Indonesia Update

Summary

This month I look first at prospects for the economy in an election year. The macroeconomic indicators are all positive. The Jakarta Stock Exchange set a record on 26 January when the Integrated Jakarta Share Price Index (IHSGJ) reached 786.

Indonesia’s economic problems have not, however, disappeared. The chances of more rapid recovery over the next three to five years are small.

Low growth and the accompanying projected decline in employment prospects and living standards are unlikely to have any serious political consequences in Indonesia this decade.

The next decade – and the DPR (Parliament) and President elected in 2009 – are more likely to confront the longer-term political consequences of sustained weak recovery.

I conclude with some impressions of some of the more vigorous and ambitious candidates in the DPR and Presidential races – including Wiranto.

The Economic Outlook in an Election Year

The year has begun with records being set by the Jakarta Stock Exchange. On 26 January, the Integrated Jakarta Share Price Index (IHSGJ) reached 786.

Share prices had been moving up strongly through 2003 – the Index was at 390 at the beginning of February, had reached 534 on 1 September and was at 691 on the last trading day of 2003.

What does this development mean for the economy and the economic outlook in an election year?

Good Macroeconomic Data

The main macroeconomic indicators show positive trends. Inflation by the end of 2003 was down to 5%. Bank Indonesia interest rates were still trending down at the end of 2003 – the 1 month SBI reaching 8.31%. The $US/Rupiah exchange rate is stable in the 8,300/8,500 range. Foreign exchange reserves are strong at $US 36 billion.

The budgeted deficit for 2004 is 1.2% of projected GDP, maintaining a downward trend since 2000 under the stewardship of the Minister for Finance, Boediono.

Government debt continues to trend downwards as a proportion of GDP. In 2004, it will reach 60%, down from 77% in 2002 and over 100% in 1998/1999 at the beginning of the crisis.

But debt servicing will be a major cost to the Government for the whole of the decade. Domestic debt servicing takes up 12% of the 2004 Budget, external debt servicing 7%. With the end of the IMF Agreement with the Government, repayment of IMF lending is a significant call on the Budget until 2009. But these demands, with continued good Government control of the deficit, are manageable.

The Contrary Signs

The outlook is not, however, uniformly positive. Banks are not able to play an effective role in promoting domestic investment. Even as SBI rates are falling, depositors, still uncertain of the banking system, prefer to deposit their money for one month only. While banks are quite liquid, their on-lending is well below loan to deposit ratios in the rest of Asia. Investment interest rates are still in the 18% range.

Indonesia remains one of the poorest performing economies in terms of attracting foreign direct investment. China is far outperforming Indonesia – and the rest of Asia – at the moment. In 2004, there will still be net investment outflow from Indonesia.

One area where there has been growing activity since 2001 is in the inflow of funds to acquire existing Indonesian assets. This inflow is strongly related to IBRA sales of assets and their re-acquisition by the original owners.

Weak investment and the absence of strong fiscal stimulus will leave consumption as the main driver of growth this year. In 2004, consumption will be particularly strong as political parties and candidates spend on all the accoutrements of political campaigns in Indonesia from t-shirts, to radio and TV advertising to rent-a-crowds.

Growth will therefore be stuck at around 4-4.5% in 2004.

In the words of economist Faisal Basri, Indonesia suffered a “serious stroke” in 1997/1998. It has not recovered from that stroke, so that seven years later, the economy is just returning to its pre-crisis size. Growth has not returned to pre-crisis levels and will not return to those levels for at least the next three years or so.

This stroke victim is now dressing well – the well-pressed macroeconomic dark suit and strong red tie. But he shuffles as he moves, revealing an array of problems:

• Weak, unresponsive Government institutions
• Corruption
• Low tax take
• Inadequate infrastructure development
• A weak legal system creating investor uncertainty.

The result is that Indonesia’s output has still not returned to pre-crisis levels and it is beginning to lag behind competitors in the Asian region. In the 2003/2005 period, East Asia is predicted to grow 6.5%, South Asia 5.4% -- both outperforming Indonesia.

Long-term – Not Short-term – Question Marks

The projected growth of 4-4.5% is not enough to absorb all new entrants to the workforce. Open unemployment is now at 10% of the workforce and will continue to grow slowly over the decade while growth is stuck in the 4-5% range.

Formal employment, which guarantees at least the provincial minimum wage and basic employment and severance conditions, is shrinking as previous staples of industry such as electronics and clothing, textiles and footwear close in the face of increasingly stiff competition from China in particular.

The unemployed and those forced out of the formal sector are compelled to find jobs in the cities or back in the rural areas from which they came for whatever payment they can secure.

