Winter 2013

A Change Is Going to Come: Indonesia Unleashed?

A. Lin Neumann

The headline slogan is a favorite here in Indonesia. The government is fond of the big promise or the big number, symbols to proclaim that the underperforming giant of Southeast Asia has arrived.

One big promise emerged from a September 2012 report by the McKinsey Institute that was almost unbearably optimistic in tone. The opening paragraph of The archipelago economy: Unleashing Indonesia’s potential” gave the government a headline it has pounded away at ever since: Home to the world’s 16th-largest economy, Indonesia is booming thanks largely to a combination of domestic consumption and productivity growth. By 2030, the country could have the world’s 7th-largest economy, overtaking Germany and the United Kingdom.”

Launched in a formal ceremony at the presidential palace, President Susilo Bambang Yudhoyono hailed the report as proof that he has presided over a transformational decade” for Indonesia. Until now, the government has been running commercials on CNN and other cable channels touting its impending move from the world’s No. 16 economy (2012 GDP $878 billion) to eventually bypass Germany (2012 GDP $3.9 trillion).

While the report itself had all the right caveats about what needs to be done, the McKinsey headline was what everyone remembered. It was almost a Genesis moment for Indonesia – as if by saying it, it was true. As it turned out, it was a headline with embarrassing timing. In the year or so since the report was issued, corruption, politics, a weakened currency and a worrying current account deficit have combined to put Indonesia on hold and backed Yudhoyono into a corner with elections fast approaching.

Success story

The country has done very well economically in recent years, of course. After contracting by over 13 percent in 1998 during the Asian Financial Crisis, it has grown an average of 5 percent a year since then; GDP had almost doubled by the end of last year. The Global Financial Crisis hardly mattered here, with the economy expanding by 6 percent in 2008 and 4.6 percent in 2009.

The country has a youthful population of nearly 250 million with a median age of just over 27 years. It adds about 89 million people to its burgeoning middle class each year, with most estimates saying there are about 74 million middle income consumers in the country. This has fuelled massive domestic demand, especially in fast moving consumer goods. All of this drives Indonesia’s growth.

But that is only part of the picture. With a current account deficit running at around 4 percent of GDP and the rupiah weakening to four-year lows of around 11,700 to the US dollar, there are major concerns. The country has to import significant amounts of oil because its own production is declining steadily, the government still partially subsidises fuel, largely for domestic political reasons, and a spate of recent policies pushing a nationalist agenda have caused many big-ticket foreign investors to delay planned investments.

Still, given the country’s success, Yudhoyono should be taking a victory lap to mark the end of his time in office. Unfortunately, with corruption charges moving ever closer to the presidential inner circle, there is a palpable sense of drift as his second and final term comes to an end and he struggles to remain relevant.

Drifting along

Indonesia also has deep deficits in infrastructure, a forlorn educational system, tottering healthcare delivery and a highly politicised policymaking apparatus that sees political party leaders put in charge of many key ministries – with predictably corrupt results. With the country waiting on a 2014 presidential election that is less than a year away, few major changes can be expected. Asianomics, an elite economic research outfit based in Hong Kong, recently advised its clients to be very cautious about Indonesia at least until the middle of 2015 when the dust of the elections will presumably have settled.

Yudhoyono’s legacy is in jeopardy over corruption charges that have implicated numerous top officials his Democratic Party and turned the political odds upside down. The president’s unity coalition” government, which is comprised of various parties that are actually rivals for power and not allies in the normal sense of the word, is fraying at the seams ahead of the polls. Far from feeling like a nation in triumph, political dysfunction is fuelling public anger at corruption while the president’s reputation for being indecisive has created a situation where the two presidential front-runners are both relative outsiders and unlikely leaders of a major regional power. The assumption as recently as two years ago that Yudhoyono would coast to the finish line as a statesman before handing power to a hand-picked successor seems woefully naïve.

This is not necessarily bad news for Indonesia. The corruption allegations and other stresses on the system could herald much-needed changes. They are unlikely to lead to violence or real instability, and the economy, while hardly a threat to Germany any time soon, is fuelled by so much consumer demand that the country can likely maintain 5 percent growth even on autopilot.

The governor or the general?

Indonesia has come a long way since the post-Suharto aftermath when it often looked as if the republic might disintegrate. Religious violence has decreased and terrorism is a much reduced threat, with no major attacks since 2009. The disparate parts of an amazingly diverse country are beginning to feel at least some of the benefits brought by 15 years of economic growth and the election is seen by big business as an opportunity for a new direction not a source of great worry regardless of who wins.

The likelihood is that Indonesia will see a massive shift away from Yudhoyono’s Democratic Party, which has plummeted in polls as corruption charges have risen. The opposition Indonesian Democratic Party of Struggle (PDIP), which has been out of power since 2014, is poised to take over because it has Jakarta Gov. Joko Jokowi” Widodo in its ranks and he is now the most popular politician in the country. If PDI‑P names him its candidate ahead of April legislative elections, the party is expected to get a major bump that will see it poised to seize the presidency in July.

