Indonesia: From volatility to stability

It wasn’t long ago that Indonesia was considered a major source of worry. The world’s most heavily populated Muslim country – now with more than 250 million residents – was hard-hit by the Asian economic crisis, which led to dictator Suharto’s 1998 resignation. Then in 2002, a devastating terrorist attack on the resort island of Bali left 202 dead, more than half of them vacationing westerners.

Some speculated that the archipelago state, made up of an estimated 17,508 islands (roughly 6,000 are inhabited, though the population is located primarily on five main islands), would break apart, leading to one or more failed states, along the lines of Afghanistan or Those overblown predictions are a distant memory today as Indonesia builds a reputation as one of the world’s most stable and unique emerging countries set to play a leadership role over the next two decades.

Despite ongoing problems with corruption, indecisive leadership, and human rights violations, Indonesia is a country the Canadian government and business community can’t ignore, according to analysts.

“Indonesia is a very different kind of emerging power, especially in the Asian context,” said Amitav Acharya, an expert on Indonesia at the Washington, D.C.-based American University.

Indonesia is a G20 member that doesn’t have the kind of pedigree of fellow Asian members such as China, India or South Korea, with their huge economies and sophisticated militaries.

But the country, which next year will go through its third presidential and parliamentary elections since 2004, is wielding a different kind of influence, according to Acharya, a Canadian who is also a senior fellow at the Vancouver-based Asia Pacific Foundation of Canada.

The country has played an active regional role in diplomatic efforts to bring stability to countries such as Cambodia and Myanmar (Burma), and to help – in a project involving the University of B.C.’s Centre for Asian Legal Studies – resolve territorial disputes in the South China Sea.

Much like Canada when it tried to carve a postwar image as a “helpful fixer,” Indonesia’s leaders and diplomats are trusted by neighbours, Acharya said.

Its relatively weak military is non-threatening, while Indonesia’s enthusiastic embrace of democracy gives it greater moral legitimacy than countries such as China and Vietnam.

It is also by far the largest of the 10 members of the Association of Southeast Asian Nations (ASEAN), an emerging global force that is attempting to create the single-market ASEAN Economic Community, with 605 million people and an estimated gross domestic product of $2.2 trillion US, by 2015.

“Nobody is talking about Indonesia breaking up anymore. Now the debate is about whether it is realizing its potential,” said Acharya, who is planning to write an essay outlining his views of Indonesia’s unique status among the emerging countries.

More ‘inclusive’ Although Indonesia is not an economic powerhouse, that day is not far off, according to a 2012 study by McKinsey Global Institute.

By 2030 it could move from 16th to seventh on the list of largest global economies, edging past Germany and the United Kingdom in the process.

Its “consuming class” of citizens able to make discretionary daily purchases is projected to soar from 45 million people to 135 million over that period – growth expected to be higher than any other country except for China and India.

“The economic potential is enormous,” said economist Rick Barichello, director of the University of B.C.’s Centre for Southeast Asia Research.

The International Monetary Fund has noted that Indonesia has developed a more “inclusive” economy by plowing oilboom profits into health, education and infrastructure, and the McKinsey report noted a relatively low national debt and an impressive development of the service sector.

All these factors have resulted in Indonesia’s having the least volatile economy over the past decade compared with both western and major emerging economies, according to McKinsey.

But despite the optimism, Indonesia poses considerable risks for Canadian investors.

A report produced earlier this year for the Canadian government by Singapore-based consultant Peter Baldwin noted that corruption, a cumbersome bureaucracy and weak infrastructure are among the major challenges.

Indonesia ranked a dismal 128th out of 185 countries in the World Bank’s Ease of Doing

Business Report, Baldwin’s report noted.

And growing economic protectionism, as well as political uncertainty ahead of the 2014 elections, has increased the risk.

The Baldwin report notes a number of areas where Canada has done well, including information and communications technology (ICT). One example cited was BlackBerry, which despite its ongoing troubles, was responsible for roughly half the smartphones imported into Indonesia in 2012 – making it the company’s third-largest market after the U.S. and Britain. Aerospace, agriculture and natural resources are other sectors where Canadian companies are finding – or could find – enormous opportunities.

“The ASEAN story is largely an ‘Indonesian story,’ with much of Canada’s expertise in ICT, infrastructure, mining, oil and gas, and agribusiness finding opportunities in Indonesia,” Baldwin concluded. B.C. companies capitalizing in the archipelago include Sidneybased Viking Air Ltd., which has sold about 26 Twin Otter aircraft to southeast Asian buyers – including five to Airfast Indonesia – since 2010.

The Twin Otter, able to land on short runways and even on grass, tundra and (with skis) water, is ideal for Indonesia, noted Viking Air president David Curtis.

“It’s a country made up of islands, and a lot of these places are tiny little airports. So this is a short takeoff and landing airplane and it’s perfect for their geography.”

Another Canadian company finding success is Burnabybased Ballard Power Systems. Since 2012 Ballard has sold 400 fuel-cell systems to Indonesian companies establishing wireless mobile phone systems.

Ballard is, ironically, one of the companies profiting from challenging infrastructure issues in Southeast Asia. Thanks to an unreliable power grid, the telecommunications industry needs diesel generators, batteries and now fuel cells as backup power sources when the grid fails, according to Ballard marketing director Guy McAree.

So while Ballard and other foreign companies struggle with challenges such as urban traffic jams and tough routes to remote locations where telecommunications towers are constructed, the company may not even have had an opportunity in Indonesia without the power-grid issues.

“It’s created an opportunity for us, so it’s a double-edged sword,” McAree told The Vancouver Sun.

One of Ballard’s toughest challenges – finding solid local partners – is a problem for many foreign investors, according to UBC’s Barichello. Another is the twin problem of corruption and rising protectionism, though The Economist magazine’s Economic Intelligence Unit has projected that economic nationalist policies will likely be pulled back after the 2014 elections.

“Economic nationalism is rising and is significant,” Barichello said, due to public concern about foreign companies’ draining wealth from the country.

And endemic corruption and weak property-rights laws mean foreign companies hit by protectionist policies are left with little recourse.

“Strong local partners provide some defence against these risks, but even the local partner has been known to turn against you,” the UBC professor said.

Another risk for the reputation of any foreign investor is Indonesia’s improving but still deeply flawed human rights record.

Amnesty International’s latest review said security forces are involved in torture and excessive use of force, usually with impunity.

And, despite a national motto of Unity Through Diversity, Amnesty accuses the authorities of standing by and doing little while religious minorities – including Christians and Shia Muslims in a Sunni-dominated country – face “ongoing discrimination, intimidation and attacks.”

But Acharya predicts that isolated acts of religious extremism are not an early indicator of a resurgence of Islamic parties, whose share of the vote in 2009 fell 10 points, to 28 per cent compared with the 2004 elections.

“People are very proud of their democracy,” he said.