Monday, January 9, 2012

Indonesia at a Crossroads

Dependence on natural resource exports must change

In late December, two leading national daily newspapers carried a huge ad by the “Keluarga Besar BUMN” (“The Big Family of State-Owned Enterprises”), titled “Indonesia itu Mengecewakan’ (“Indonesia Disappoints”). Inspired by the wry humor of Chatib Basri, one of Indonesia’s sharpest young economists, it was a satirical take on criticism of Indonesia’s economy, which grew by 6.5 percent in 2011.

The ad said that this was “disappointing” to both optimists (who feel that the nation could do much better) and pessimists (who are hoping for it to fail). It then concludes by saying that Indonesia is only disappointing to those “whose hobby is to be disappointed.”

Humorous as it is, it marks the real crossroads that Indonesia finds itself at this new year. No one can deny that Indonesia has turned the “corner.” Almost 15 years after the Asian economic crisis and the fall of Suharto, the Southeast Asian giant has made a stupendous recovery marked by two major milestones. First, rating assessor Fitch Ratings in mid-December upgraded Indonesia’s sovereign debt rating from BBB- to BB+, marking a return to investment grade after it was lost in 1997. Next, its annual gross domestic product per capita has passed $3,000.

While these are welcome developments, economics is not a straight-line discipline and present success is no guarantee of future prosperity. The speed of the European and American decline is, if anything, proof of how quickly fortunes can turn and the need to plan ahead.

In this sense, the longstanding policy failures of the West — the introduction of the euro without sufficient political safeguards to ensure its viability, and American profligacy, leading to crippling debt —have returned to haunt these nations. Moreover, it’s increasingly apparent that the overly generous welfare systems of these countries have damaged their work ethic and altered their social dynamic.

Indonesia is confronted with a fundamentally similar set of choices. Its leaders have a chance to plan for the long-term health of the country, or let the opportunity pass. What exactly is at stake?

It ought to be stressed that the Indonesian economy will continue to grow. It is ironically enjoying the benefits of previous underinvestment, but also a demographic dividend (with about 29 percent of its 240 million population aged under 14) and a rich supply of natural resources at a time of escalating demand by China and India.

Still, Indonesians need to ask if they are taking advantage of this to lay the foundations of future growth and prosperity, or merely creating a bubble. For all its promises, the Indonesian economy still faces two major obstacles.

On one hand, a solely natural resources-driven economy is unsustainable in the long run. The cost to Indonesia’s environment may be too high a price to pay. Furthermore, relying too much on mineral wealth robs a country of the incentive to innovate or add value. Indonesia’s growth cannot be kept up if it fails to diversify its exports. Indeed, Indonesia is considering restricting the export of natural resources like coal and gas to meet local demand and boost its downstream industries.

Then there’s the issue of its vast domestic market. Again, the challenge here is to develop a manufacturing sector that is globally competitive in the face of the East Asian juggernauts. While pricing is critical, there’s also an element of consumer preference that policy makers need to consider. More should be done to make Indonesians aware of the importance of supporting local produce and wares.

Indeed, we can detect in Europe, America and Japan an attempt to move back to smaller-scale production of consumer goods that also stresses location, design and ethical components. We only need to look at how lucrative the market is for iconic French terroir, or indigenous/local, goods such as Champagne, foie gras and Armagnac brandy to see the potential of such an approach.

Indonesia is making some progress in this regard, such as the Ministry of Trade’s 2009 “100 percent Cinta Indonesia” (“100 percent Love Indonesia”) campaign. Interestingly, this movement has also spread to the regions, with Solo Mayor Joko Widodo championing small- and medium-industries promoting distinctive, local brands in his city. He has backed Solo’s famous Batik Keris and Dana Hadi brands, as well as smaller-scale producers, to compete with foreign textiles.

Indonesia is at a crossroads. It can easily end up as just another fad that petered out. On the other hand, with courage, foresight and imagination, it can take its rightful place at the forefront of a changing world.

(By Karim Raslan columnist who divides his time between Malaysia and Indonesia.)

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