Quotes of the Day
Democracy, for all its imperfections, at least offers society's less fortunate the hope that their lives might one day change for the better. This is a perk that Kurnia Riza, one of millions of downwardly mobile Indonesians, does not take lightly. The soft-spoken 28-year-old was until recently a purchasing agent and union representative at a Jakarta factory run by a South Korean company that made backpacks for brands including Adidas and Jansport. But on July 1, management informed the union that the factory was closing and production was being moved to China because the costs of doing business in Indonesia were simply too high. Freshly unemployed and with poor prospects, Riza expressed his frustration at the ballot box on Sept. 20. In Indonesia's first-ever direct presidential election, Riza rejected incumbent President Megawati Sukarnoputri and voted instead for challenger Susilo Bambang Yudhoyono. "I hope that there will be change under this government, especially in the creation of jobs," Riza says. "I can rely on him."
Now it's up to Yudhoyono—or "S.B.Y.," as he is commonly known—to prove that confidence is not misplaced. Preliminary election results show him winning a commanding 61% of the vote. Although ballot counting will continue for about another week and Megawati has yet to concede, Yudhoyono is widely expected to take the helm of the world's fourth-most-populous country and largest Muslim nation on Oct. 20. The challenges ahead could make even a hard-boiled general like Yudhoyono blanche. Over the past six years, since the 1998 fall of dictator Suharto, Indonesia has been losing ground on several fronts, beset by civil strife, separatist movements and terrorism. Just 11 days before the election, suicide bombers detonated explosives outside the Australian embassy in Jakarta, killing nine and wounding 182. Earlier this year, the military undertook a brutal crackdown on Islamic separatists in the province of Aceh that left 2,200 dead, according to army estimates.
One of the reasons the charismatic, straight-talking military man was elected was the perception that he would be more resolute than the uncommunicative Megawati. Maintaining civil order is a high priority for the incoming administration. But during his five-year term, Yudhoyono's political fate may well depend less on guns than it does on butter—on how successful he is in improving Indonesia's battered economy. His mandate, after all, comes from citizens like Riza and the estimated 40 million other workers either unemployed or without as much work as they need. Megawati "wasted her political capital because of bad economic policy," says Dradjad Wibowo, senior economist at the Institute for Development of Economics and Finance. "The same fate could happen to S.B.Y. if he chooses the wrong economic course."
Indeed, the key political element in Indonesia can best be described with a modified Clintonism: "It's the stupid economy." Of all the countries devastated by the 1997 Asian financial crisis, Indonesia is the only one that has yet to fully recover. Over the past five years, Indonesia's gross domestic product (GDP) has on average grown 3.4% annually compared with 6.5% for all of East Asia's developing countries. More than half of the population still lives on $2 a day or less. In recent years, the plight of many has worsened. Morgan Stanley estimates that GDP per capita has decreased by 2.5% annually over the past eight years. While the economies in other populous developing countries such as India and China roar ahead, crucial foreign investors continue to shun Indonesia due to the threat of terrorism, rampant corruption (a survey conducted last year by Berlin-based watchdog Transparency International ranked Indonesia as the 12th most corrupt country in the world), an often whimsical legal system, high labor costs and an obstructionist bureaucracy poisonous to commerce. Last year, investors pulled $597 million in investment capital out of Indonesia; a net $13.6 billion has fled since 1999.
The country isn't returning to the Dark Ages—GDP this year is expected to jump a healthy 5%, the fastest pace since the economic crisis, according to Goldman Sachs—but it is moving in the wrong direction in many sectors. Even as global commodity prices spike, Indonesia's valuable natural resources, including natural gas and minerals, remain untapped because of doubts about the legal system and worries over security. Over the past two years, more than 20% of Indonesia's shoe manufacturers have shut down. "The country has been deindustrializing for several years," says Hans Vriens, managing director of the Indonesia office of consulting firm APCO. "Investors don't even dare to visit this place, how can they invest?"
During the election run-up, Yudhoyono said most of the right things, promising to create jobs, raise growth, build much-needed infrastructure, woo foreign investors and support key sectors like the oil and gas industry. Although the incoming administration has yet to reveal a detailed economic-reform strategy, Sofyan Djalil, a member of Yudhoyono's economic team during the campaign, says corruption is the economy's biggest obstacle—and Yudhoyono plans to follow through on his promise to lead the fight against it personally. Sofyan says the new administration in its first 100 days may file charges against big-name government officials suspected of wrongdoing. There are also plans to strengthen a government antigraft watchdog, and, importantly, to ensure that the incoming Cabinet is uncompromised by questionable business entanglements and conflicts of interest. "To clean the floor, you have to have a clean broom," Sofyan says. "We have to send a strong signal to the markets, and to the society, that this government means business."
