Like India, Indonesia will pay for resting on its laurels

Indonesia has often been described as the next India. With 250m people, it has a huge population of aspiring consumers. Like India, it is a democracy, albeit a far more recent convert. Like India, too, its solid record of growth has been propelled not by manufactured exports but by domestic demand. When the global financial crisis struck, both economies weathered the storm better than most

Suddenly, however, the comparison with India does not sound so sweet. After India, Indonesia has been the Asian economy that has received most scrutiny from markets concerned about its current account deficit and reliance on capital inflows. More fundamentally, market pressure is raising awkward questions about the growth model of an Indonesian economy that has cruised along without laying the policy foundations for sustained development. Such doubts apply equally to a number of other emerging economies in Asia, Latin America and Africa that have floated on a tide of easy money and high commodity prices. 

The comparisons between India and Indonesia, the world’s second and fourth most populous nations, are many. Indonesia is now running a hefty trade deficit after years of surplus came to an abrupt end last year. The rapid deterioration since 2012 has largely been a result of weaker prices for commodities such as coal and palm oil, undermining the notion that Indonesia’s economy is not export-dependent.

India, in common with Indonesia, has not developed a sufficiently sophisticated manufacturing industry capable of generating big foreign exchange receipts or, just as important, jobs. Both countries share a supposed demographic dividend. Yet unless the economy can create enough employment, a young, restless population can be more of a curse than a benefit.

India is the more extreme case. Services account for most of its growth, commanding two-thirds of national output with just one-third of its workforce. (More than half the adult population are farmers.) Some of those services are exported via the country’s formidable technology industry. Still, its economy invites comparison with the fabled South Sea island whose model relies on everybody doing each other’s laundry. In the end, unless a country can make the things required by an aspiring middle-class economy – from iPads to power stations – it must earn the money to import them.

Indonesia’s economy is less skewed to services, which account for 39 per cent of output against 47 per cent for industry. Still, few would argue that it has done enough to build up manufacturing capabilities commensurate with its potential. As in India, building factories has been made unnecessarily difficult by power and transport constraints, by the problems related to acquiring land, and by overly-complex regulations that facilitate bribe-taking. 

India at least boasts some world-class entrepreneurs in such areas as outsourcing and pharmaceuticals. Many of Indonesia’s most successful businessmen are rent-seekers whose political connections and entrenched monopolies allow them to build easy fortunes. Too many are content to ship out raw materials or sell foreign goods at home under licence. The lure of a quick buck often trumps notions of improving productive capacity or nation building. 

There are also political parallels. Both countries are staggering towards the end of their leader’s second term. Manmohan Singh, India’s prime minister, and Susilo Bambang Yudhoyono, Indonesia’s president, will have served 10 years apiece by the time each country holds general elections next year. 

Mr Singh was once hailed as the superman of Indian reform. In his second term, he has turned back into Clark Kent. There have been stop-start attempts to open up industries from retail to insurance. But foreign investors have not been convinced. They have been put off by red tape, shifting tax policy and regulations as unreliable as the electricity supply. Public fury at the corrupt nexus between businessmen and politicians has been commendable, but in the absence of strong leadership, the result has been paralysis. 

SBY, as Indonesia’s army general turned civilian leader is known, has also coasted in his second term. There has been very little structural reform or coherent industrial policy. He has been more preoccupied with cementing the political transition by keeping the country’s power brokers happy than with taking on vested interests for the sake of the nation. 

Indonesia has pursued a radical decentralisation of power. This has brought certain advantages, but has also multiplied the regulatory layers and opportunities for corruption. One reform that its government did pass was to cut a fuel subsidy that had pushed the budget into deficit. While the price rise has had an inflationary impact, it is the right thing to do. Trying to help the poor through ill-targeted subsidies is another policy mistake Indonesia shares with India.

Indonesia’s growth, which has dropped below 6 per cent, has not fallen as far as India’s. Its people are already more than twice as well off, with nominal gross domestic product per capita of $3,900 against $1,500. Still, like India, Indonesia has rested on its laurels when it should have been advancing. Unless it can gain a new sense of urgency, in the long run its inaction will prove costly.

david.pilling courtesy Joyo News