Kerry B. Collison Asia News: The Depression of 2019-2021? – Analysis

Kerry B. Collison Asia News: The Depression of 2019-2021? – Analysis: The profound question which transcends all this day-to-day market drama over the holidays is the nature of the economic slowdown now occ...

The Depression of 2019-2021? – Analysis

The profound question which transcends all this day-to-day market drama over the holidays is the nature of the economic slowdown now occurring globally. This slowdown can be seen both inside and outside the US. In reviewing the laboratory of history — especially those experiments featuring severe asset inflation, unaccompanied by high official estimates of consumer price inflation — three possible “echoes” deserve attention in coming weeks and months. (History echoes rather than repeats!)

Will We Learn from History — And What Will Soon Be History?

The behavioral finance theorists tell us that which echo sounds and which outcome occurs is more obvious in hindsight than to anyone in real time. As Daniel Kahneman writes (in Thinking Fast and Slow):

Whichever historical echo turns out to be loudest as the Great Monetary Inflation of 2011-18 enters its late dangerous phase.  Whether we’re looking at 1927-9, 1930-3, or 1937-8, the story will seem obvious in retrospect, at least according to skilled narrators. There may be competing narratives about these events — even decades into the future, just as there still are today about each of the above mentioned episodes. Even today, the Austrian School, the Keynesians, and the monetarists, all tell very different historical narratives and the weight of evidence has not knocked out any of these competitors in the popular imagination.

The Stories We Tell Ourselves Are Important

And while on the subject of behavioral finance’s perspectives on potential historical echoes and actual market outcomes, we should consider Robert Shiller’s insights into story-telling (in “Irrational Exuberance”):

Bottom line: great asset inflations (although the term “inflation” remains foreign to Shiller!) are populated by “naturally occurring Ponzi schemes,” with the most extreme and blatant including Dutch tulips, Tokyo golf clubs, Iceland credits, and Bitcoins; the less extreme but much more economically important episodes in recent history include financial equities in 2003-6 or the FANMGs in 2015-18; and perhaps the biggest in this cycle could yet be private equity.

Echoes of Past Crises

First, could 2019-21 feature a loud echo of 1926-8 (which in turn had echoes in 1987-9, 1998-9, and 2015-17)?

The characteristic of 1926-8 was a “Fed put” in the midst of an incipient cool-down of asset inflation (along with a growth cycle slowdown or even onset of mild recession) which succeeds apparently in igniting a fresh economic rebound and extension/intensification of asset inflation for a while longer (two years or more). In mid-1927 New York Fed Governor Benjamin Strong administered his coup de whiskey to the stock market (and to the German loan boom), notwithstanding the protest of Reichsbank President Schacht).

The conditions for such a Fed put to be successful include a still strong current of speculative story telling (the narratives have not yet become tired or even sick); the mal-investment and other forms of over-spending (including types of consumption) must not be on such a huge scale as already going into reverse; and the camouflage of leverage — so much a component of “natural Ponzi schemes” — must not yet be broken. The magicians, otherwise called “financial engineers” still hold power over market attention.

Most plausibly we have passed the stage in this cycle where such a further kiss of life could be given to asset inflation. And so we move on to the second possible echo: could this be 1937-8?

There are some similarities in background. Several years of massive QE under the Roosevelt Administration (1934-6) (not called such and due ostensibly to the monetization of massive gold inflows to the US) culminated in a stock market and commodity market bubble in 1936, to which the Fed responded by effecting a tiny rise in interest rates while clawing back QE. Under huge political pressure the Fed reversed these measures in early 1937; a weakening stock market seems to reverse. But then came the Crash of late Summer and early Autumn 1937 and the confirmed onset of the Roosevelt recession (roughly mid-1937 to mid-1938). This was even more severe than the 1929-30 downturn. But then there was a rapid re-bound.

On further consideration, there are grounds for skepticism about whether the 1937-8 episode will echo loudly in the near future.

In 1937 there had been barely three years of economic expansion. Credit bubbles and investment spending bubbles (mal-investment) were hardly to be seen. And the monetary inflation in the US was independent and very different from monetary conditions in Europe, where in fact the parallel economic downturn was very mild if even present. And of course the re-bound had much to do with military re-armament.

It is troubling that the third possible echo — that of the Great Depression of 1930-2 — could be the most likely to occur.