So far, the mere prospect of fresh thinking in Jakarta has been enough to send a wave of optimism surging through the capital. After years of dithering leadership, economists, businessmen and ordinary Indonesians are hopeful that Yudhoyono's popular mandate (past leaders were chosen by parliament, not through direct elections) will give him the authority to overcome obstacles that his predecessors could not. "There are grounds for confidence," says Andrew Steer, the World Bank's country director for Indonesia. "The recognition of the problems is now there."
For Yudhoyono to deliver economic reform, though, he must overcome resistance from a legislature dominated by his adversaries: members of Megawati's Indonesian Democratic Party of Struggle, who have formed an opposition alliance with members of Suharto's former party, Golongan Karya (known as Golkar). However ineffectual Megawati's administration was perceived to be, it was far from idle on the economy—her team is praised for slashing the national debt, stabilizing the currency, lowering interest rates and selling off state-controlled assets. But the toughest reforms—those that might threaten the interests of powerful bureaucrats and business leaders—have been left to Yudhoyono. "The low-hanging fruit has already been plucked," says Tom Lembong, a manager with a U.S. hedge fund with investments in Indonesia.
Moreover, the unofficial President-elect appears to be on a collision course with his mainstay constituents, Indonesia's working class. To attract investment and new factories, the country needs to overhaul labor laws that businessmen say make it too costly to compete with countries such as China. They especially complain about rules that mandate high severance payouts to laid-off workers, which they contend impedes their ability to adapt to changing economic conditions. According to a study by the World Bank, the cost of firing a worker in Indonesia averages 157 weeks of pay, higher than in any other East Asian country except communist Laos. Union leaders, of course, don't see the labor rules as overly protectionist. Dita Indah Sari, a longtime labor activist and chairperson of the Front Nasional Perjuangan Buruh Indonesia union, says current law doesn't go far enough to protect workers. Business and government leaders "shouldn't scapegoat the workers to hide their economic failures," says Sari, who blames the country's lackluster performance on corruption and bureaucracy.
Labor-reform efforts, Sari says, will probably be met by strikes and protests—the kind of civil unrest Yudhoyono would like to avoid. The potential wrath of the unions was on display Sept. 21 outside the High Court in central Jakarta. Hundreds of workers laid off last year from aircraft maker PT Dirgantara Indonesia raged in protest when the court rejected their claim that layoffs were conducted illegally. Nandang Rusmana, a mechanic who worked at Dirgantara for 20 years, is still unemployed more than a year after he lost his job and is borrowing money from his family to keep his children in school. "There's no justice in Indonesia!" he yells.
On that score, management and workers are often in agreement. Indonesian courts have handed down a series of bizarre verdicts in commercial cases in recent years that have eroded the confidence of investors. In April, for example, the Commercial Court declared the very profitable Indonesian operation of Prudential Life Assurance bankrupt after an Indonesian consultant claimed the company owed him money from a terminated contract. The court immediately replaced Prudential managers with a receiver, who fired key staff. By the time Prudential got the Supreme Court to reverse the verdict in June, sales of new policies had fallen 50%. Since then, Prudential has fought off two other attempts to declare the unit bankrupt, including one last week (Sept. 23). Charlie Oropeza, president-director of Prudential's Indonesia operations, calls his situation "wacky." The legal system "is the biggest and most urgent problem for us," he says.
Yudhoyono will also have to set straight the country's stance on the development of key industries such as mining and oil-and-gas production. Although Indonesia is rich in natural resources, investors in recent years have shied away from development projects because of confusion over industry regulations as Jakarta grants more power to local governments. In one case, three years of haggling between Exxon-Mobil and Indonesian oil company Pertamina, now in the process of being privatized, has stalled the development of the massive Cepu oil field on the island of Java. The negotiations were dealt a serious blow in August, when Exxon-Mobil says it was informed by Pertamina that its contract to operate the field, set to end in 2010, would not be continued. Exxon-Mobil says it will hold off on a $2.6 billion investment to develop the field until its contract is extended. With oil prices remaining near $50 a barrel, Indonesia is losing nearly $3 billion a year in oil production due to this one unresolved dispute alone.
That's money left on the table by a nation that is hard pressed to pay for basic infrastructure. Little wonder the pressure will be on Yudhoyono to make swift progress on the economic front. Yudhoyono "gives the impression of someone who has an understanding of the problems and has a clear idea of what needs to be done and how he's going to do it," says Agost Benard, a credit analyst at Standard & Poor's in Singapore. But political honeymoons tend to be short, and the feel-good factor could easily fade if first impressions quickly prove unfounded. After that, the new President will have to answer to voters like Riza, the laid-off backpack maker, who says he'll vote with his wallet in the next election, too, if Yudhoyono doesn't surpass his predecessors in creating jobs. "We will try to find a new person who is better than him," Riza says—demonstrating once again that democracy, like second marriages, represents the triumph of hope over experience.
- Michael Schuman | Jakarta
- The nation will soon have a new President, but the same old problems remain. Can Yudhoyono enact the reforms that eluded his predecessors?