Sunday, September 9, 2012

Beware, Indonesia

Power, money and influence are irresistible aphrodisiacs. They also drive global diplomacy, and in the past few weeks, Indonesia has flaunted its growing clout as high-profile visitors ranging from the German Chancellor Angela Merkel to US Secretary of State Hillary Clinton descended on Jakarta.

Indeed, Clinton — her pro forma statements about human rights in the republic aside — was effusive in her praise for Indonesia, hailing its efforts to mediate Asean’s South China Sea dispute with China. This may have been done with one eye toward China (Clinton’s next destination after Jakarta), but it was also a sign that the hard work that Indonesia (particularly Foreign Minister Marty Natalegawa) has put into regional diplomacy and leadership is being recognized.

Still, Indonesia cannot let itself be distracted by the acclaim. The global natural resources boom that has facilitated Indonesia’s rise is waning; coal, for instance, is no longer as lucrative a proposition as it was before. Indonesia’s trade figures aren’t doing too good either. Exports in July were down 7.2 percent to $16.15 billion, and the trade deficit rose to a record $1.33 billion June.

With falling demand from China and India, as well as the rise of cheaper alternatives like shale gas, Indonesian coal players are starting to feel the pinch as prices continue to slacken.

Adding to the complexity is Bank Indonesia’s falling foreign exchange reserves, which went from $116.41 billion at the end of April to $106.56 billion at the end of July.

Indonesia is facing many of the same dilemmas confronting Brazil — part of the BRIC club that Jakarta so aspires to join. Like Indonesia, Brazil is now a global darling: Hillary’s husband, former President Bill Clinton, in late August praised the South American giant, saying it was the most promising of the rising economies thanks to its natural resources (read iron ore, soybeans and now oil).

Dig a little deeper, however, and the picture’s not all that rosy for the land of Pele and Gisele Bundchen. Brazil is also suffering from falling demand from China, but more fundamentally, from a failure to invest in productivity as well as infrastructure, and it shows.

According to the Financial Times, in the Brazilian central bank’s latest survey of market economists, GDP growth was seen at just 1.64 percent, compared to 1.85 percent four weeks ago. Industrial production was seen falling 1.78 percent this year and domestic consumption was seen growing just 2.4 percent year-on-year, compared to 7.3 percent in 2010.

The value of Brazil’s exports fell by 2.5 percent in the second quarter, the first contraction since the end of 2009.

Slacking off on fundamentals will come back to haunt you no matter how much mineral wealth your country has. The analyst Tony D’Altorio estimates that Brazil only spends 2 percent of its GDP on infrastructure. The strain on the country’s infrastructure is likely to increase as its middle class grows. At the same time, as the Financial Times argues, necessary policy reforms — including taxation and labor laws — are likely to stall due to political infighting and inertia.

Now where have we seen all this before?

Infrastructure is also as much a problem for Indonesia as it is for Brazil. Never mind the issue of pride, failures like the possibility that the TransJava toll road will not be completed on time mean that many Indonesians who ought to have been lifted out of poverty will miss the boat (or bus, rather).

No one denies the potential of both Indonesia and Brazil, but you can’t shake the feeling that the natural resource export-based economic models that has taken these two countries so far have run out of steam.

If Indonesian doesn’t respond to the current challenges, Jakarta may not glitter quite so alluringly as a diplomatic port of call. As they say: no money, no honey.

Karim Raslan is a columnist who divides his time between Indonesia and Malaysia. Jakarta Globe

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