The Great Depression from a US perspective was two back-to-back recessions; first the severe recession of autumn 1929 to mid-1931; and then the immediate onset of an even more devastating downturn from summer 1931 to summer 1932 (then extended by the huge uncertainty related to the incoming Roosevelt Administration and its gold policy). It was the global credit meltdown — the unwinding of the credit bubble of the 1920s most importantly as regards the giant lending boom into Germany — which triggered that second recession and snuffed out a putative recovery in mid-1931.

It is possible to imagine such a two-stage process in the present instance.

Equity market tumble accompanies a pull-back of consumer and investment spending in coming quarters. The financial sector and credit quakes come later as collateral values plummet and exposures come into view. In the early 1930s the epicentre of the credit collapse was middle Europe (most of all Germany); today Europe would also be central, but we should also factor in Asia (and of course China in particular).

And there is much scenario-building around the topics of ugly political and geo-political developments that could add to the woes of the global downturn. Indeed profound shock developments are well within the normal range of probabilistic vision in the UK, France and Germany — a subject for another day. And such vision should also encompass China.

*About the author: Brendan Brown is the Head of Economic Research at Mitsubishi UFJ Securities International.

 

Kerry B. Collison Asia News: In Thailand, Mahathir Offers Hypocritical Take On ...

Kerry B. Collison Asia News: In Thailand, Mahathir Offers Hypocritical Take On ...:   “The stability and prosperity of our region,” Malaysian premier Mahathir Mohamad claimed earlier this week, “rely heavily on a unit...

In Thailand, Mahathir Offers Hypocritical Take On ASEAN Unity

 “The stability and prosperity of our region,” Malaysian premier Mahathir Mohamad claimed earlier this week, “rely heavily on a united and integrated ASEAN.” The call for regional unity came as Malaysia’s prime minister was conferred an honorary doctorate in Thailand in the field of social leadership, entrepreneurship and politics, an occasion that marked Mahathir’s second visit to the country since winning a landmark election in May this year. His earlier visit saw him pledge to facilitate peace in the southern border provinces of Thailand amid a persistent separatist insurgency.

While his speech may have been stirring, Mahathir’s grandiose vision of a more unified ASEAN community does not extend to his own government’s policies, at least judging by the escalating border dispute Putrajaya has ignited in recent weeks with neighbouring Singapore. The same Mahathir that called for regional unity in Thailand is refusing to remove ships from disputed waters, while a senior member of his party threatened Singapore with “pain by a thousand cuts”. The provocative language harkens back to the long and tense relationship between the two countries since their 1965 split, with boundary issues typically flaring up in parallel with domestic politics.

This latest dispute straddles two sets of issues. On the maritime side, Malaysia’s October claim to extended limits of the Johor Bahru port has been rejected by Singapore on the grounds that the new boundaries exceed previous claims. In terms of airspace, Malaysia has voiced opposition to the Instrument Landing System (ILS), an assisted navigational aviation facility for Seletar Airport. Malaysia protests the system’s implementation on the grounds that it infringes on national sovereignty and creates adverse impacts on flight paths and shipping in Pasir Gudang.

Mahathir’s renewed aggression toward Singapore marks a notable about-face from predecessor NajibRazak’s efforts to build stronger ties between Malaysia and the city-state. Najib sought to increase mutual trust through cross-border infrastructure and education projects. “We certainly do not want to return to the era of confrontational diplomacy and barbed rhetoric between our two countries,” he declared earlier this year in a barely-veiled barb at Mahathir’s preceding stint in office. “It was an era that we want to forget.”

That attitude was echoed by international observers, who held high hopes for bilateral relations upon Mahathir’s election as PM in May despite his widely-known frosty attitude towards Singapore. A few months in, those hopes have given way to somber disillusionment. The tensions of the past several weeks have revived uncomfortable memories of cross-causeway relations during Mahathir’s first stint in power, when he ruled Malaysia with an iron fist from 1981 to 2003.

One focal point of tensions is Mahathir’s so-called 2001 “crooked bridge” plan, designed to replace the causeway linking the two countries with a bridge to allow ships to cross the Johor Strait. Singapore refused to back the project, declaring the bridge unnecessary as long as the causeway was in good condition. Mahathir’s insistence on building Malaysia’s end of the bridge, and more recent attempts to revive project discussions, have confirmed fears that his return to power would revive old issues previously laid to rest.

