Will Indonesia become a regional economic powerhouse?

By Endy Bayuni (Jakarta Post)

Indonesia continues to enjoy robust growth after successfully averting the global recession these past two years. But whether South East Asia’s lone representative in the G20 can become a true regional economic powerhouse hinges on its ability to address some fundamental problems that have hindered it from realizing its full potential.

An important sign that the economy is doing well is its exports earning, growing 40 per cent in the first eight months of this year. This expansion is broad-based, coming not only from the mining and energy sectors, but also agriculture and manufacturing.

Asia is becoming its main market today: China for coal and India for crude palm oil. Indonesia is also shipping more rubber products, electronics, footwear and car parts.

The economy is expected to grow 6 per cent this year, up from 4.5 per cent last year, as Indonesia joins other Asian countries in leading the global recovery. A 7-per-cent GDP growth is within sight next year, even when the global recovery has slowed a little.

The influx in foreign direct investment ensures that this growth is more sustainable. Indonesia is attracting investors who are looking not so much for large margins as for economic and political stability when the world is clouded with uncertainty.

Companies from Taiwan, South Korea, Japan and the United States are considering relocation to Indonesia from China and Vietnam, where wages have been rising fast, or from other South-east Asian neighbors to tap the huge Indonesian market of 240 million people.

Like the rest of Asia, Indonesia is getting the attention of international fund managers looking for extra percentage points from its stock and bond markets.

So much money is flowing in that the rupiah has grown from strength to strength against the US dollar. Yet, concerns that the strong rupiah would undermine Indonesia’s export competitiveness have proven to be groundless, going by export figures released in August.

The macro-economic indicators may paint a rosy picture, but Indonesia has yet to emerge as one of Asia’s economic powerhouses, in reflection its membership of the elite Group of 20 wealthiest nations in the world.

Indonesia has been mostly at the receiving end of the spillover effects from the recovery occurring in China. In the global supply chain, Indonesia’s role is still confined to providing energy resources, raw materials and semi-processed goods.

While it is diversifying, much of the growth has been fueled largely by the same factors: A strong domestic market and exports of natural resource-based products.

Investors are turning to Indonesia because other countries seem less attractive, not because of any fundamental changes in the country. Policy-wise, not much has changed. Some investors, particularly fund managers, would just as quickly take their money out when conditions in other countries improve.

The economy continues to be beset by the same problems that President Susilo Bambang Yudhoyono has faced since he took charge in 2004: Poor economic infrastructure, rampant corruption and a legal framework that does not quite provide investors with better certainty.

Mr Yudhoyono last year won a new five-year mandate to have a second chance at tackling these problems and turn Indonesia into a regional economic power.

We will know in the next few years whether he can pull it off.

He needs to do this not only to create spillover economic effects in the rest of Asia, but more importantly to create jobs at home, raise income and lift millions of Indonesians out of poverty.