Indonesia's Next Five Years

Growth and (In)Security

On July 8th, Indonesia’s pro-Western president, Susilo Bambang Yudhoyono, was reelected in a landslide widely perceived as free and fair. Nine days later, suicide bombers attacked two Western luxury hotels in Jakarta, killing seven. These contrasting events throw into stark relief Indonesia’s precarious political and economic state. Southeast Asia’s largest economy may grow 3-4% this year (compared to double-digit negative growth a decade ago) but is still plagued by terrorism, crumbling infrastructure, and rampant corruption. Will Yudhoyono’s reelection enable Indonesia to further cast off the shackles of its authoritarian and violent past, and perhaps, as some experts say, even join the ranks of the BRIC countries?

Insights from the Ergo Network

Ergo asked three of our leading experts on Indonesia to comment on the implications of this election for foreign investment and security issues in the country.

• Expert 1: Former Australian diplomat in Indonesia focusing on political affairs

  “The choices the president has made for the top two positions says a lot about the direction the country will head and the attitude towards foreign investment. The new vice president, Boediono, is known as being Western-oriented. He will be a figure that is incredibly reassuring for Western business. The finance minister [Sri Mulyani] is very competent and she is another figure that is very welcoming to Western investors. Boediono is an economist and this is rather unusual for the position of vice president. He was the mover and shaker [under President Megawati] and he has a track record. He is known as a mild and competent technocrat, very non-political. He is very favorable toward Western business and strongly believes that Western business is essential to the success of Indonesia. His role will be very important. Mulyani, the finance minister, is a dynamo and she has done a lot to stop corruption. She is a petite little thing with nerves of steel. The president has a good team.”

• Expert 2: World Bank specialist on governance and development in Indonesia

  “Today, Islamic extremism is completely marginalized [politically] and mainstream Islam has been moved to condemn and separate from the extremists. They are concerned with dealing with the problem and the effectiveness of police. Terrorism is an issue of concern but it is controllable.”

• Expert 2: World Bank specialist on governance and development in Indonesia

  “An investment law was passed that facilitates entry for foreign investors, increases competition, and enforces transparency. The government’s next priority is to give meaning to the law by drafting and implementing the necessary regulations. The main obstacle is that such regulations are drawn up [by] the relevant ministries which are often subject to pressures from existing vested interests who don’t want things changed, or want them changed in a way that favors particular interests and particular businesses. There is now a commitment though, at the highest level of government, to move to a Western economy and provide more opportunities for foreign businesses.”

• Expert 3: Director of an Indonesian coalition of civil society groups promoting transparency and accountability in the oil, gas, and mining sectors

  “This elected government will likely endorse the Extractive Industry Transparency Initiative (EITI). The vice president-elect was the first in the government to express his support for Indonesia’s endorsement of EITI and the president himself has a bold stance for more reform tackling bureaucracy.”

Ergo's House View

If Yudhoyono makes good on his campaign promises, the outlook for Indonesia’s continued economic growth and political stability is promising. Yudhoyono has pledged to double infrastructure spending to $140 billion in his second term, and in a bid to attract foreign investment, has committed to enforcing laws that increase competition and mandate transparency. In 2008, foreign investment rose to $8.3 billion – double that of the entire decade before Yudhoyono took office. Vice President Boediono recently said he expects annual economic growth of 7% by 2014.

The scourge of terrorism, however, looms large over the country. Indonesia’s key economic and demographic indicators may merit its inclusion among the world’s emerging markets powerhouses, but many believe it should not be classed with the BRICs until it is safer for Westerners to live and do business there. Others say, however, that the terrorist threat is overblown. Many experts commend the security forces’ success in controlling extremist groups, and the country’s mainstream Islamic organizations – which historically have not spoken out against violence – widely condemned last month’s bombings.

Yudhoyono’s second term begins on October 20th. If he can quickly demonstrate real progress in fostering economic growth and cracking down on terrorism, Indonesia will become an increasingly attractive destination for foreign investment in the years to come.