From Asia Times

May 19, 2006

Indonesia's economic reform tightrope
By Federico Bordonaro

President Susilo Bambang Yudhoyono is actively wooing new foreign investment to boost the Indonesian economy. While that newfound openness definitely sends a positive signal overseas, he still faces four big problems at home that seriously hinder his ambition to speed up economic growth.

Political instability, growing social unrest, the threat of terrorism, and lingering legal uncertainties continue to undermine Indonesia's economic growth prospects, not to mention overall competitiveness. And for all Yudhoyono's considerable efforts, there is no indication that these obstacles can be overcome in the short term.

On paper, Indonesia has all the resources to become a major economic power. The economy is on pace to grow by about 5% this year, but that is just barely enough to absorb new workers entering the labor pool. So it is significant that Yudhoyono has acknowledged that foreign investment is essential for achieving the country's full economic potential.

Notably, the soft-spoken president won his office in 2004 partially on a pro-globalization ticket at a time when nationalistic posturing was in fashion across the region. After the 1997-98 Asian financial crisis, Indonesia's battered economy was driven largely by internal consumption, while both foreign direct investment and private domestic investment declined.

A volatile mix of political instability, social unrest, endemic corruption, and fiscal austerity imposed by the International Monetary Fund greatly undermined Indonesia's business environment.

Many of those problems remain today, but a measure of optimism about the country's economic prospects has palpably returned. Yudhoyono has worked hard to burnish the country's image with foreign investors. His recent intervention against the national oil-and-gas giant Pertamina in favor of US oil giant ExxonMobil demonstrated that he is willing to stand up against powerful local interest groups to achieve economic growth.

A cabinet minister during the Suharto era, Yudhoyono has tried to establish his reform credentials even in the face of a resurgent nationalism emanating from certain quarters of parliament. A recent presidential statement acknowledged and vowed to address a foreign-investor wish list, including better protection against expropriation of investments, termination of contracts, and establishing better dispute-settlement mechanisms, among other structural reforms.

Still, Yudhoyono walks a political tightrope when making concessions to foreigner investors. Labor leaders protested loudly against a recent Presidential Instruction to amend the 2003 national labor law, which had acted to boost workers' bargaining power, guarantee minimum wages and allow for peaceful strikes.

The neo-liberal-influenced amendments, which aim to lower minimum severance payments to released employees and loosen regulations for hiring and firing, were widely viewed as favoring big business over labor. If pushed too aggressively, the legal changes threaten to trigger serious social conflict among the country's well-organized and increasingly vocal social movements.

For Yudhoyono, Indonesia's poor historical and, some would argue, recent human-rights record means that the resort to brute force to put down social ferment is not an option. This was clearly demonstrated in the restraint security forces recently demonstrated in tackling nationalistic protests outside of a US-operated gold mine in Papua.

Intensified social unrest in Jakarta could easily lead to more social instability across the entire archipelago, particularly if nationalistic political elements choose to mobilize grassroots sentiment in pushing their particular agendas. Social unrest could also potentially be manipulated by terrorist groups, some Indonesian officials fear.

Defense Minister Juwono Sudarsono recently told the local press that terror cells are still "scattered across the Indonesian archipelago" and that "more attacks are inevitable with the militants so entrenched in the country". Although the authorities have recently done a relatively good job in mopping up suspects from the Jemaah Islamiya terror group, Sudarsono's comments suggest a new threat of attacks from so-called "random cells".

If so, a new kind of decentralized and flexible militant activity would prove even more difficult to counter than traditional, top-down-structured terror groups. Sudarsono's words also sound a grave warning to Indonesia's regional partners, which to date have worked only halfheartedly in coordinating their counter-terrorism measures.

Obviously terror attacks are bad for business, not just in Indonesia but regionwide. In 2002, the bombings on the resort island of Bali that targeted foreign tourists had a devastating impact on the entire country's tourism industry. In the wake of September 11, 2001, and the first Bali bombing, Jakarta came under severe US and Australian pressure to follow their controversial methodologies for fighting against terrorism.

Sudarsono has said, "Southeast Asian nations must fight terrorism on their own terms or risk being seen as lackeys of nations such as the US and Australia." Jakarta is working quietly to strike a balance between cooperation with Washington and maintaining national sovereignty over law-and-order issues. The fact that both the United States and Australia have recently toned down their criticism indicates that Indonesia has recently demonstrated a tougher tack against terror suspects.

More optimistically, the growing global demand for oil, gas and biofuel is opening new investment opportunities for Indonesia. Its national energy corporation Elnusa plans to build a US$5 billion oil-refinery project together with a subsidiary of the National Iranian Oil Co. Elnusa's adviser, Global Union, declared its intention to invite Middle Eastern crude-oil producers together with fuel buyers in Japan, South Korea, China and Southeast Asia to join the new refinery project. Iranian President Mahmud Ahmadinejad's recent visit to Indonesia firmed up bilateral business relations and promises to pave the way for future collaborative energy deals.

Moreover, state-owned Pertamina and ExxonMobil agreed in March to develop jointly what is potentially Indonesia's largest untapped oilfield, in Cepu. The $2 billion investment deal will commence commercial activity in 2008, with estimated output of about 165,000 barrels per day over a 30-year horizon.

There are plenty of other untapped natural-resource deals for the making in Indonesia. The promotion of pro-business policies, the push for more regional economic integration and enhanced counter-terrorism cooperation will form the core of Yudhoyono's political agenda.

Whether his bold market-oriented policies unite or further fragment the country and effectively stymie the spread of radical Islam into socially unstable areas will determine how investors view and pursue the many business opportunities to be had in one of the world's most resource-rich Muslim nations.

Federico Bordonaro is senior analyst with the Power and Interest News Report. He can be contacted at
_________________________ Indonesian Business and Investment News Aggregator