It’s difficult to determine exactly why Mahathir is so blatantly after confrontation with Singapore. Two main theories have emerged to explain the PM’s enmity towards Malaysia’s tiny neighbour. According to the first theory, the idiosyncratic Mahathir holds a grudge from his university days in Singapore, where he faced anti-Malay prejudice and condescension from Singaporeans.

Mahathir does indeed have a history of holding grudges. Long before the Seletar airport issue and the revival of the Johor Strait bridge project, Mahathir had one-time protégé Anwar Ibrahim thrown in jail on trumped up sodomy charges after they disagreed over financial policy in the wake of the 1997 Asian Financial Crisis. Anwar, who has since re-emerged as a critical political ally for Mahathir, was just one of a long list of political opponents to suffer similar fates during Mahathir’s first tenure.

That trend has carried over into the premier’s second term. Having already spoken at length of his soured impression of successor Abdullah Badawi, the newly reinstated leader is now going after predecessor Najib. Arrested in July in connection with the billion-dollar corruption scandal surrounding state investment fund 1MDB, Malaysia has also filed criminal charges against Goldman Sachs for its involvement in the embezzlement of large sums of money. The unfolding case against Najib is being held up as a litmus test of Mahathir’s commitment to justice. The supposedly “bitter” Mahathir is unlikely to disappoint.

The second theory, however, may offer a more straightforward explanation. It suggests Mahathir is using this latest spat with Singapore as a means of drawing attention away from domestic problems. A Nikkei Asian Review report released earlier this year held Mahathir’s government responsible for a rapidly declining ringgit, with the new administration lacking in substantial new economic policies and failing to curb capital outflow.

Mahathir’s economic woes are compounded by rising concerns over Malaysia’s ballooning debt. In the wake of the 1MDB scandal, realizations that government debt exceeds RM1 trillion – more than $238 billion – are ringing national alarm bells. The benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index has fallen nearly ten percent since Mahathir took office.

Amid rising debt, dubious economic policies, and broken election promises, Mahathir’s comments in Thailand earlier this week belied what could very well be a conscious strategy of exploiting regional tensions to maintain domestic control. While ASEAN unity almost certainly is the only path to shared regional prosperity, Mahathir does not seem to be to be listening to his own advice.

Source: This article was published by Modern Diplomacy By Eliza King

 

 

 

Kerry B. Collison Asia News: China: Time of Reckoning

Kerry B. Collison Asia News: China: Time of Reckoning: China has long occupied a unique place in America’s relations with the world. In the 18 th and early 19 th centuries, China was a comm...

China: Time of Reckoning

China has long occupied a unique place in America’s relations with the world. In the 18^th and early 19^th centuries, China was a commercial magnet. Chinese products—tea, porcelains, silks—were in high demand and drew American merchants to Cathay. The clipper ships that plied the Pacific tea trade became as much a part of American lore as the Pony Express. In the late 19^th and early 20^th centuries, a potent new actor entered the scene: Christian missionaries. For many American denominations, the prospect that China might be converted to Christianity became a lure more powerful than money. By the 1930s, Christian missionaries funded by American congregations had established an impressive network of schools, hospitals, and universities—along with churches—across much of China. Moreover, China’s political leaders at the time, Chiang Kai-shek and his redoubtable wife, were baptized Christians. Americans envisioned a China that would soon become an Asian version of the U.S.

Unfortunately, Chiang’s regime bore the brunt of Japan’s World War II onslaught against China. After the war, the Nationalist armies were defeated in a civil war with Mao Zedong’s communist forces. The victorious communists immediately expelled the American missionaries, doctors and educators. It was a great shock; suddenly, China was no longer America’s ally and project—it had become an enemy. Any doubts on that score were erased when the Korean War pitted U.S. Marines against a large number of Chinese troops. The result was two decades of intense hostility between Beijing and Washington. Everything about Mao’s China seemed alien and threatening—communes, red guards, guerrillas, and ideological campaigns.

