As the largest economy in Southeast Asia, Indonesia is one of the most interesting and attractive emerging markets worldwide. The archipelago nation successfully survived enormous political and economic difficulties during the 1990s. The reforms adopted in recent years by President Susilo Bambang Yudhoyono positively impacted the overall business climate, thus generating an increase in net foreign direct investment (FDI), and supported continued political stability. At the same time, the country has experienced a sustained increase in domestic consumption, which has significantly supported its economic growth and political standing. Indonesia in now listed in first place as a preferred destination for global investors, as demonstrated in a BBC survey that was made public on May 25, 2011. Nonetheless, it is important to note that there continues to be a number of risks and limitations that could be seriously detrimental to this country’s bright economic forecast. This could be especially the case if the political leadership and regulatory authorities fail to implement a series of specific measures that are necessary to continue reforming Indonesia’s economy in a timely and effective fashion.
An Emerging Economy on the Rise
The survey for the BBC’s Extreme World series demonstrated how Indonesia was placed in first as a preferred destination for investors based on a survey conducted in 24 different countries. The survey was a representative sample of 24,000 respondents. The polling instrument was developed by the BBC. Respondents were asked whether “innovation was highly valued in their country; whether it was hard for people like them to start a business; whether people who do were highly valued; and whether people with good ideas could usually put them into practice” (BBC: Indonesia "Top" for Entrepreneurs). The results were not entirely surprising, especially when one considers the performance of the Indonesian economy over the past five years.
Indonesia continues to experience a period of strong economic growth, and it currently ranks after China and India as being the third fastest growing economy among G20 member countries. Based on estimates of the Asian Development Bank (ADB), Indonesia’s gross domestic product (GDP) grew by 6% in 2010, and this impressive rate was driven both by robust domestic consumption and a significant high level of investment and increased in export revenues.
Indonesia is also making numerous advances in terms of its competitiveness. The country ranks in the 44th place among 139 countries in the 2010-2011 period based on the Global Competitiveness Index, as developed by the World Economic Forum (WEF). This is a marked improvement of 10 positions compared to the period 2009-2010. Among the countries of Southeast Asia, only Thailand is better positioned in the standing, at 39. Still, Indonesia is among key emerging countries, including India (51), South Africa (54), Brazil (58) and Russia (63).
The increased overall competitiveness of the Indonesian economy has an immediate effect on the flow of foreign direct investment (FDI). Returning to positive gains over the past five years, in 2008, FDI had reached $8.3 billion before falling to $5.3 billion in 2009, a drop attributed to the onset of the global financial crisis. However, in the first three quarters of 2010, FDI increased by nearly one third (32%) over the previous year, as based on estimates of the Central Bank of Indonesia (BI). In 2011, FDI flow is expected to further increase. It is also expected that the increase in commodity prices, particularly gas and coal in the wake of Japan’s Fukushima nuclear meltdown, will further contribute to the outstanding economic growth of Indonesia. Several sectors are booming, especially after an emphasis on infrastructure was announced at the 2011 Indonesia Infrastructure International Conference & Exhibition, with new projects totaling $30 billion.
The Government has also announced a plan to inject $22.3 billion to stimulate and create a strong industrial base to complement the mining sector in order to achieve a broader and more sustainable platform for economic development in the medium and long term. In turn, domestic consumption grew by 4.5% during the first quarter of 2011, contributing to 2.6 percentage points of economic growth in the country. In April, the Confidence Index published by the BI showed a clear optimism on the part of Indonesian consumers with a score of 106.9 (an index with a value above 100 indicates that optimists outnumbered pessimists in the survey conducted by the BI). Optimism of future prospects and consumer confidence levels are trends also reflected in retail sales expectations for the month of August 2011, a period that will be marked by the Islamic holy month of Ramadan, and the period of post-fasting holidays of Eid al-Fitr.
