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Reformasi: A tale of Indonesia’s success

PETALING JAYA: Nearly two decades have passed since the world witnessed the bloody May riots in Indonesia which saw over 1,000 lives lost, over 160 women raped, shops looted and businesses destroyed.

Few would argue that Indonesia has come a long way since the days of its strong-armed ruler Suharto, under whose rule the May riots erupted in 1998. The ethnic Chinese population and businesses were the target of rioters.

Today, Indonesia is being touted as the next Asian economic powerhouse, with current President Joko Widodo (Jokowi) receiving plaudits for his economic reforms to stimulate the economy, improve competitiveness and encourage investments through measures such as deregulation and tax incentives.

But an international expert in socio-economic development in Southeast Asia says credit must also be given to Jokowi’s predecessors, who had over the years committed to reforms after the fall of Suharto.

In an interview, Prof Patrick Ziegenhain, a visiting professor at Universiti Malaya’s (UM) Asia-Europe Institute, explained how Indonesia moved on from the days of Suharto, the reforms which have brought it some measure of success and the threats which could derail the progress made in the past 19 years.

Although the riots erupted in May 1998, the tension had been building for some time, particularly after the Asian Financial Crisis a year earlier which hit all Southeast Asian countries hard.

But Indonesia was hit the worst, says Ziegenhain who was in the country at the time.

This was because Suharto’s Indonesia was plagued by cronyism and excessive government involvement in business, according to Ziegenhain.

“By 1998, the rupiah had lost its value and there was an enormous negative economic growth. The banking sector collapsed and many jobs were lost.

“Ordinary people, and also parts of the elite, were frustrated with Suharto. His family controlled nearly all of the big businesses in the country through state-owned enterprises,” Ziegenhain said.

He added that although state-owned enterprises are still a big part of Indonesia’s economy, it is nowhere as bad as it was during the Suharto era.

“His cronies, friends and family members received bank loans and credit for projects which weren’t economically useful and the government made bad business decisions like backing PT Timor, Indonesia’s national car company.”

Known as PT Timor Putra Nasional (PT Timor), the company was owned by Suharto’s son Tommy. The company entered into a joint venture with Korea’s Kia Corporation and initially produced the cars in Korea.

The company went bankrupt during the Asian Financial Crisis, despite enjoying tax exemptions applied to foreign cars and supplying government agencies with cars.

Ziegenhain says the economic and political crisis, coupled with the people’s frustration and the tragic riots, eventually saw Indonesia’s powerful military and other political allies abandoning Suharto.

“He was left alone and had to step down and so ended the era of Suharto, which facilitated the start of political and economic reforms.”

Suharto falls, reformists rise

“After Suharto stepped down, his vice-president B J Habibie took over and committed to political reforms, like free elections, allowing new parties, protecting freedom of speech and opinion as well as releasing political prisoners,” Ziegenhain said.

He added that these political reforms brought back social trust and political stability which had a positive impact on the economy.

The economic reforms, which were in part enforced by the International Monetary Fund (IMF), also saw the dismantling of monopolies owned by Suharto’s cronies.

“The banking sector was restructured and nowadays, it is very stable. Indonesia’s credit ratings are currently much better than they ever were.

“It’s interesting to note that the Indonesian government reduced the country’s national debt from over 100% of its gross domestic product (GDP) in 2000 to only 27.9% in 2016, and this is one of the lowest levels in Asean,” Ziegenhain said.

He added that this means the Indonesian government hasn’t been spending excessively and a lot of this has to do with political reforms.

Ziegenhain says that post-Suharto, Indonesia’s parliament and judiciary have also become more powerful and independent, especially with the notable introduction of a constitutional court aimed at safeguarding democracy, the rule of law, the constitution and constitutional rights.

“Separation of powers was really evident after 1999. This does not only refer to the state institutions, but also to the relationship between central and local government.

In fact, before 1999, Indonesia was one of the most highly-centralised countries in the world and in just over a decade became one of the most decentralised countries in the world.

“Local governments are very powerful in Indonesia. They have a huge say in the governing of their areas and control over resources, and this has a positive impact on stimulating economic growth and freeing up the economic potential at the local level.”

