. To date, export manufacturing has remained largely in foreign hands, with the factory belts of greater Jakarta, Surabaya and Medan serving essentially as export-processing zones for Japanese, Korean, European and American companies. For all the success of Indonesia's diversified conglomerates in local natural-resource extraction, banking, real estate, construction and in various domestic markets for goods and services, none of them have joined the ranks of the major export-manufacturing firms that have motored economic growth in Indonesia over the past 25 years. Without a Tata or a Lenovo on the horizon, how can Indonesia evolve from its current role as low-wage assembly and production site for foreign firms into an exporter in its own right? Or, less ambitiously, how, without a large well-educated, high-skilled labor force, might Indonesia attract investment in higher value-added forms of production and/or engage in 'upstream' movement into higher domestic content in export products?

Alongside the dreams of Indonesia's ascendancy into the ranks of the 'BRIC' countries looms an alternative scenario: Indonesia stuck in a classic 'middle-income trap'.

What the future may hold

At least since 2009, optimism as to Indonesia's prospects for a 'BRIIC'-future has rested in no small measure on the shoulders of President Susilo Bambang Yudhoyono. A retired Army General first elected in 2004 and re-elected by a wide margin in 2009, Yudhoyono has been depicted as a 'professional soldier', 'honest broker', and neutral arbiter of competing interests and a steadfast proponent of reform. Foreign commentary on Indonesia in recent years has been strongly colored by this picture of rational, responsible, reformist leadership, a business-like president fighting corruption and rising above special interests in the promotion of economic growth and broadly construed national development.

Among Indonesian commentators and veteran Indonesia-watchers, however, a somewhat more jaded perspective has come into view. In the wake of Yudhoyono's re-election in 2009, a number of analysts argued that the president's victory at the polls had been essentially manufactured through a massive deployment of state patronage and private funding. Indeed, Yudhoyono's popularity had risen dramatically from a low of 25 percent in mid-2008 thanks in large part to the massive infusion of state funds into a variety of 'populist' programs. According to Marcus Mietzner, a leading Indonesia specialist, an estimated $2 billion was spent between mid-2008 and the 2009 elections on fuel subsidies, school allowances, micro-credit schemes and a variety of 'anti-poverty' programs, with more than $1.4 billion paid out in direct cash payments across the country.

In addition to this massive infusion of state funds, a huge, largely unreported, private campaign 'war chest' was also assembled by Yudhoyono and his party - the Partai Demokrat - in advance of the 2009 elections. An investigative report by veteran muckraker George Aditjondro detailing the Yudhoyono family's diverse corporate interests and connections to various businessmen began to circulate after the election, causing considerable controversy. By mid-2010, moreover, disappointment in Yudhoyono and disillusionment with 'reform' under his administration had broadened and deepened after the resignation of the technocratic Finance Minister Sri Mulyani in an apparent resolution of her long-running conflict with prominent businessman-turned politician Aburizal Bakrie. May 2010 saw not only Mulyani's departure, but also Bakrie's elevation to the leadership of a newly formed 'joint secretariat' of the coalition of parties supporting the administration. By the end of 2010, in other words, the much inflated image of Yudhoyono as a champion of good government and reform had begun to lose some of its luster.

Beyond Yudhoyono

Looking beyond the president's record to date, previous examples of other 'professional soldiers' who rose to prominence as champions of 'reform' in the region suggest a much more uncertain future. After all, in Thailand under Armed Forces Commander General Prem Tinsulanonda in the 1980s and in the Philippines under Armed Forces Chief of Staff General Fidel Ramos in the 1990s, such soldiers-turned-politicians played roles strikingly similar to that assumed by Yudhoyono in Indonesia.

Marking periods of re-equilibration, rationalization and reform after years of unrest, instability and institutional decay, these 'honest brokers' won support from powerful civilian patrons - and, in due course, a broader range of backers from the population. As with Yudhoyono, in Thailand and the Philippines during this time respectable economic growth rates were achieved, even as serious structural reforms were neglected, with underlying problems of social inequality under conditions of oligarchical democracy left essentially unaddressed.

If the parallels seen in the early post-authoritarian eras in Thailand and the Philippines are anything to go by, the future looks very uncertain in Indonesia as the end of the Yudhoyono era looms on the horizon. In Thailand, after all, the end of Prem's tenure as prime minister was followed by the administration of the notoriously corrupt Chatichai Choonhavan (1988-91), whose excesses helped to inspire a military coup in 1991 and a prolonged and arguably still unresolved period of political instability. In the Philippines, the Ramos years were similarly followed by the election to the presidency in 1998 of the popular, pseudo-populist Joseph 'Erap' Estrada. Estrada's widely publicized failings, in turn, catalyzed a 'People Power' rebellion in 2001 that forced him from office and ushered in a period of corruption and cronyism under the administration of his former vice president and successor, Gloria Macapagal-Arroyo.

Viewed against the backdrop of these rather unpromising precedents, the end of Yudhoyono's second and final presidential term in 2014 may thus see a similarly disruptive, destabilizing shift in Indonesian politics, with the proverbial knight in shining armor riding off into the sunset and leaving Indonesia to face an uncertain - 'BRIIC' or 'BRIIC'-less - future without serious structural fortification for the battles and challenges ahead.

John T Sidel is the Sir Patrick Gillam Professor of International and Comparative Politics at the London School of Economics and Political Science. He is the author of The Islamist Threat in Southeast Asia: A Reassessment (East-West Center, 2007), Riots, Pogroms, Jihad: Religious Violence in Indonesia (Cornell University Press, 2006), and Capital, Coercion, and Crime: Bossism in the Philippines (Stanford University Presss, 1999).