Indonesia: Indonesia's Disappointing Economic Peformance


Ross H McLeod

The government of Susilo Bambang Yudhoyono (SBY) has now been in office for about 20 months. Despite the high hopes that accompanied his election, economic performance during this period has been disappointing. The most telling statistic is the annual rate of economic growth, which has declined continuously since the December quarter of 2004, when SBY was elected, through the March quarter of 2006, from 7.1% to 4.6%. It is difficult to foresee much improvement in growth, because business confidence on the part of both domestic and foreign firms continues to be lacking. Whereas investment spending was above 30% of GDP in the last years of the Soeharto era, it languishes at little over 20% now, showing no sign of improvement.

The point has been made before that SBY often creates a good impression by saying sensible things about what needs to be done, but that this has not been matched by concrete action. Consider a number of examples:

" In its first months of office the new government emphasised the desirability of private sector involvement in the development of infrastructure. An infrastructure summit was held, at which some 91 projects worth US$22 billion were offered to the private sector. But although some 14 new regulations had to be written if these projects were to go ahead, only one of these had been drafted by the time the summit took place. At no time has the government acknowledged the simple reality that private sector involvement will only occur if there is reasonable certainty of adequate profits, and that this will not be possible as long as prices of the infrastructure services in question remain politically determined, regardless of costs. It is not surprising that very little progress has been made in relation to infrastructure.

" Cognisant of the bureaucratic hurdles, infrastructure shortcomings and policy constraints on business activity, especially relating to exports, the government's most recent initiative has been to announce its intention to set up a number of Special Economic Zones, within which business is intended to be quarantined from these problems. Well and good, but at best this is just a quick fix, reflecting the government's unwillingness to confront these kinds of problems on a nationwide basis.

" Much has been made of the need for a new investment law but, although a draft is now being discussed by the parliament, the original and highly desirable proposal to change the Investment Coordination Board from regulatory agency to investment promotion agency has been cut from the draft as a result of resistance from vested interests in the bureaucracy.

" The shameful behaviour of the previous government in the face of pressure from province level interests in reneging on its contractual commitment to the multinational cement manufacturer, Cemex - to allow the latter to purchase a majority shareholding in the previously government owned cement producer, PT Semen Gresik - has now been compounded. Cemex has given up on its intention to invest heavily in Indonesia, but the SBY government has blocked the intended sale of its shares in Semen Gresik, seeking instead to acquire the shares itself (presumably at a lower price than that available in the market), possibly for later sale to those same provincial interests.

" Finally, the government has backed down in the face of strong protests by organised labour from its planned amendments of industrial relations and manpower legislation, even though it is well aware that artificially high minimum wage levels and very high severance pay entitlements for workers both reduce the attractiveness of investment in labour-intensive sectors in Indonesia, and discriminate against relatively low productivity workers - the poorest of the poor - who are priced out of the formal sector labour market.

One of the key features of good government is a willingness to lead by promoting and implementing policies for the public good, rather than bowing to the entreaties of noisy or powerful interest groups. Despite his clear majority victory in the presidential elections in 2004, SBY has so far failed to demonstrate such a willingness, as these examples illustrate. He is widely praised for his attack on corruption within the public sector, but such progress as has been made here is virtually negligible relative to the size of the problem. Corruption has long been endemic in Indonesia, and there is no realistic chance of bringing it under control until its root causes are recognised: namely, the failure to offer market related salaries to officials at higher levels, and the failure to promote healthy competition for public sector positions through a willingness to recruit from outside the public sector and to base promotions on merit rather than seniority.

WATCHPOINT: Will the SBY government begin to implement needed economic policy reforms in the next year or two, before electoral politics take over in response to the presidential election looming in 2009?


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