A Terrorist Attack Can’t Derail Indonesia’s Booming Economy

Posted on July 20th, 2009 at 3:03 am by Akhyari


The bombings that have killed eight people in Jakarta and wounded dozens more on Friday morning have understandably captured plenty of international attention. But they shouldn’t obscure an important emerging reality: Indonesia is fast becoming one of the world’s most important political and economic success stories.

The recent landslide re-election of Indonesian President Susilo Bambang Yudhoyono has revived talk that Southeast Asia’s largest economy belongs with the BRICs, that elite club of emerging market heavyweights that are expected to drive global growth for decades to come. Even if treating Brazil, Russia, India and China as a coherent bloc doesn’t make much sense, Indonesia has earned a place among the most promising developing economies. The resilience of Indonesia’s currency and markets in the face of the terrorist attacks underscores the quiet confidence investors have developed towards Indonesia.

Yet, there is good reason for optimism that the reform picture will improve, given the strong mandate that Yudhoyono earned at the polls last week. At the top of his agenda will be overhaul of the bloated bureaucracy and a streamlining of Indonesia’s labyrinthine investment procedures. We can also expect genuine efforts to reform the judiciary and the police.

In addition, when he was first elected in 2004, his relatively narrow margin of victory forced him to give the patronage-driven Golkar party several key cabinet positions. Winning this election without a runoff will allow Yudhoyono to consolidate power in both the executive and legislative branches, and to avoid the need to trade cabinet posts for second-round support. That will give him the freedom to bestow top economic posts on technocrats and reform-minded ministers. With Yudhoyono’s Democrat Party nearly tripling its share of seats in the Indonesian People’s Representative Council from 10% to 27%, he will begin his second term with a lot more political clout.

There are still political roadblocks to overcome. Long-standing ties between key players among the political and business elites will continue to skew economic decision-making. The president’s coalition partners include the same Islamist parties that have traditionally adopted a parochial attitude toward foreign investment. He may sometimes have to accommodate them, though he will try to limit political appointments to non-economic portfolios.

Another potential worry: Indonesia’s economic resilience has generated a wave of national pride that could create obstacles for much-needed foreign investment. Indonesia still lacks a mature domestic capital market and local expertise in many sectors, and Yudhoyono must make a compelling case that foreign investors are crucial for Indonesia’s future. He must also summon the political courage to make unpopular decisions on the growth of wages and inflation.

That should now be easier, since Indonesia’s constitution frees him of any thought of seeking a third term. But this brings us to the key question for Indonesia’s future: Will the country’s next president forge ahead along the same path? The older generation of leaders (like former presidents Megawati Sukarnoputri and Abdurrahman Wahid) will likely give way to a younger generation before the next presidential election in 2014. Can Yudhoyono build political consensus in favor of economic liberalization and improved governance over the next five years?

There is cause for cautious confidence. Legislative elections in April demonstrated that Indonesians will abandon incumbents who perform poorly or abuse their positions for personal gain in favor of those who promise competence and reform. Direct elections for Indonesia’s powerful provincial governorships in 2008 revealed the same pattern.

Indonesia still has far to travel. Friday’s bombings demonstrate that terrorism remains a threat. Its economy remains less than half the size of any of the BRIC countries. But its increasingly robust democracy, its abundant natural resources and its demographic dividend suggest that its greatest attraction may be that it has plenty of room to grow.

Ian Bremmer is president of Eurasia Group and co-author of The Fat Tail: The Power of Political Knowledge for Strategic Investing. David Kiu is a Southeast Asia analyst with Eurasia Group. (forbes.com)

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