In this context, the reforms introduced by the Indonesian government to improve the working environment have played a crucial role in the country’s economic success. During the first term of President Yudhoyono (2004-2009), the government adopted significant reforms in the financial sector: changing the tax system, reducing tariffs and promoting the development of capital markets. Yudhoyono’s re-election in 2009 has also been seen as a strong signal of continuity and reassurance to the markets and investor confidence. President Yudhoyono immediately promised to continue with its reform agenda, prioritizing new job creation, fighting corruption and building infrastructure. In line with these promises, recent reforms have focused on improving the business environment, increasing the country’s competitiveness at regional level and helping to create a more robust private sector through a series of decentralization measures.
To confirm the improvements carried out in 2010, Indonesia has significantly climbed in the ranking "Ease of Doing Business" established by the World Bank, especially with regards to indicators such as, starting a new business, registering a property and investor protection. In particular, the government introduced a standardized registration forms, cut out the procedures required to obtain a certificate of domicile for companies and made the payment of business taxes faster. Also introduced were time limits for issuing certificates of ownership and processing the registration paperwork at the Land Registry. The latter change means that the ownership transfer of a land in Indonesia can be carried out in a maximum of 17 days.
Limits and Risks
Nevertheless, it should be remembered that some long term hindrances could undermine the country’s growth. According to the World Economic Forum’s Global Competitiveness Report 2009-2010, there are three main problems when it comes to actually “doing business” in Indonesia. They are: a lack of adequate infrastructure, an inefficient bureaucracy and difficulty in accessing financing. These problems are compounded by the high level of perceived corruption, with a rate of 2.8 to 10 according to the latest Transparency International (2010) report. Despite corruption scandals in 2009 involving the Attorney General’s Office and the Police, the resignation of Finance Minister Sri Mulyani Indrawati, and promises made during a series of election campaigns, the planned reforms have not yet been fully implemented by President Yudhoyono. This delay puts at risk the credibility and reputation of the governmental campaign for a cleaner and more transparent country.
However, among the countries of Southeast Asia it is important to note that only Malaysia and Thailand have a lower rate of perceived corruption than Indonesia, with a value of 4.4 and 3.5, respectively. The Indonesian political scene is also characterized by a myriad of minority parties, and the various formal and informal coalitions, combined with a complex bureaucracy, have reduced the effectiveness of government action. Corporate vested interests are also a major obstacle for Indonesia in terms of the business climate. Such widespread and ingrained business interests are fostering strong opposition within the country to reforms of the governmental apparatus. Consequently, the Economist Intelligence Unit expects weak improvements in Indonesia’s governance. All in all, the combination of the previously mentioned problems and the weakness of the judicial system represents a major brake on possible new investments, an inflow that would otherwise generate additional economic opportunities and bring about many benefits to an Indonesian population of 230 million.
Finally, even if the risk of the Indonesian political situation getting out of control is actually quite moderate at worse, there are continued concerns of possible terrorist attacks, as many fundamentalist Islamic groups are present in Indonesia where Islam is the dominant religion. Though the last significant attack occurred in 2009, the alert level remains high. For example, in January 2011 seven young people were arrested on charges of plotting a terrorist attack. The government has repeatedly emphasized that terrorism remains a major threat throughout the country. Indonesian society is also characterized by considerable ethnic and cultural diversity. The Southeast Asian country has been repeatedly shaken, and sometimes shattered, by separatist rebellions, especially its territory of Aceh. The Free Aceh Movement, also known as the Aceh Sumatra National Liberation Front (ASNLF), a separatist group seeking independence for the Aceh region of Sumatra from Indonesia, and the Indonesian government fought a thirty years war between 1975 and 2005 that took the lives of 15,000 people.
The success of the country’s transition to democracy in 2004 was nevertheless confirmed by peaceful presidential and parliamentary elections held in 2009, which substantially reduces the possibility of further military coups and resurgent separatist movements.
Richard Rousseau, Ph.D. is a professor of international relations at the Azerbaijan Diplomatic Academy in Baku and a contributor to Global Brief, World Affairs in the 21st Century.