Then, in 1971, like a bolt from the blue, President Richard Nixon visited China. The pendulum swung again; suddenly, China was all the rage whether it was pandas, acupuncture, or the Great Wall. China’s post-Mao leader, Deng Xiaoping, came on a state visit, attended a Texas rodeo, and donned a Stetson hat. The American romance with China was back in full flower. For the next 35 years, U.S.-China relations were broadly positive—even cordial. Trade flourished, and Chinese students flocked to U.S. universities while American tourists and scholars descended on China. The U.S. hope, heavily colored by wishful thinking, was that China was on the way toward becoming a modern and enlightened country. China might not be Christian, but it could still be a constructive partner for America.

This seductive vision ignored some fundamental realities. China was not just another big developing country. The Chinese were deeply aware of China’s long (“five thousand years”) and illustrious history. Deep in the collective DNA was the conviction that China embodied the world’s oldest and greatest civilization. However, part of that heritage was the “century of humiliation” (roughly from the 1840s to the 1940s) when China was dominated and despoiled by Western powers and finally by Japan.

The combination of absolute certitude concerning China’s cultural superiority and burning resentment over the actions of outside powers generated a fierce determination in China’s contemporary leaders to do more than just build a modern, successful China. Chinese nationalism and pride demanded much more—the restoration of China to a position of regional dominance and global preeminence. The Middle Kingdom must once again resume its rightful place, i.e., China must become the world’s greatest economic and military power.

In specific terms, this means (1) China will achieve a strategic monopoly in East Asia including full dominance over the South China Sea and the expulsion of U.S. military power from the area and (2) China must gain dominance over the most advanced scientific and technological sectors that constitute the foundations of 21^st century state power. In support of the first objective, China has built and deployed an impressive armada of naval and air power off its shores. At the same time, China has built a number of artificial islands in the South China Sea that are being equipped as military bases. As for the second objective, China’s much-ballyhooed “Made in China 2025” is a government campaign designed to achieve Chinese dominance over key hi-tech industries (including robotics, artificial intelligence, and aerospace) within the next seven years.

China has long used the lure of its market to compel U.S. firms to divulge key trade and technology secrets as the price of doing business in China. At the same time, China has built a robust intelligence capability dedicated to stealing the most advanced science and technology developed by U.S. companies, universities, and research institutions using cyber penetrations and traditional spies. The head of the FBI’s counter-intelligence programs recently testified before Congress portraying the threat in graphic terms. “I believe this is the most severe counterintelligence threat facing our country today. Every rock we turn over, every time we looked for it, it’s not only there, it’s worse than we anticipated. Our prosperity and place in the world are at risk.”

The U.S. government has been very slow to recognize the full dimensions of China’s challenge—and the costs of self-delusion and delay are very high. In the South China Sea, the U.S. navy is faced with the question whether it can maintain an effective presence where it is already outgunned at least ten to one by Chinese maritime forces. In the world of advanced S&T, China’s bid for global leadership (read dominance) is already formidable. Just ask Silicon Valley. The administration has adopted a more confrontational posture toward China, but the focus has been on trade revenues and tariffs. These are a sideshow. The Pentagon and the Intelligence Community know that the main event is far more serious. It is not at all clear that President Trump understands that.

*About the author: Marvin C. Ott is a Senior Fellow at the Foreign Policy Research Institute and a Senior Scholar at the Woodrow Wilson International Center for Scholars

 

Kerry B. Collison Asia News: Indonesia opens military base on edge of South Chi...

Kerry B. Collison Asia News: Indonesia opens military base on edge of South Chi...:   Indonesia this week opened a military base with more than 1,000 personnel on the southern tip of the disputed South China Sea, w...

Indonesia opens military base on edge of South China Sea to ‘deter security threats’

 

Indonesia this week opened a military base with more than 1,000 personnel on the southern tip of the disputed South China Sea, where the territorial claims of China and several other countries overlap.

The base, which opened on Tuesday, is located in Selat Lampa on Natuna Besar Island – part of the Natuna Islands – one of the country’s outermost areas and more than 200km off the island of Borneo.

Indonesia is not a claimant state in the South China Sea but Jakarta and Beijing have had several maritime skirmishes in the resource-rich area, including one in 2016 when an Indonesian patrol boat seized a 300-tonne Chinese fishing vessel.

Several hours later, a Chinese Coast Guard vessel rammed the fishing boat, resulting in the Indonesian authorities releasing it.

At an inauguration ceremony for the base, Indonesian National Armed Forces (TNI) chief Marshal Hadi Tjahjanto said the outpost is designed to work as a deterrent against any potential security threats, particularly on border areas, according to military spokesman Colonel Sus Taibur Rahman.