The inevitable result will be a steady rise over the decade in the number of Indonesians below the official poverty line, which is set very low. The greatest rise will occur in the cities. At present, 18% are counted as being below the poverty line.
Another 30% of the population lives close to the poverty line. They will be increasingly vulnerable to the longer-term consequences of the predicted sustained stagnation in economic growth.

These issues do not, however, worry the Government or its main political competitors this election. They may not be major concerns in the 2009 round of Parliamentary (DPR) and Presidential elections.

If, however, growth in the Indonesian economy remains flat over the rest of this decade, these issues could well become much more pressing in the next decade. The predicted economic decay and declining economic opportunity for increasing numbers of Indonesians could become fertile ground for a future resurgence in radical politics.

With the destruction of the PKI in 1966 and the continued ban on it since then, communism and radicalism from the Left are unlikely to re-emerge. Islamic radicalism, never totally eliminated by Soeharto as was communism, is a much more likely vehicle for future economic discontent.

The 2004 Elections – a Policy-free Zone

For the time being, these longer-term problems for Indonesia are not a concern for parties and Presidential candidates. The immediate news is good. Why worry?

And yet polls consistently tell politicians that the electorate are concerned right now about declining health and educational services and their children’s long-term economic future.

The explanation of this dichotomy between what worries the electorate and what their politicians do not want to talk about is that the major parties and Presidential candidates prefer to stick to traditional religious politics. No major candidate or party is ready to argue to the electorate that votes can be a weapon to force politicians and Governments to address voter concerns about the economy, society and the future. No major candidate or party is coming forward with sensible solutions to Indonesia’s economic and social crisis.

The electorate is therefore still caught in a vicious circle of ignorance, with their votes likely to be decided in this policy vacuum by a voter’s position on the traditional Islamic-secular/nationalist spectrum that has dominated Indonesian politics for 50 years. The vicious circle will be broken only when parties and Presidential candidates come forward with sound economic and social policies that promise to make a difference to the lives of voters.

This will not happen this year.

The 2004 DPR Election Campaign

Although there are only two months left to go before the 2004 Parliamentary (DPR) elections on 5 April, there are few obvious signs of election fever.

This is in large part due to the stipulation in the election law that campaigning begins 11 March and ends 1 April. Campaigning outside this period is unlawful. Where parties or individual candidates have campaigned, local election supervisory committees have quickly called for such activity to stop. In Solo, for example, the PDIP held a huge rally on 18 January to celebrate the PDIP’s 31st birthday, turning the streets of the city red. The local election supervisory organisation is now investigating whether this constituted a breach of the law.

While open campaigning is outlawed during January/February, smart politicians keen to win a seat in the DPR have already been getting to know their Districts, their key constituents and local issues and to win over local interest groups.

This need to get to know one’s electorate is coming from an unexpected quarter. The Government’s 2003 draft election law had originally proposed single member electorates. This was too much for the party leaderships, which wanted to maintain headquarters control over who was elected to the DPR. This was achieved by the system of proportional voting in multi-member seats, with headquarters always determining the ranking of candidates on the ballot paper.

The DPR opted to maintain the existing proportional system. In a small concession, the DPR did agree that voters could vote for one candidate from the party the voter was choosing. The theory was that a very popular candidate with a low placing on the ballot paper could beat headquarters and win a quota in his or her own right.

Trials of the ballot papers have shown, however, that voters make frequent mistakes in trying to exercise this right to chose both a party and one candidate from that party’s list. Parties are consequently urging voters to vote just for the party.
The pressure to know your electorate as well as you can is not, therefore, being driven by this capacity to choose one candidate from your party of choice but rather from the break up of big provinces into electoral zones.

Up until now, the electorates have been provinces. This time, East Java is divided into 10 electorates, Central Java 8 and West Java 11. These smaller electorates, while still large, are much more manageable than the whole province. This more manageable size is enabling smart candidates in potentially winnable positions to get out into their electorates and build direct support for themselves and, thereby, for their party.

The New Candidates 1: Al Hilal Hamdi

For example, Al Hilal Hamdi, a former PAN Minister for Manpower in the Gus Dur Administration, is the number 3 PKB candidate for the Central Java 6th District covering mountain Wonosobo and Magelang down to the Indian Ocean coast of Purworejo kabupaten.

Ranked number 3, Al Hilal Hamdi is not guaranteed a seat. The PKB vote in the 1999 election, if repeated this year, will deliver the PKB only two seats in this electorate.

But Al Hilal Hamdi is not so far away from a third quota for a third PKB seat in the electorate as to give up now. He has been crisscrossing the electorate, ensuring his acceptance by the local PKB and NU structures and figures. He has been delving into local concerns. In January, he and the PKB organised a large rally of tobacco growers from the electorate to discuss their problems.

