Sunday, February 19, 2012

Indonesia and The Komodo economy

Workers’ protests dampen news of a ratings upgrade

IN THEIR presentations to foreign investors, Indonesian officials often like to begin with a montage of images from their fascinating country: the elegant mast of Jakarta’s Wisma 46 skyscraper, for example, and the vast ninth-century Borobudur monument. One presentation last year even featured a Komodo dragon peering out of the frame.

As a symbol of Indonesia’s economic virtues, these enormous and venomous lizards, native to a couple of islands, are not obviously appealing. But they are apt. The Komodo is thick-skinned, with scales resembling chain-mail, and surprisingly quick. That is a fair description of Indonesia’s resilient, resurgent economy. It grew by 6.5% in 2011, according to figures released this month, its fastest pace since the Asian financial crisis in 1997 (see chart). Ministers are already looking forward to Indonesia’s entry this year or next into the club of 14 countries with an annual GDP above $1 trillion.

Its growth also appears armour-plated. The economy withstood the global crisis of 2008 better than most, and so far appears little troubled by the euro’s strife. That resilience reflects the buoyancy of its home market—exports accounted for only 26% of its GDP last year—and Indonesia’s efforts to wean itself off foreign borrowing. Net foreign debt is now less than 10% of GDP, and Fitch, a ratings agency, believes Indonesia’s government might become a net foreign creditor by the end of next year.
That is one reason why the agency raised the country’s sovereign credit rating in December; Moody’s followed a month later. It has restored the cherished “investment-grade” status that Indonesia’s government lost during the Asian financial crisis. The establishment is thrilled.

Government officials say all the good news should be a catalyst for greater foreign-direct investment, which reached a record $19.3 billion in 2011, up a fifth from the previous year. But there is danger in reading too much into a credit rating. Maybe the government will always pay up, but other kinds of investment will not necessarily pay off.

Indeed, some of Indonesia’s fiscal austerities may have come at the expense of the economy as a whole. The government has often struggled to spend the money it has budgeted, even for worthwhile projects. In 2008-10 the central government spent less than three-quarters of the money it had allocated for public investment. Sometimes the only cash that seems to flow freely is for wasteful fuel subsidies. Part of the improvement in Indonesia’s public finances, therefore, reflects fiscal constipation more than it does budget conservatism.

Chronic underspending is partly because of heightened scrutiny of graft in the wake of some high-profile corruption busts, as well as bureaucratic bottlenecks, such as the difficulty of buying land. A new land-acquisition law passed in December should quicken spending on needed infrastructure.

But if land is one problem, labour is becoming another. On January 27th several thousand factory workers on motorcycles blocked a main toll road linking manufacturing zones in West Java to Jakarta, the capital, backing up traffic and paralysing the region’s commerce. The workers were protesting against a court ruling overturning the provincial governor’s decision to raise their minimum wage by 15.5%, to about $165 a month.

Susilo Bambang Yudhoyono, Indonesia’s president, immediately intervened—on behalf of the blockading workers. His labour ministry asked the employers’ association, which had won the court case, to back down. The government’s handling of the dispute irked foreign investors. The South Korean embassy, according to the Jakarta Post, wrote to the government, lamenting the congestion, disruption and damage to factories. Japan’s embassy complained to the police. And an official at Taiwan’s trade office warned that some Taiwanese firms would leave Jakarta or even Indonesia. Wages, he argued, should not outstrip inflation.

Yet foreign investors protest too much. To say that wage rises should not exceed inflation is to say that real wages should remain stagnant—in other words, that Indonesia should never develop. Moreover, figures from Indonesia’s statistics agency suggest that the average wage for Indonesian production workers has not, in fact, outstripped inflation in recent years, although minimum wages have done so. So expect most foreign manufacturing firms to cough up and stay put. Nonetheless, the havoc has reminded overseas investors that a Komodo economy sometimes has a nasty bite. The Economist

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