On Wednesday, Indonesian president Joko “Jokowi” Widodo, who is seeking re-election next year, stressed the Indonesian government was ready to make clear that the Natuna Islands, with a population of 169,000, are its sovereign territory.

Collin Koh Swee Lean, an analyst at the S. Rajaratnam School of International Studies in Singapore, said the plan for a military hub in the Natuna Islands had been in the making for years.

“The March 2016 incident with China gave more impetus to the plan,” Koh said.

Aaron Connelly, a research fellow at the International Institute for Strategic Studies, described Jokowi’s comments as “clearly campaign rhetoric”.

“He was primed to say something tough on the subject by the previous speaker, Yenny Wahid,” Connelly said, referring to the daughter of Indonesia’s fourth president, Abdurrahman Wahid.

“And perhaps also by the setting: he was speaking at a gathering of religious scholars in Madura, which has a celebrated reputation for bellicosity among Indonesians.”

Hadi did not disclose the exact number of military personnel in the Natuna Islands area, but said the new base is supported by an army battalion, companies of marines and engineers, and artillery. In Indonesia’s military, a battalion consists of between 825 and 1,000 personnel, while a company consists of about 100 personnel.

“The development of this kind of military base will also be done in other strategic islands,” Hadi said.

The new base has a hangar for an unmanned aerial vehicle squadron, according to Hadi, and would be improved in accordance with threat levels, with personnel there prepared to join in any military operation.

Photos on the official Twitter feed of the TNI’s Information Centre also showed an inauguration ceremony for a hospital to serve military personnel at the base.

The South China Sea is home to some of the world’s busiest sea lanes and China has overlapping territorial claims with the Philippines, Vietnam, Malaysia and Brunei, as well as Taiwan.

Although China recognises Indonesian sovereignty over the Natuna Islands, it insists the two countries have overlapping claims to maritime rights and interests in the area that need to be resolved – a claim Indonesia rejects.

Last year, the Indonesian government presented an updated national map in which the country’s exclusive economic zone (EEZ) north of the Natuna Islands was renamed the North Natuna Sea. It was previously described as being part of the South China Sea.

In 2002, Indonesia renamed the section of the South China Sea within its EEZ the Natuna Sea, except for the waters north of the Natuna Islands. With the latest name change, the South China Sea is no longer used for any part of Indonesia’s territorial waters.

Immediately after the name change, China expressed opposition to the move, saying it would result in complications and the expansion of the dispute. Changing an internationally recognised name would also affect peace and stability, and is not conducive to a peaceful relationship between Jakarta and Beijing, it said.

Indonesia countered, however, that it had the right to name its own territorial waters and that the North Natuna Sea falls within its territory.

But while Indonesia has focused on protecting its own interests around the Natuna Islands, this does not mean it wants to antagonise China, given Widodo’s interest in drawing Chinese investment for infrastructure projects, according to a report by Australian think tank, The Lowy Institute.

“Despite Jokowi’s resolute rhetoric on maritime rights, Indonesia has sought to ensure its campaign against illegal fishing does not target Chinese vessels; and in regional diplomacy, Jokowi’s administration has been eager to ensure it does not offend Beijing,” said Connelly, who wrote the report. South China Morning Post

 

Kerry B. Collison Asia News: Indonesia’s Year of Dithering Dangerously - Why di...

Kerry B. Collison Asia News: Indonesia’s Year of Dithering Dangerously - Why di...: While U.S.-China relations dominated attention at the recent G-20 Summit, a little-noticed aspect was that Indonesia President Joko Wido...

Indonesia’s Year of Dithering Dangerously - Why did Indonesia’s President Joko Widodo skip the G-20?

While U.S.-China relations dominated attention at the recent G-20 Summit, a little-noticed aspect was that Indonesia President Joko Widodo did not even bother to attend. Vice President Jusuf Kalla represented him instead. Widodo was the only head of state among the 20 to skip the meeting, but he offered no explanation for his decision – nor did any Indonesian politicians or commentators question the choice. The official presidential campaign that is underway provides an excuse, but election day is still four months away. Widodo has a massive lead and cavorting with world leaders could have provided advantageous photo opportunities.

