November 25, 2009

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Indonesia: Tiger-in-Waiting

On any list of the world’s ascendant emerging economies, Indonesia would be pretty close to the top. Nestled in the planet’s hottest economic growth zone, the archipelago is blessed with natural wealth and the world’s fourth-largest population. Through membership in the G-20 and other international fora, Indonesia is gaining recognition as a global force. Politics has often restrained economic progress, but recent developments give hope that even on this front, things are looking up.

Restraints notwithstanding, Indonesia still racks up impressive stats. Growth averaged 5.6% annually in the 2003-08 period. Output slowed abruptly last fall as the world economy contracted, but the Indonesian economy is proving resilient. Despite plunging international sales, vibrant domestic growth will help the economy to expand by 4% this year. Domestic strength is at least in part due to the post-1998 re-tooling of the financial system, which insulated Indonesia from last fall’s global liquidity crisis.

Future economic potential is strong. The population is large and growing, enough to boost the labour force by 1.9% annually. The middle class is on the rise, and currently about 25 million strong, a growing consumption powerhouse. At the same time, per capita income is low, suggesting an army of potential entrants to the middle class. Trade intensity – the share of exports and imports in GDP – is relatively low at 58%, suggesting potential penetration into brisk inter- and intra-regional trade flows.

These factors suggest that Indonesia could sustain long-term growth at the 7% level. Moving to that pace from the current 5-5.5% rate will depend to a large degree on greater government effectiveness. Is this likely? Governing a country of 32 provinces containing over 450 districts, spread across 17,000 islands is no small feat. Moreover, in the post-Soeharto period, power was decentralized to these regions, complicating the process of developing and executing a cohesive policy program.

Despite these significant hurdles, recent events give hope that progress will be made. On July 8, for the first time in Indonesian history, an incumbent president was re-elected in a surprisingly smooth electoral process. President Susilo Bambang Yudhoyono (known as SBY) is capable, untainted by corruption, and popular. As of mid-October, a new cabinet with an eclectic mix of politicians, career bureaucrats, members of different parties, experienced and rookie Ministers was sworn in. Building consensus may prove difficult, but it’s SBYs preferred model.

The new Cabinet is already in high gear. Following the 2-day national summit that brought together over 1000 representatives from business, government and civil society, the government rolled out one- and five-year plans, and also a 100-day Plan. The latter includes 45 programs, 15 of which were deemed high-priority, spanning infrastructure, regulation and counter-terrorism. No-one expects completion in this short timeframe, as the machinery of government turns slowly in Indonesia. But the package, if successfully implemented, will contribute to creation of necessary conditions for Indonesia – and its trading partners – to begin harnessing its great economic capabilities more effectively.

The bottom line? Indonesia’s new government has already experienced some key ‘firsts’, and the newly-minted economic program suggests there is more to come. Plans are well-timed – they are being implemented in time to catch the next wave of world growth – and the world will be watching.