Great Decisions Review: Inside Indonesia

Great Decisions: Inside Indonesia (click for Great Decision video preview)

To its credit, FPA’s annual world affairs discussion program, Great Decisions, covered the strategically-important, but ambivalent, rising power, Indonesia.  With all the focus on China, the BRICs, conflict in the Middle East, Afghanistan and the like, it is easy for the average world citizen, and Americans in particular, to lose sight of Indonesia, a critical bellwether given its geographical position, its relationship with China, and its status as the world’s third most populous democracy and most populous predominantly Muslim country.  I applaud Great Decisions for giving its viewers a broad-brush of this sprawling island archipelago and linchpin in Southeast Asia.

Great Decisions covered important themes:  1) Indonesian history — the country’s role as an anti-communist bulwark during the Cold War and its transition to democracy after the Asian financial crisis; 2) political economy — especially the country’s strong recent economic performance; and, 3) foreign policy — Indonesia’s friendly links with competitors China and the U.S. and its ambivalent role as a prototypical Muslim democracy.   As for the latter, the question was raised as to whether Indonesia should mimic Turkey in being a proactive role model or should keep a low profile and avoid alienating anyone.

What I will highlight in this blog is Indonesia’s remarkable transformation since the dog days of 1998 both economically and politically, as well as the heavy development challenges facing this cumbersome country.

With over 230 million inhabitants, $700 billion in GDP, and a vast array of islands amid the busiest sea lanes in the world (where over a half of the world’s shipping passes, including China’s and Japan’s energy lifeblood), Indonesia remains a poor, underdeveloped country.  It has below average political risk indicators (see the World Bank’s Governance indicators here).  Infrastructure is lacking.  Corruption remains a problem.  And, though its democratic transition has been a positive surprise almost as marked as South Africa’s, its democracy is at best plodding in effecting reform.

On the other hand, Indonesia’s key sovereign credit metrics — government debt and deficits to GDP, current account surpluses, foreign exchange reserves — are stellar.  Greece, Portugal and Spain should be so lucky.  True, after Suharto’s fall in 1998, Indonesia defaulted on commercial debt.  Still, this past year its sovereign ratings were upgraded to investment grade by two of the three major rating agencies.  Nevertheless, the country has one of the lowest tax bases in the world, reflecting institutional weakness and corruption.  This limits its ability to address the nagging challenges of development — improving human capital, investing in roads, ports and other public infrastructure.  With per capita GDP of just over $3000, Indonesia is poorer than China, representing an opportunity to compete against its giant neighbor in cheaper labor-intensive manufacturing.  Indonesia’s enviable GDP growth rates of 5-6% per year have not rested on manufacturing, but rather on domestic demand and high commodity prices.  Indonesia relies on energy and commodity exports, whereas its poorer neighbors, Vietnam and India, have benefited from growth in manufacturing and services exports.  Further, inflation remains higher in Indonesia than in most peer countries, with the central bank having a relatively short track record delivering single digit inflation.

The Great Decisions program aptly noted that Indonesia has been successful at building a non-sectarian democracy since 1998, a formidable achievement given its numerous ethnic groups and religions.  With nearly 90% of the population Muslim, Indonesia’s democracy has given a boost to Islamist politicians, the most radical of whom have not had much traction as yet in attracting popular support.  Nevertheless, there remains a delicate balance between free expression and sectarian strife.  Given that Christians, though not numerous, live on a vast portion of the Indonesian land mass in the eastern regions (not to mention the Hindus on the island of Bali), this delicate balance must be maintained to keep the country intact.  Ethnic tensions in Nigeria and the outright break-up of the Sudan should give Indonesians pause and provide impetus to maintain a relatively strong state that can hold the place together.

Bravo Great Decisions for raising the profile of this vital power in the minds of Americans who care about foreign policy…