January 26, 2011 8:29 pm

Islands of hope amid the Indonesian hype

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Economies can perform well even when corruption is rife

The reader who wrote in to the Jakarta Post this month suggesting Gayus H. Tambunan as Indonesia’s man of the year had a wry sense of humour. Mr Tambunan, last week jailed for seven years for corruption and abuse of official position, is the perfect representative of his country’s seamier side. Mr Tambunan was convicted of accepting millions of dollars in cash and gold bars, alleged bribes by companies seeking more favourable tax treatment.

Mr Tambunan, a mid-ranking tax official whose palatial residence, replete with swimming pool and jogging track, belies his $1,000-a-month salary, has become a cause célèbre. That’s because his case has exposed a world of corruption witnessed daily by Indonesians but often hidden by officialdom.

Susilo Bambang Yudhoyono, who has made graft-busting a selling point of his two-term presidency, has referred the case to the Corruption Eradication Commission. Since it was set up in 2004, the commission has had a 100 per cent conviction record in the cases its overworked staff have managed to bring to trial. But it is not without blemish. The previous head of the commission was sentenced to 18 years’ jail for hiring a hitman. Two of its deputies were framed for corruption by senior police and members of the attorney-general’s office. Even the president has admitted corruption “jeopardises the nation’s development”.

That’s a pity. The drip of scandals is discolouring Indonesia’s spanking new image. The world’s seventh best-performing stock exchange last year – up 52 per cent in dollar terms – is this year’s seventh worst, down 6.5 per cent. This week’s initial public offering of Garuda, the flagship carrier, looks like being a flop, at the lower end of the range and with minimal foreign take-up. That does not auger well for a country hoping to offload big stakes in telecommunications, cement and construction companies.

A funny thing about Indonesia is that some investors are cooling on the story before the wider world even realised it was hot. One of the concerns is that surging inflation has caught the central bank flat-footed. Another is the questionable competence of many Indonesian officials. The two best-known exceptions are Sri Mulyani Indrawati, the former finance minister, and Mari Pangestu, the trade minister, both western-educated and committed reformers. Last May, Ms Mulyani was forced out. She has taken refuge at the World Bank.

The state of roads, ports and rail continues to appal, although the government is making some attempts to tackle this. Mr Yudhoyono’s government has also been accused of letting its much-improved human rights record slip, and of failing to protect religious minorities in a Muslim-majority country rightly praised for its moderation.

All of this is, indeed, worrying. But a quick reprise of the country’s achievements is also called for. Since the fall in 1998 of military dictator Suharto, Indonesia has become a relatively stable democracy. It has fought a brave campaign against Islamist terrorism. Economically, the resource-rich country of 240m people, the world’s fourth-most populous, has finally started living up to its potential. From an average of 3 per cent annual growth in the five years to 1998, gross domestic product rose to 3.7 per in 1999-2003, and again to 5.6 per cent in 2004-2010. Leif Eskesen, chief economist for India and the Association of South East Asian Nations at HSBC, expects growth to go from 6 per cent last year to 6.4 per in 2011 and 6.3 per cent in 2012. Foreign investment surged 60 per cent last year to $16bn.

Indonesia is on the cusp of becoming a middle-income country, with GDP per capita above $3,000. The economy is increasingly driven by domestic consumption as the “middle class” swells to an expected 100m people or more by 2020. Unilever, the consumer products group, and Nestlé, the Swiss food company, are among multinationals ramping up investments. After losing much of its manufacturing base during the Asian crisis of 1997-98, Indonesia soon expects to make more shoes than Vietnam and more cars than Thailand.

Against all this, investors will have to weigh the corrosive effect of corruption and any lingering fears that the country remains too dependent on commodity prices. Naturally, corruption can put off would-be investors, especially ones from countries such as the US that routinely penalise overseas bribe-paying. It is also maddening for ordinary Indonesians who know their “elites” are defrauding the state and who must face the daily humiliation of greasing palms.

Certainly, this must affect Indonesia’s growth potential. But moral indignation should not blind us to the fact that economies can perform well even when backhanders are a way of life. India, which has been growing at 8-9 per cent a year, is still reeling from revelations that the telecoms ministry lost the exchequer up to $39bn by handing out 2G spectrum to friends and hangers-on. Graft in India has poisoned many areas of society and damaged faith in government. But it has not stopped the country from growing rather fast. Indonesia, too, is unlikely to slip backwards.

david.pilling@ft.com

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