In Indonesia, ambivalence about engaging in the international arena is even more pronounced than usual, and this may explain Widodo’s absence. The president has often appeared indifferent about foreign affairs, but now this attitude increasingly applies to cabinet-level policymaking and the broader political arena.  

Ironically, with the trade war prompting manufacturers to shift production bases elsewhere in Asia, a prime opportunity now exists for Indonesia to attract sorely needed investment. But, in fact, the giant of Southeast Asia ranks well down the list of desirable destinations for capital in the region: as a proportion of GDP, Foreign Direct Investment (FDI) was larger in 2016-17 in Vietnam, the Philippines, Thailand and Malaysia. FDI inflows have declined for two successive quarters, according to the Investment Coordinating Board (BKPM), and they appear likely to fall again in the fourth quarter.  

Labor Ministry data shows that work permits for expatriates from key investor nations – Japan, Korea, the United States, the U.K. and Australia – declined by 5 percent from 2012-18. This bodes ill for attracting the capital inflows that Indonesia increasingly needs to fund its current account deficit. With mediocre export performance and heavy dependence on imports (especially for fuel), FDI is essential for preventing yet more currency depreciation in the years ahead.  

Nonetheless, foreigners continue to face difficulties in obtaining work permits. The process remains convoluted, expensive, overly rigid and unpredictable. The president ordered investor-friendly reforms in March 2018, but policymakers produced changes that have proven largely inconsequential. (Ministry data shows soaring numbers of work permits for Chinese nationals, but this increase is not commensurate with increased investment flows from China and there is reason to question the value added by the staffing practices of Chinese projects.)  

Furthermore, with the adoption of the Automatic Exchange of Information (AEOI), Indonesia’s residency-based system of global taxation serves, in practice, to make the country a highly uncompetitive place for expatriates to work, relative to regional neighbors that are competing for capital. Policymakers are aware of the problem, but Finance Minister Sri Mulyani Indrawati has made no initiative to address it.  

Institutional reforms for better governance could go a long way to improving legal certainty, lowering operating risks and improving investor sentiment. But Widodo has shown scant interest in fundamental governance reform. To fill a recent vacancy in a cabinet post that is crucial for bureaucratic performance, Widodo chose a career police general (Syafruddin) with personal ties to Kalla – hardly a choice that inspires confidence for addressing persistent dysfunctions in the state apparatus.  

Meanwhile, a host of policies continue to mitigate against foreign investment. Overly rigid labor regulations prioritize iron-clad job security for unionized workers, who number no more than 10 million from a workforce of approximately 120 million. In practice, strictures on hiring and firing workers deters new investment that might create good jobs for the majority of workers (58 percent as of 2017, according to Labor Ministry data) who still toil in the informal sector, with no benefits or safeguards whatsoever. The pernicious pro-union bias of the regulatory framework has been evident since the Labor Law’s passage in 2003, but successive administrations have been too fearful of union demonstrations to broach reform.

In the resource sector, the complacency of policymaking is particularly stark. Foreign mining companies must divest majority ownership within 10 years of commencing operations, while also bundling mines with expensive and highly-polluting smelters – conditions that run directly counter to commercial viability. Widodo’s move to nationalize PT Freeport Indonesia (the world’s largest gold mine and second-largest copper mine) exacerbates the investment climate, especially considering that the state-owned purchaser, PT Inalum, will struggle to fund its share of the mine’s vital $20 billion capital expansion.

The coal-mining sector has benefited recently from buoyant prices, prompting producers to undertake long-overdue investments in their operations. This has apparently propped up levels of fixed-capital formation in the national accounts, while driving an uptick in bank-credit growth (which reached 13 percent year-on-year in October). But this price-induced trend may prove fleeting.

In the oil-and-gas sector, policymakers have repeatedly rejected contract-extension requests by foreign majors, in order to confer production on state-owned Pertamina – despite its weak performance record and inadequate balance sheet. These decisions have exacerbated sentiment that already suffered from an overly cumbersome and inconsistent regulatory framework. Energy Ministry data through the third quarter of this year suggest that upstream oil-and-gas investment is on pace to decline for the fifth consecutive year.

With GDP growth stuck on a plateau of 5 percent per annum, and with a large current account deficit having weakened the currency, reforms to address business conditions in key sectors would presumably be in order. Instead, the latest phase of Widodo’s “Economic Policy Package” (previewed in early November and still only partially implemented) is another damp squib.  