Photo: Jakarta - © istockphoto.com/ Warren Goldswain
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Indonesia: A Rising and Reforming Economy in Southeast Asia
July 1, 2011
As the largest economy in Southeast Asia, Indonesia is one of the most interesting and attractive emerging markets worldwide. The archipelago nation successfully survived enormous political and economic difficulties during the 1990s. The reforms adopted in recent years by President Susilo Bambang Yudhoyono positively impacted the overall business climate, thus generating an increase in net foreign direct investment (FDI), and supported continued political stability. At the same time, the country has experienced a sustained increase in domestic consumption, which has significantly supported its economic growth and political standing. Indonesia in now listed in first place as a preferred destination for global investors, as demonstrated in a BBC survey that was made public on May 25, 2011. Nonetheless, it is important to note that there continues to be a number of risks and limitations that could be seriously detrimental to this country’s bright economic forecast. This could be especially the case if the political leadership and regulatory authorities fail to implement a series of specific measures that are necessary to continue reforming Indonesia’s economy in a timely and effective fashion.
An Emerging Economy on the Rise
The survey for the BBC’s Extreme World series demonstrated how Indonesia was placed in first as a preferred destination for investors based on a survey conducted in 24 different countries. The survey was a representative sample of 24,000 respondents. The polling instrument was developed by the BBC. Respondents were asked whether “innovation was highly valued in their country; whether it was hard for people like them to start a business; whether people who do were highly valued; and whether people with good ideas could usually put them into practice” (BBC: Indonesia "Top" for Entrepreneurs). The results were not entirely surprising, especially when one considers the performance of the Indonesian economy over the past five years.
Indonesia continues to experience a period of strong economic growth, and it currently ranks after China and India as being the third fastest growing economy among G20 member countries. Based on estimates of the Asian Development Bank (ADB), Indonesia’s gross domestic product (GDP) grew by 6% in 2010, and this impressive rate was driven both by robust domestic consumption and a significant high level of investment and increased in export revenues.
Indonesia is also making numerous advances in terms of its competitiveness. The country ranks in the 44th place among 139 countries in the 2010-2011 period based on the Global Competitiveness Index, as developed by the World Economic Forum (WEF). This is a marked improvement of 10 positions compared to the period 2009-2010. Among the countries of Southeast Asia, only Thailand is better positioned in the standing, at 39. Still, Indonesia is among key emerging countries, including India (51), South Africa (54), Brazil (58) and Russia (63).
The increased overall competitiveness of the Indonesian economy has an immediate effect on the flow of foreign direct investment (FDI). Returning to positive gains over the past five years, in 2008, FDI had reached $8.3 billion before falling to $5.3 billion in 2009, a drop attributed to the onset of the global financial crisis. However, in the first three quarters of 2010, FDI increased by nearly one third (32%) over the previous year, as based on estimates of the Central Bank of Indonesia (BI). In 2011, FDI flow is expected to further increase. It is also expected that the increase in commodity prices, particularly gas and coal in the wake of Japan’s Fukushima nuclear meltdown, will further contribute to the outstanding economic growth of Indonesia. Several sectors are booming, especially after an emphasis on infrastructure was announced at the 2011 Indonesia Infrastructure International Conference & Exhibition, with new projects totaling $30 billion.
The Government has also announced a plan to inject $22.3 billion to stimulate and create a strong industrial base to complement the mining sector in order to achieve a broader and more sustainable platform for economic development in the medium and long term. In turn, domestic consumption grew by 4.5% during the first quarter of 2011, contributing to 2.6 percentage points of economic growth in the country. In April, the Confidence Index published by the BI showed a clear optimism on the part of Indonesian consumers with a score of 106.9 (an index with a value above 100 indicates that optimists outnumbered pessimists in the survey conducted by the BI). Optimism of future prospects and consumer confidence levels are trends also reflected in retail sales expectations for the month of August 2011, a period that will be marked by the Islamic holy month of Ramadan, and the period of post-fasting holidays of Eid al-Fitr.
