Indonesia's Untapped Potential


Back in July, the Indonesian president, Susilo Bambang Yudhoyono, visited Darwin as part of an annual leaders summit. He had a clear message for Julia Gillard: Australia needs to boost investment in Indonesia.

Following the release of the Asian Century White Paper, a similar message emerged in Australian commentary. Australian business must engage more comprehensively with its northern neighbours. This means more Asian experience, more Asian literacy and more Asian investment.

The plan is that by focusing hard enough on Asia, and pushing our wares and wiles northwards, Australia will somehow benefit from the appealing growth rates elsewhere in the region. Somehow, this story glosses over the complexities both Australian businesses and Australian graduates often face when they try their hand in Asia. Just ask an Australian Bahasa-speaking graduate about getting a private-sector job in Jakarta, or the innumerable resource companies whose forays into the archipelago have ended in tears.

Fortunately, the demand side, at least as far as Indonesia is concerned, is also poised to support Australian supply. Around the capital, business people are riding high on the findings by a new report by the management consultancy, McKinsey & Co. Although it was actually released back in September, "The Archipelago Economy: Unleashing Indonesia’s potential" remains a popular topic in Jakarta’s bullish conversation.

The irony of the post-report giddiness is that McKinsey’s publication is somewhat of a lagging indicator insofar as signs of Indonesia’s popularity among the global business community goes. For the last 12 months, getting a reservation at one of Jakarta’s popular neo-colonial restaurants was an impossibility. These ill-lit institutions heave with men who run resources projects in the outer islands and suave Europeans bringing ecommerce to an archipelago.

Anecdotes aside, Indonesia just recorded an all-time high of Foreign Direct Investment (FDI) in the third quarter, hitting US$5.9 billion for the period. That equates to a 22 per cent year-on-year improvement, and some pretty good small talk.

The underlying reasons for ongoing optimism and FDI are also appealing. Amid much fanfare in the archipelago, Moody’s re-anointed Indonesia with "investment grade" status in January for the first time since the Asian Financial Crisis. The move, which followed shortly on the heels of a similar action by Fitch, reflected the country’s resilience during the GFC and the gradual improvement of key macroeconomic measures. It’s an impressive list of highlights.

Since the beginning of the century, inflation in Indonesia dropped from a soaring 20 per cent to its current 8 per cent. Government debt as a share of GDP performed a similar trick and now stands below 85 per cent of OECD countries. This year, the World Economic Forum ranked Indonesia the 25th most stable economy in the world. And it’s growing at 6.4 per cent. President Yudhoyono has presided over a competent administration, the first democratic government to be re-elected for a second term, and can claim some credit for the country’s economic fortunes.

In September, Joko Widodo (Jokowi) and his deputy, Basuki Purnama Tjahaja (Ahok), stared down the incumbent, Fauzi Bowo, in Jakarta’s gubernatorial election despite Fauzi’s long list of supporters from the nation’s top political parties. Tempo, the nation’s leading political journal, interpreted it as a victory for democracy.

Consequently, many hope Jokowi and Ahok will herald a new brand of leadership. Both received strong popular support in their previous roles as Mayor of Solo and Regent of East Belitung respectively. Jokowi, currently in the running for the 2012 World Mayor award, is widely viewed as pro-poor and anti-corruption. Ahok, an Indonesian Chinese, is the hope of a diaspora historically sidelined from politics and frequently the focus of violent ethnic attacks. One credible poll even put the Indonesian Chinese support of their ticket at 100 per cent.

All this news is enough to put Indonesia squarely in the sites of the Asian Century White Paper, not to mention the countless analysts for whom the sole statistic, a 240 million person population, is almost sufficient cause for investment. But the assumptions underpinning the models should be considered with some caution (as the McKinsey report freely admits).

Their report claims, all going well, Indonesia will rank as the seventh largest economy by 2030. It also concedes that to get there will require some impressive feats. Over the past two decades, a majority of Indonesia’s GDP growth came from labour productivity. To hit the government’s 7 per cent per year growth target in the coming two decades — and get to seventh place — will require labour productivity to grow 60 per cent faster than it did in the last 10 years. That alone is a pretty big undertaking.

Achieving lucky number seven is not just about labour productivity, although it does play a very big part. McKinsey identifies four strategies for success: transform consumer services (driven mostly by reducing regulation and improving infrastructure), boost productivity in agriculture and fisheries, build a resource-smart economy (that is, diversify the nation’s fuel sources and exploit its natural resources more effectively), and invest in skill building.

To execute each strategy effectively will require proactive involvement from the government. And if the task alone was not big enough, this is where much of the doubt lies: nobody knows where the government will head after the next federal election in 2014. The question is whether the next administration will follow the path laid out by McKinsey, by cutting unnecessary regulations and boosting government investment in critical areas like education, or whether it will stick closer to the status quo.

Given their impact on Indonesia’s long-term economic fortunes, the unfolding political events are being closely watched by investors.

To secure ongoing growth, whoever governs Indonesia will need to apprehend the usual issues: corruption, government bureaucracy and inadequate infrastructure. It will not be an easy task, but investors across a range of industries clearly feel the time is right. With any luck, Australians will too.

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