A key feature is an attempt by Indrawati to boost “pioneer industries,” such as tech and heavy industry, by offering income-tax holidays that range up to 100 percent for 20 years. Arguably, this is overly generous. Common-sense reforms for governance and institutions could achieve the same result by lowering country risk, without sacrificing future government revenues. In effect, Indrawati’s policy exemplifies how the administration neglects meaningful reform and relies instead on (costly) palliatives.  

The other main feature of the package pertains to the so-called Negative Investment List (DNI), which imposes foreign-ownership ceilings on varied sectors. A long-awaited revision has faced delays, and in any event the proposed changes disclosed by ministers constitute little more than tweaks. In particular, there is no meaningful discussion about opening Indonesia’s decrepit education system to increased foreign involvement – a change that is needed in order to better equip Indonesia’s youth to function in a competitive economy.

To be sure, Indonesia’s economy has certain highlights: tourism and e-commerce are robust, while infrastructure development is making real progress. However, state entities dominate the latter and funding constraints loom.  

Perhaps the most constructive policy in recent months emanated from the independent central bank: Bank Indonesia (BI) removed debilitating prohibitions on hedging local currency risk. (In the past, skeptics had denounced derivatives as a form of malicious speculation.) BI’s introduction of a relatively easy-to-use hedging instrument (the domestic non-deliverable forward, or “DNDF”) helps reduce short-term demand for dollars, and this has coincided with a period of improved rupiah stability. However, monetary instruments alone cannot steer Indonesia’s economic course.

Widodo’s ambivalence applies not just to international engagement and economic policymaking, but also to democratic pluralism. While strident Islamic groups are making shows of strength, Widodo – along with the bulk of the political elite – remain irresolute. In effect, Widodo is applying appeasement: early last year, he sat idly by while police charged Indonesia’s most effective reformer, Jakarta Governor Basuki Purnama (known as Ahok), with blasphemy (he is still in jail).  This year, Widodo recruited a staunchly conservative cleric – a chief accuser of Ahok– as his vice-presidential running mate. The president has extended no support to Grace Natalie, chair of the small pro-Widodo Solidarity Party (PSI), who faced police questioning for having declared that her party opposes “Syariah by-laws” (regional-government decrees that enforce religious behavior). Meanwhile, Widodo’s presidential-election opponent, Gerindra Party Chair Prabowo Subianto, actively courts sectarian clerics, such as the fugitive leader of the Islamic Defenders Front (FPI), Rizieq Shihab. The FPI and like-minded groups managed to mobilize approximately one million supporters who descended on Central Jakarta on December 2 – a dramatic show of force that has elevated FPI’s status and leverage.   

Some may attribute Widodo’s stances to electioneering, and argue that he will embark on reforms after winning a likely second term. But this view overlooks the pattern of Widodo’s appointments for strategic posts in recent months: The president has persistently favored candidates linked to conventional (or discredited) political elites – including elites whose support is clearly immaterial with regard to re-nomination or re-election. His tendency to avoid reform, appease fringe groups and align with elites has been growing gradually more pronounced over the past two years. The once-enterprising regional head now rarely shows signs of political courage, creativity or inspiration. Rather than an election tactic, this appears to be an intrinsic transformation of his character. Rather than improved policymaking, a second Widodo administration seems likely to offer yet more dithering – which Indonesia can ill afford.

Unfortunately, Indonesia’s demographic dividend is expiring and a middle-income trap is rapidly approaching. Widodo seems likely to coast to re-election, and he can at least offer stability, but another five years of erratic policymaking will be costly in terms of opportunities squandered.

Kevin O’Rourke has been author of the Reformasi Weekly Service on Indonesian Politics and Policymaking since 2003.

Kerry B. Collison Asia News: Indonesian Presidential Race - Does Prabowo have a...

Kerry B. Collison Asia News: Indonesian Presidential Race - Does Prabowo have a...: He's a controversial former army general, multi-millionaire businessman and failed presidential and vice-presidential candidate. ...

Indonesian Presidential Race - Does Prabowo have a “thing” and other awkward questions

He's a controversial former army general, multi-millionaire businessman and failed presidential and vice-presidential candidate.

For decades Prabowo Subianto has been a household name in Indonesia and in 2019, once more, he is seeking the presidency.

