Indonesia: A True Tiger?

Indonesia: A True Tiger?

CONTRIBUTOR YOUR SAY  JUN. 3, 2014, 10:40 AM

The complexity of Indonesia’s culture is perhaps only outmatched by its economic and political workings.  This is a country and people with a history of battling colonialism, erupting in constant turmoil and political unrest.  Its democracy is a fairly young 15 years.  While Indonesia portrays itself to have a stable democracy, the tenseness surrounding the presidential elections this year tells a widely different story.  Political and economic “games” erupt, for which corruption is the most common explanation.  Corruption almost seems to be a way of life here in Jakarta, as it is acknowledged constantly in conflicts, with heads nodding in understanding and then dismissal, as “that is just the way it is.”

But it shouldn’t be the way it is.  Corruption brings with it problems which are so endemic to this archipelago, it is enough to scare investors away.  The last decade has shown Indonesia to be a hotbed of economic growth.  Data from 2009-2015 suggest that Indonesia’s growth rate, measured by GDP per capita during that period of time suggests a 13.8% increase, second in growth only to Russia.  Decreases in poverty and increases in employment are both positive indicators, which might lead to increased portfolio and foreign direct investment.  While the Gini index indicates income distribution not much better than that of the United States, it has worsened recently, which indicates a lack of governmental policies that are effectively helping its own people to achieve economic equality.

In addition, while Indonesia weathered the economic crisis much better than other countries initially, it was hit in 2013 with rising trade imbalances leading to a depreciation of the rupiah, high inflation, high interest rates and much slower economic growth.  Even so, it escaped that which plagued other developed countries – no major banking crisis, unemployment is still in check, consumer spending is still going strong and the middle class is still growing.  As a result of this perceived economic success, Indonesia has taken on a policy of increased economic nationalism.

This form of nationalism, aimed at creating further self-reliance, has resulted in increased sanctions placed onto foreign firms operating throughout Indonesia.  In particular, the mining sector has been hard hit with high tariffs and export controls.  Aimed at cutting foreign gains and increasing local involvement in the extraction and profits, there have been unintended consequences.  Mines have had to shut, temporarily at best, and this has led to a rather significant increase in structural unemployment in local communities.  Additionally, foreign firms are reassessing the viability of their business in Indonesia.

Indonesia is increasingly come to be seen as anti-foreigner.  Couple this sentiment with corruption, and one can imagine the implications.  The lack of rule of law, corruption of payoffs, and corruption of the media who report unverified facts heightens any potential foreign/local “conflict”. An excellent example of this is currently occurring in Jakarta.  A tragedy occurred at a very prominent and esteemed international school, which educates expats and the wealthy Indonesians.  Outsourced cleaners who are Indonesians raped a young kindergarten boy in the bathroom.  Due to media reporting wrong facts, and a level of corruption Americans could never understand, the school has been demonized.  Anti-foreigner demonstrations occur almost daily.  Bribery is a big factor, the spin of the media by lawyers, and a corrupt government have led to this school having emergency shutdowns, teachers being threatened to be deported, and a fear amongst the expats while out in the local community.  The Indonesian government seems to be perpetuating the anti-foreigner sentiment, and perhaps economic nationalism is at the root, fueled by the upcoming presidential elections in July.

It is understandable that Indonesia is worried about its incredible and beautiful resources being exploited for the gain of foreign corporations who repatriate much of their profits. Not only are Indonesia’s natural resources an asset force to be reckoned with, but its human capital is also incredibly value.  The population of workers is increasing, and as the GDP per capita is increasing, so too does some of it lead to increased levels of education and health care. However, many of its people are working as domestic staff for foreigners and for wealthy Indonesians.  These people are mostly not paid the legal government minimum wage, nor are they provided any benefits.  I’m sure this also fuels the anti-foreigner sentiments.

Yet, expats working in Indonesia do add to the economy in a strong way.  For example, the international school previously mentioned hires 250-300 foreign teachers every year, whom most of employ 1-5 or more household staff.  Foreign workers fuel consumption in this economy, especially at high-end super markets, department stores and restaurants.

While Indonesia examines its policies of economic nationalism, and its need to solve corruption problems, it seems that all is focused on winning the upcoming presidential election.  I hope this country can come to terms with solving corruption issues, as the diversion of public resources for personal gain is not solving any of its development problems.  Additionally, is discouraging foreigners and foreign direct investment the best policy right now for Indonesia’s continued economic success?

These issues bring to question the issue of investing in Indonesia.  While some government officials in Indonesia have expressed the importance of increasing foreign direct investment, the current climate is discouraging.  The country also experienced a big outflow of capital investment, which has had large economic implications with the depreciation of the rupiah.  Capital flight, and decreased FDI both will add to a decrease in the output of Indonesia, leading to economic consequences perhaps greater than intended.  Is it prudent to invest in a country which is unfriendly to foreigners, and filled with corruption?  At first glance, the GDP growth rates look inviting, as compared to global growth rates. However, how sustainable is this growth, and is it wise to plunk your hard earned cash into a volatile and anti-foreigner country?

* This post was written by Hunter Parker who is an economist, with a degree from the University of California at Berkeley, currently residing in Indonesia.  Hunter also holds the distinctions of the US Securities Series 7, Series 65 and Series 66, having worked for Smith Barney.  Hunter has had articles published in California, Oregon as well as Dubai.

* The views expressed in this post are those of the author and do not necessarily represent the views of Business Insider.