Ziegenhain noted that more than 50% of the national budget is spent by the local governments rather than the central government and this is one reason Indonesia has enjoyed a degree of economic success, as the locals in each area better understand what works for the local economy.

He also believes that state institutions, such as Indonesia’s central bank, are very independent nowadays and that this has benefited the banking sector as a whole, leading to better credit ratings from ratings agencies such as Fitch and Moody’s.

Another important reform in Indonesia, Ziegenhain says is the fight against corruption, led by the Corruption Eradication Commission (KPK), which has in the past decade jailed nine ministers and 19 (provincial) governors, and other high-ranking officials and members of Parliament.

Still far behind neighbours

Ziegenhain says that although Indonesia is still far behind its neighbours, such as Singapore and Malaysia, in terms of economic development, the country has made significant progress in reducing poverty levels.

“They have a rapidly growing middle and upper middle class, particularly in urban areas on the islands of Java and Sumatera.”

Citing World Bank figures, Ziegenhain says Indonesia has cut its poverty rate from over 50% in 1999 to 10.9% in 2016.

He adds that although 40% of the country is still earning less than US$2 a day, according to Asian Development Bank statistics, this figure has been going down steadily.

“Where poverty was more widespread in the past, it is now more concentrated on Indonesia’s eastern provinces like Maluku, East Nusa Tenggara and Flores where agriculture is still the main economic activity.

“Unfortunately, these areas most probably won’t be booming anytime soon,” he adds.

Threats to Indonesia’s reforms

At the heart of Indonesia’s reforms, says Ziegenhain, is the rule of law, which is important to ensure that corruption and political interference are kept as far away from the economy as possible.

To this end, institutions such as Indonesia’s parliament, judiciary and the KPK must continue to remain independent and have their own powers in a system of checks and balances.

Ziegenhain criticised recent efforts by the Indonesian parliament to weaken the power of the KPK, which is, according to some surveys, the most popular and trusted among all state institutions.

In this regard, Indonesia, he says, is still not perfect, but there is a generally shared consensus that the power of the government must have its limits.

“Religious hardliners can also have a negative impact on political stability and economic policies of Indonesia, if they can influence the behaviour and the decisions of politicians and elected representatives.”

Ziegenhain says religious hardliners currently threaten the business activities of religious and ethnic minorities. If this continues, it will be bad for Indonesia’s goals to open up the economy and pull in more foreign direct investments (FDI).

Since taking office in 2014, Jokowi has made attracting FDI a key priority but in this area, the country still lags behind its neighbours.

Ziegenhain suggested Indonesia do more by removing protectionist policies in order to encourage FDI and place more emphasis on investments in basic education, vocational education and infrastructure projects to improve connectivity in the country.

Malaysia can learn from Indonesia’s reforms

The Institute for Democracy and Economic Affairs (IDEAS) says that Indonesia’s has shown the need for systems of checks and balance to ensure real transformation and that Malaysia could learn from this.
IDEAS external relations manager Azrul Mohd Khalib

“Reforms which made clear separation of power between the executive, legislative and judicial arms of the state, ended the domination of the executive,” said IDEAS external relations manager Azrul Mohd Khalib.

“While the Indonesian presidential system allows for a powerful executive, the legislative branch has become equally powerful, and is not just a rubber stamp, like in the Suharto years.”

Azrul said that the judiciary in Indonesia is “completely independent”, while the Constitutional Court allowed the public to challenge laws regarded as problematic.

However, he noted the strong system of checks and balances have made decision-making more difficult and time consuming, though the Indonesian public’s confidence in the legal system is higher than the days of Suharto.

He added that the ongoing reforms to Indonesia’s negative investment list has demonstrated the harmful effects of protectionism and the realisation that it stifles and stunts growth, creates domestic bottle necks and creates a perception of hostility towards foreign investment.

“Malaysia could learn from Indonesia’s experience of introducing such moves, particularly reducing the number of restrictive and costly regulations which govern valuable sections of the economy such as the transportation and pharmaceutical sectors.”

First published, 2 August 2017

2017-08-02T05:30:12+08:00 2nd August 2017|News, Advancing a Competitive Economy|Comments Off on Reformasi: A tale of Indonesia’s success