In this context, the reforms introduced by the Indonesian government to improve the working environment have played a crucial role in the country’s economic success. During the first term of President Yudhoyono (2004-2009), the government adopted significant reforms in the financial sector: changing the tax system, reducing tariffs and promoting the development of capital markets. Yudhoyono’s re-election in 2009 has also been seen as a strong signal of continuity and reassurance to the markets and investor confidence. President Yudhoyono immediately promised to continue with its reform agenda, prioritizing new job creation, fighting corruption and building infrastructure. In line with these promises, recent reforms have focused on improving the business environment, increasing the country’s competitiveness at regional level and helping to create a more robust private sector through a series of decentralization measures.
To confirm the improvements carried out in 2010, Indonesia has significantly climbed in the ranking "Ease of Doing Business" established by the World Bank, especially with regards to indicators such as, starting a new business, registering a property and investor protection. In particular, the government introduced a standardized registration forms, cut out the procedures required to obtain a certificate of domicile for companies and made the payment of business taxes faster. Also introduced were time limits for issuing certificates of ownership and processing the registration paperwork at the Land Registry. The latter change means that the ownership transfer of a land in Indonesia can be carried out in a maximum of 17 days.
Limits and Risks
Nevertheless, it should be remembered that some long term hindrances could undermine the country’s growth. According to the World Economic Forum’s Global Competitiveness Report 2009-2010, there are three main problems when it comes to actually “doing business” in Indonesia. They are: a lack of adequate infrastructure, an inefficient bureaucracy and difficulty in accessing financing. These problems are compounded by the high level of perceived corruption, with a rate of 2.8 to 10 according to the latest Transparency International (2010) report. Despite corruption scandals in 2009 involving the Attorney General’s Office and the Police, the resignation of Finance Minister Sri Mulyani Indrawati, and promises made during a series of election campaigns, the planned reforms have not yet been fully implemented by President Yudhoyono. This delay puts at risk the credibility and reputation of the governmental campaign for a cleaner and more transparent country.
However, among the countries of Southeast Asia it is important to note that only Malaysia and Thailand have a lower rate of perceived corruption than Indonesia, with a value of 4.4 and 3.5, respectively. The Indonesian political scene is also characterized by a myriad of minority parties, and the various formal and informal coalitions, combined with a complex bureaucracy, have reduced the effectiveness of government action. Corporate vested interests are also a major obstacle for Indonesia in terms of the business climate. Such widespread and ingrained business interests are fostering strong opposition within the country to reforms of the governmental apparatus. Consequently, the Economist Intelligence Unit expects weak improvements in Indonesia’s governance. All in all, the combination of the previously mentioned problems and the weakness of the judicial system represents a major brake on possible new investments, an inflow that would otherwise generate additional economic opportunities and bring about many benefits to an Indonesian population of 230 million.
Finally, even if the risk of the Indonesian political situation getting out of control is actually quite moderate at worse, there are continued concerns of possible terrorist attacks, as many fundamentalist Islamic groups are present in Indonesia where Islam is the dominant religion. Though the last significant attack occurred in 2009, the alert level remains high. For example, in January 2011 seven young people were arrested on charges of plotting a terrorist attack. The government has repeatedly emphasized that terrorism remains a major threat throughout the country. Indonesian society is also characterized by considerable ethnic and cultural diversity. The Southeast Asian country has been repeatedly shaken, and sometimes shattered, by separatist rebellions, especially its territory of Aceh. The Free Aceh Movement, also known as the Aceh Sumatra National Liberation Front (ASNLF), a separatist group seeking independence for the Aceh region of Sumatra from Indonesia, and the Indonesian government fought a thirty years war between 1975 and 2005 that took the lives of 15,000 people.
The success of the country’s transition to democracy in 2004 was nevertheless confirmed by peaceful presidential and parliamentary elections held in 2009, which substantially reduces the possibility of further military coups and resurgent separatist movements.
Richard Rousseau, Ph.D. is a professor of international relations at the Azerbaijan Diplomatic Academy in Baku and a contributor to Global Brief, World Affairs in the 21st Century.
Photo: Jakarta - © istockphoto.com/ Warren Goldswain