But despite being so well known to the public, Prabowo's campaign team has taken the unusual step of releasing a so-called "Blue Book" that, as well as outlining some of the key promises made by the candidate and his running mate, Sandiaga Uno, also includes a lengthy frequently asked questions section.

Fair and Prosperous with Prabowo-Sandi examines suggestions that the candidate is in debt – a claim he strongly denies – his marital status, why he likes horses so much ("what's wrong with a horse?") and even whether or not he has a "thing". In Indonesia this will be universally recognised as dealing with a rumour that his genitals were shot off during his army service.

 

The most serious claims made against Prabowo relate to his time in the military. The candidate served in the Indonesian military, including in East Timor in the 1980s at a time of conflict with the East Timorese rebel army. He rose through the ranks to become commander of Kostrad, or Army Strategic Command.

Over the years, Prabowo has been accused of human rights abuses in East Timor, and of being involved in the kidnapping pro-democracy activists during the 1998 reformasi demonstrations that led to the end of former president Suharto's long rule.

The Blue Book asks the rhetorical question, "if he violated human rights, why is he allowed to freely go to any country?"

"He was even chosen by [the Indonesian Democratic Party of Struggle chairman] Megawati to be her vice-presidential candidate during the 2009 election."

On the kidnapping claims, the Blue Book states that "it was not kidnapping but securing. And it was not Prabowo who secured [the activists] but Tim Mawar [a team of soldiers].

"Nine people were secured and they are now free and alive and some are Gerindra Party [Prabowo's political organisation] members.”

The book is similarly defiant about suggestions he was sacked from the military. He was "not fired, but honourably retired early. If he was fired how could he still receive pension money each month?"

But the expert view on Prabowo's role in Indonesia's relatively recent political and military history is a little more nuanced than the candidate would have people believe. The Australian National Univeristy's Marcus Mietzner says Prabowo was never convicted of any crimes.

"He was 'relieved from military service' in August 1998 by an honorary council of military officers for a number of violations, which included the extra-judicial disappearance and arrest of anti-Suharto activists, but also made mention of a number of operations in Aceh, East Timor and Papua. These operations were viewed as being conducted outside of the official command structure. The written verdict of the council avoided the term 'human rights violations'," Dr Mietzner says.

To help him save face, "the presidential decree that discharged him called it an 'honourable' discharge. The honorary council had only recommended a 'discharge'."

Professor Hermawan Sulistyo, a research professor at the Indonesian Institute of Sciences, adds that the human rights abuse allegations levelled against Prabowo relate to the 1998 kidnapping of activists.

"What was important at that time was that he resigned from the military. There are several allegations related to human rights abuses in East Timor but he is just one of the accused. There are other actors. Since the East Timor cases were never brought to court we cannot say he committed human rights abuse in East Timor."

The booklet also examines what sort of government a president Prabowo would lead. Specifically it addresses the question of whether he would revive the "New Order", the name given to the 1966-1998 regime of strongman president Suharto which was characterised by authoritarianism and crony capitalism. At also asks whether he would allow the formation of an Islamic State, given his support from conservative Islamic groups.

On the New Order, the booklet states that "every government has positive and negative sides to it.

"We will continue the positives, and abandon the negatives."

On the Islamic State, the book says Prabowo "is a TNI [army] general, whose duty is to safeguard the NKRI [the secular Unitary State of the Republic of Indonesia]. [His] commitment toward the NKRI is final!"

In the book, Prabowo also denies that he is divorced from Siti Hediati Haryadi, one of Suharto's daughters. The couple separated in 1998, but he argues "he was chased away by the Cendana family [the Suharto family], provoked by generals who were anti-Prabowo".

But Mietzner says "yes, he is divorced.

"He wants to create the impression that this was not because they didn't love each other anymore, but because of political reasons".

Perhaps the most delicate question addressed by the Blue Book is the one about his "thing".

"If Prabowo doesn't have 'the thing' how does he have a child? His child is an international designer and designed the most expensive series of BMW cars, with only five cars made in the world," the book states.

Professor Hermawan Sulistyo says he doesn’t know if Prabowo does or does not have "the thing", but notes "the rumour about it relates to an accident in East Timor.

"The incident in East Timor occurred after he had a child".

James Massola is south-east Asia correspondent, based in Jakarta.