Jakarta's Frustrating Path to Prosperity

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“TWO steps forward, one step back”. This rather depressing catchphrase seems to fit Indonesia rather well these days.

Like the mythical frog struggling to climb out of a water well, for every two steps the country takes to improve, it seems to take another one backwards. Progress is arduous and deeply frustrating.

One recent example concerns the turnaround in international attitudes towards Indonesia’s financial position. Last year, steady improvements in Indonesia’s macroeconomic position convinced both Fitch Ratings and Moody’s Investors Service to raise the country’s sovereign risk ratings.

In a statement released to the media in December, Fitch said it raised Indonesia’s long-term and local currency debt rating to BBB- from BB+, putting the country into the investment grade for the first time in 14 years. But the international vote of confidence did not last. Several months later, Standard and Poor’s (S&P) announced that it would not be following suit. Citing the subsequent failure to carry out planned fuel subsidy reductions in the wake of nationwide protests, the agency maintained Indonesia’s sovereign debt rating at junk status.

S&P’s decision was a serious blow to the government, which had been hoping that unanimity among the world’s top three rating agencies would help spur renewed foreign investor interest in the country.

According to the World Bank, the delay in raising domestic fuel prices will cost the government between US$20 billion and US$30 billion (S$25.6 billion and S$38 billion) a year in fuel subsidies. Borrowings to cover the budget deficit will also be more expensive than they might otherwise have been.

But it is not only the government’s fiscal position that is likely to suffer. Its credibility has also been seriously eroded. The next time President Susilo Bambang Yudhoyono’s government wants to do something controversial, many will question its chances of success.

Yet another example concerns the recent return to nationalist economist policies after years of wooing foreign investors with progressive economic liberalisations.

If these were the only occasions when Indonesia backtracked, they might be dismissed as mere aberrations. Unfortunately, there are many more.

The move towards decentralisation after the fall of President Suharto’s authoritarian regime in 1998, for example, was meant to bring democracy right down to the kebupaten (district) level and ensure that future political decisions would be made by people familiar with local conditions.

Sadly, many local leaders used their newly acquired powers to impose a plethora of new regulations on business, many formulated with no other purpose than to enrich local bureaucrats.

Little wonder that Indonesia ranks 129th out of 183 countries in the World Bank’s 2012 ease of doing business rankings.

Indonesia’s attempts to improve its human rights record have produced similarly mixed results. The National Human Rights Commission (Komnas HAM) was established in the hope that future generations would not have to endure the human rights abuses of the past. Yet despite its high profile, human rights abuse is arguably as widespread in the country now as it has ever been.

One reason for this is that Komnas HAM’s recommendations do not have binding legal status. Its well-researched reports are sometimes ignored and even contradicted by the government, the courts and the attorney-general.

The KPK, Indonesia’s anti-corruption agency, has more power. But even it faces serious constraints. Soon after the KPK began operating in 2003, the organisation gained a formidable reputation, boasting of a 100 per cent conviction rate in the high-profile cases it prosecuted.

But when a political backlash resulted in Parliament attempting to undermine the KPK’s authority, the President seemed reluctant to back up the organisation.

Observers who once cheered both the President and the KPK for their efforts now speak darkly about an increasingly toothless tiger.

A similar point can be made about technocrats such as reformist finance minister Sri Mulyani Indrawati. Credited with steering Indonesia through the difficult days following the global financial crisis of 2008, she was hounded out of office in 2010 by parliamentarians who accused her of misusing her powers.

This backward step has made it that much more difficult for the government to convince potential investors of its determination to support future reformist ministers.

Meanwhile, a highly successful crackdown on terrorist groups has been followed by a marked reluctance to ensure that militant groups such as the Islamic Defenders Front respect the rule of law.

How does one make sense of this zig-zag approach to development? Those who wish Indonesia well generally prefer to focus on the positives. Economic growth in recent years has been strong. And despite Sri Mulyani’s fate, there always seems to be a small band of dedicated technocrats around to save the country from itself.
Somehow, Indonesia will muddle through.

(C) Singapore Press Holdings Limited 

Key Political Risks

The inability of the government led by Prime Minister Yingluck Shinawatra to bridge the deep divisions between her populist government and its royalist opponents in the military and bureaucracy remains a major concern.

Prime Minister Yingluck has selected a competent economic team, but it is difficult for these technocrats to deliver on the new government's campaign promises without triggering inflation or hurting business. 

The government has also been unable to resolve the ongoing insurgency involving ethnic Malay Muslim rebels in the south.



  1. Attempts by the government to amend the constitution. The proposed rewrite is aimed removing legal measures initiated by the royalist generals who overthrew former Prime Minister Thaksin Shinawatra, the current prime minister's elder brother, in 2006.
  2. Ballooning government debt as officials seek to finance government programmes aimed at subsidising rice prices in order to retain the support of farmers.
  3. The relationship between Prime Minister Yingluck and senior generals. Coups have been a common means of regime change in Thai history, and any attempt by the government to purge royalist elements in the top brass could trigger yet another. Thailand

About Me

My name is Dr Bruce Gale and I am a senior writer with the Singapore Straits Times. I studied at  LaTrobe University (BA Hons) in Melbourne and later at the Centre for Southeast Asian Studies at Monash University (MA). My PhD thesis, which focussed on Malaysian political economy, was completed at the Malaysian National University (Universiti Kebangsaan Malaysia) in 1987.

From 1988 to 2003 I was Singapore Regional Manager for the Hong Kong based Political and Economic Risk Consultancy (PERC). 

I have written several books and articles on Southeast Asian affairs, including Political Risk and International Business: Case Studies in Southeast Asia (Pelanduk Publications, 2007). Books on language include Mastering Indonesian: a guide to reading Indonesian language newspapers (Pelanduk Publications, 2008)

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