This could be a major gamble. Jokowi, as he is universally known, began his political career just eight years ago when he became mayor of the small East Java city of Solo. Plain talking and accessible to his constituents, the former furniture manufacturer attracted notice from national leaders because he excited people in a way that traditionally reserved and imperious Indonesian politicians don’t.

In 2012, he stood for Governor of Jakarta and confounded polls by winning against an incumbent supported by Yudhoyono’s Democrats and the country’s biggest party, the Suharto-founded Golkar machine. He almost immediately became a presidential contender by default just as the Democrats were sinking into the mire of scandal. But he is a blank slate. He goes to rock concerts – Metallica is a favorite – and mixes in the mosh pit with the masses, he walks about on handshake tours of the city and has undertaken relatively small but effective projects to give some Jakarta neighborhoods modest facelifts. Bigger problems – massive traffic congestion, pollution, lack of clean water and sanitation – are more daunting but Jokowi seems likely to be President long before he has to answer for those issues.

Should Jokowi run, as seems likely though he refuses to discuss the matter publicly, it is unclear what kind of policies he would pursue. PDI‑P is nationalist and secular in origin, the party of the nation’s founding president, Sukarno. His daughter, former President Megawati Sukarnoputri, still chairs the party and she has the sole power to decide if PDI‑P will ask Jokowi to run. Jokowi himself is untested on the national and international stage – which is a big part of his domestic appeal and while he seems honest and forthright, how that will translate into complex national governance is a matter of some concern.

The other front runner is even more of a wild card. Retired Gen. Prabowo Subianto, who is comfortably in second place in opinion polls, is overshadowed by Jokowi but still has a chance. Prabowo and his Gerindra (Great Indonesia Movement) party supported Jokowi’s run for Jakarta governor last year but they are no longer allies.

Known for a fierce temper and a checkered human rights record from his days as a hard-man general in Suharto’s army, Prabowo is still unable to get a visa to the United States because of his rights record – although he has never been fully investigated or tried for alleged crimes perpetrated in East Timor when it was under Indonesian rule and other alleged violations. His temper is also known to explode at odd moments such as one anecdote I heard recently: he grew enraged and challenged an American female Marine colonel to a push up contest during a formal dinner. It ended in a draw.

Once married to Suharto’s daughter, Prabowo has resurrected himself as a populist-nationalist man of the people after being drummed out of the army in 1998 amid allegations – never proven – that he was plotting a coup. His tough guy image appeals to a lot of people and his blue-blood Javanese heritage gives him a sense of almost noblesse oblige, as if the nation has been waiting for him to come to its rescue.

Prabowo’s plain talk can be appealing. In the end we found that the political and economic system we built in the last 15 years turns out to be a very weak system,” he told me recently in an interview. Corruption has increased. It is so massive at every level. This is common knowledge. Even the poorest people in the street know this is happening. They see it every day.” Do nothing, he says, and Indonesia will become a failed state.”

Corruption on a massive scale

There is a great weariness over constant tales of politicians enriching themselves at the public trough. The powerful if outgunned Corruption Eradication Commission (KPK) seems to drag down a new politician every few weeks, undermining the Democrats, Golkar and numerous other parties with high-profile investigations that have made the small agency one of the most popular offices in government.

The rot seems to go deep. Under Yudhoyono’s politically charged administration, political party hacks guiding key ministries like forestry, agriculture and mining have not only been accused of corruption but have driven restrictive regulations that impede foreign investment. In natural resources, for example, officials openly attempt to steer the sector toward Indonesian companies who often do not have the expertise or capital for multi-billion dollar investments in things like offshore oil drilling. The result has been a dramatic slowdown in energy extraction that is making the current account deficit worse.

The biggest complaint of investors, foreign and local, is that policies flip-flop and contradict one another and the legal tangle can be nightmarish. Under the country’s radical decentralisation put in place after Suharto was booted out, local governments have a major say in mining, land use and other licensing regimes. Corruption has skyrocketed as literally hundreds of sub-provincial governments exercise new-found power.

What keeps the machine ticking over is Indonesia’s enormous demographic advantage and the growth of the middle class. Entrepreneurs are keen to stay away from involvement with the government and as a result much investment goes into the lightly regulated consumer goods sector, technology and services. But infrastructure has lagged behind, massive government-owned contractors dominate competition for big-ticket projects, the implementation of a new land acquisition law is stalled. It is a long list and the chief complaint against Yudhoyono has been that he rarely sorts out anything, preferring not to take hard stands on controversial issues.

The short-term answer I hear more and more is that Indonesia simply needs leadership.” I was speaking recently with an heir to one of the country’s major business families about the prospects for the 2014 transition. We are just tired of Yudhoyono. It’s good he is going,” said the young man, whose family backed the president’s rise a little under a decade ago. We like Jokowi but even Prabowo is OK. We just need a change.” A change is certainly what Indonesia will get. My money is on Jokowi. He is polling at an electability” rate of nearly 40 percent, 20 points ahead of Prabowo. The public simply loves him even if they have no idea what kind of president he might be. It is enough that he seems engaged. Is this risky? Very. But it is a risk the country seems prepared to take.

A. Lin Neumann was the founding editor of the Jakarta Globe newspaper and is currently the publisher of Strategic Review, a policy journal in Jakarta. He has covered Asia for more than 30 years