The Future of Economic Reforms in Indonesia after SBY Wins Landslide

 
 Jakarta, Indonesia, 4 August 2009. With the landslide re-election of Indonesian President Susilo Bambang Yudhoyono to a second term as Indonesian President, backed by a strong showing for his party in parliament, hopes are high that the pace of economic reforms can be increased.

 
 Jakarta, Indonesia, 4 August 2009. With the landslide re-election of Indonesian President Susilo Bambang Yudhoyono to a second term as Indonesian President, backed by a strong showing for his party in parliament, hopes are high that the pace of economic reforms can be increased.

It is not an easy job. This huge nation of 17,508 islands, over 300 ethno-linguistic groups and a population of 237 million suffers from chronic corruption, social and cultural instability, and economic disparity. Much of the wealth is held by only a few, leaving the poor wondering where their nation’s rich natural resources have gone.[br]

 

 

It is a massive challenge to manage, but President Yudhoyono, known locally as SBY, has won plaudits for his steady hand and (admittedly) slow economic reforms. His anti-corruption commission has been so successful that the members of parliament and the police, considered the two worst institutions, are plotting ways to stop it working. With SBY’s strong mandate, there are hopes that the commission will be both protected and expanded.
Traditionally, the government has been military-backed, as seen in the infamous Suharto regime. The main challenger, Megawati, was in many ways the hier of that era, and selected a military running-mate (Prabaowo Subianto).

Yudhoyono himself was a Suharto-era general, but he has distanced himself from the military and is now focused on strengthening an economy that is increasingly independent of the once all-powerful army. This, along with his promised reforms led to him winning a landslide election in July for a second term. Consequently, all eyes are on him and his party to bring in foreign investment, develop its third-world infrastructure, and continue its rate of growth.

As if to emphasise this, his choice for Vice President, Boediono, is a former Bank of Indonesia Governor and Finance Minister. His stated aim is to achieve average GDP growth of seven per cent a year for the next five years. This growth will see unemployment reduced from 8.1 per cent in 2009 to a range of five to six per cent. In addition to attracting foreign investment and reducing corruption, Boediono is targeting an increase in social safety nets to further boost consumer spending and tackle endemic poverty – about 32 million people live on less than 70 cents per day, and they urgently need help.[br]Foreign investment could indeed be key to ensuring long-term, sustainable growth. Many firms are unable to cope in the Indonesian business climate and simply do not understand the creative (corrupt) ways the most successful companies operate there.

After the 1997-1998 Asian Financial Crisis, the IMF stepped in and attempted to restructure the nation’s financial system. The IMF was so hated here and elsewhere in Asia that the loan was paid off early, and Indonesians promised themselves never to have to submit to outsiders ‘austerity’ measures again. This led to Indonesia amassing around $40 billion in foreign exchange reserves, acting as a buffer for future economic crises.

This experience with economic meltdown and then recovery has put Indonesia in a better position than many of its neighbors to weather the current storm.

Its high commodity prices between 2004-2007 also aided it in recovery from the crippling crisis. And because the nation only exports about 20% of its GDP, it is protected when its trading partners slash imports. Again, this is unlike many others in Asia, like Singapore, Japan, and Korea, who rely heavily on exports.

Domestic consumption has proven to be a much more reliable economic base, spread out among its 237 million people.

And falling gas and oil prices have helped the population cope with otherwise higher costs of living. Overall, Indonesia is forecast to grow by 3.5 percent this year, according to the IMF. SBY has come and said he expects GDP to grow 5 per cent in 2010, which would be an excellent – and achievable – result.

This years budget includes increased provisions for infrastructure and civil service reform, areas that have long held back the nation. Education spending has been increased, another vital area considering high illiteracy rates on many smaller islands. The military budget has also grown, but that seems a fair compromise to most as long as the armed forces stay in their barracks and continue to divest out of their economic enterprises.

Although the recent terrorist attacks show how vulnerable Indonesia is politically, the strong government response has prompted Citibank to say that the Indonesian economy will not be harmed by the hotel bombings.

Despite the risks, the World Bank has said that Indonesia will be a ‘winner’ from the changing landscape of the global down turn. Hundreds of millions of people and a fair few investors are all rooting for SBY to prove them right.

Dwayne Ramakrishnan, EconomyWatch.com