The New Candidates 2: Nurul Arifin

Nurul Arifin is the number 1 Golkar candidate for the West Java seat focused on Krawang, to the west of Jakarta. She is secular, young, a successful TV and film actress, an HIV/AIDS and women’s rights activist. She is often criticised by fellow professionals and young people for joining Golkar, but she is persuasive in defending her choice of the ‘new Golkar’.

She has developed an inventory of the concerns of her electorate – from the problems of fishermen along the coast to the growing factory closures that threaten employment in the region. She is active across the electorate even though as number 1 Golkar candidate, she has a good chance of winning a seat almost automatically. For her, the aim is to maximise the Golkar win in her electorate and then take her issues into the DPR.

The New Candidates 3: Bara Hasibuan

Bara Hasibuan is the number 1 PKB candidate in the 3rd District of North Sumatra. This District borders much of Aceh province. It skirts in a half-circle around the electorate based on Medan and has a long coastline along the Malacca Straits in kabupaten Langsat and then eastwards from Deli. Inland, the electorate includes the major city of Pematang Siantar.

Although number 1 for the PKB in this District, Bara’s challenge is that the PKB vote in the electorate in 1999 will not deliver him a quota for election to the DPR this year. He has to win at least 150,000 new voters for the PKB in a highly diverse electorate.

This means understanding the complex ethnic and social mix – from Karo Bataks to Malays to Javanese plantation workers. There is a movement to create a new province for part of the region. There is the possibility of new investment in hydroelectric power and related industry in the Asahan region.

To win a seat, Bara must cover the whole electorate, understand its needs, and win over not just community leaders but also individual voters. He has two months in which to get 150,000 or more voters to do something they have never done before – vote for the PKB. If Bara can succeed, he will have a seat in the 2004-2009 DPR.

This level of engagement with the electorate is possible only because the big provinces are now split into more manageable regions. None of this interest in the voters of Java and Sumatra would have been possible without this important change in the electoral system.

The New Candidates 4: Adi Nasution

Not all examples of this new style of active, interests-based campaigning at the grassroots will have a happy ending. One case has already come to grief for a quite unexpected reason.

Adi Nasution is the Partai Bintang Reformasi (PBR) number 1 candidate for the 1st District in Banten. The KPU map of the electoral districts in Banten showed that the 1st District was centered on the urban industrial centre of Tangerang on the outskirts of Jakarta. Adi began vigorous preparations for the campaign, including the development of an ‘SMS’ strategy for accessing the urban population of Tangerang. Large numbers of PBR T-shirts and calendars were distributed around Tangerang.

It emerged in late January that the 1st District of Banten is not, in fact, focused on Tangerang. It is in rural western Banten. Now that the lists of candidates have been submitted to and approved by the KPU, Adi cannot shift to the Tangerang seat. He must now campaign across a much wider area. He is not as comfortable campaigning with farmers as he was with the industrial and office workers of Tangerang. His ‘SMS’ strategy will not work in western Banten because much of it is out of hand phone range. His t-shirts and calendars will benefit not him, but the lead PBR candidate in Tangerang.

Not all candidates are as keen as the four I mention above. During the month, I met a young PDIP candidate for a DPR seat in East Kalimantan. A PNI/PDIP ‘blueblood’, he wasn’t quite sure of his ranking on the ballot paper, but it was too low to win a seat. Yes, he would campaign when the campaigning started. No, he hadn’t yet visited the electorate. He isn’t from the electorate. He is unlikely to win one vote for the party.

Presidential Campaigning – New Year’s Eve with the Little People

Wiranto continues his own intimate grassroots campaign, which has presented such a strong challenge to Akbar Tanjung’s hopes of winning the Golkar Presidential nomination. On New Year’s Eve, Wiranto was in Batu, an apple growing mountain resort in East Java, to meet the “little people” and capitalise on old links with the area:

“One Presidential candidate from Golkar, Wiranto, spent the 2004 New Year’s celebrations with thousands of residents of Batu...

Wiranto said that while his visit could not be separated from the fact of his Presidential candidacy, it was purely for the purpose of feeling the pulse of the inner feelings of the little people in facing the New Year…

Nevertheless, as Wiranto sang the song “Widuri” on stage, the event organiser was distributing to all present calendars and key chains with Wiranto’s picture and the inscription ‘presidential candidate’ on them.

Wiranto said that he had long planned to celebrate the New Year with Rendra and the people. “We have now been able to mark the end of 2003 with the people of Batu. It so happens that I served here for four years so that I have many acquaintances here…”

The next day, Wiranto conducted a dialogue with leading figures from Batu and representatives of the people, including the mayor of Batu.”

Kompas 2 January 2004

Given that no party or presidential candidate is addressing the issues that genuinely worry the electorate – declining spending power, the declining quality of schools and health services and the uncertain economic future – a good song could go a long way in the 2004 campaign.

2 February 2004