Indonesia: The Emerging Secret

Session Overview: Indonesia's Economic and Democratic Trajectory

• The panel, moderated by former Ambassador Robert Gelbard, identifies Indonesia as a "dramatically different" nation from 1999, transitioning from the "perfect storm" of the 1998 financial crisis and Suharto's dictatorship collapse to a vibrant democracy with a robust business climate.
• Indonesia has achieved a unique combination of democratic stability and economic growth, averaging 6.5% annual growth (the second-highest in Asia after China) while maintaining the world's third-largest democracy.
• Domestic consumption drives approximately 70% of GDP, insulating the economy from the 2008 global financial crisis, whereas exports constitute only 12% of GDP compared to over 100% in Singapore.
• The nation recorded its first peaceful transition of power with President Yudhoyono completing two full terms, a historic milestone for a country previously known for frequent leadership turnover (four presidents between 1998–2002).
• Recent polls indicate 85% of Indonesians believe the country is heading in the right direction and 70% feel their country is thriving, despite low trust in specific politicians (approx. 15% popularity).
• Upcoming April 2014 elections face a 20% parliamentary threshold, likely limiting presidential candidates to three major parties (Golkar, PDIP, Democratic Party), with Jakarta Governor Joko Widodo (Jokowi) currently polling at 87.5% electability.
• The government is shifting from an export-focused raw material economy to a downstream industry model, recently banning raw material exports to stimulate domestic processing and manufacturing.
• A "demographic dividend" is underway with a growing middle class; the Boston Consulting Group reports 70 million people in the upper-middle class, projected to double to over 140 million by 2020.
• Corruption remains a significant hurdle, with a Gallup poll finding 88% of citizens believe it is widespread, though the independent anti-corruption commission has successfully jailed ministers and generals, signaling a shift toward accountability.
• Bureaucratic inefficiencies and decentralized autonomy laws present challenges; local district officials often lack the capacity to manage investments, leading to delays in permits and coordination between central and local governments.
• Human capital is identified as the single biggest constraint on growth, with the education system unable to scale capacity commensurate with the 250 million population, particularly outside of Java.
• A 40% overnight increase in the minimum wage in 2013 has negatively impacted export-based manufacturers, forcing a relocation of production bases to central Java where wages are half those of Jakarta.
• The government has increased the budget allocation for education to 20%, though fuel subsidies currently exceed this expenditure in actual outlays.
• Foreign direct investment (FDI) is surging, exemplified by recent deals including a Boeing 737-800 order for Lion Air and a $24 billion Airbus A320 deal, signaling renewed confidence in the aviation sector.
• Political risk in 2014 is expected to manifest as rising economic nationalism, though investors anticipate a return to open policies post-election as the new president inherits a $1 trillion economy and 67 bilateral investment treaties.
• The panel advises foreign investors to adopt a "think globally, act locally" strategy, emphasizing the critical need for a trusted local partner to navigate complex regulatory and cultural landscapes.
• Public scrutiny of political leaders is intense; the free press allows citizens to criticize the president daily, creating a system of checks and balances that, while sometimes creating "unforced errors" in policy, ensures government accountability.
• The panelists note a generational shift, with young, US-educated Indonesians returning to drive the economy, contrasting with the often short-term, election-focused mindset of the current parliament.
• Indonesia's diplomatic posture is expanding beyond immediate Asian neighbors, establishing strategic partnerships with emerging powers including the US, Russia, Brazil, Turkey, and South Africa as part of its G20 membership.
• Investment timelines have improved significantly, with the Indonesian Investment Coordinating Board (BKPM) reducing license processing times from one or two months to less than one week through a transparent, online tracking system.
• The panel warns against premature public announcements of investment plans before securing local consensus, as early media exposure can drive up costs and complicate negotiations.
• Future growth prospects depend on maintaining an open, pluralistic nationalism to prevent social disobedience, particularly as the wealth gap threatens to trigger unrest among the poor despite overall economic gains.
• Long-term stability relies on locking in reforms beyond the 2014 election, as political momentum can wane in the absence of an immediate crisis, risking the reversal of democratic and economic progress.
• The panel concludes that Indonesia is ready for foreign investment, with a risk profile that is now manageable given improved transparency, a stable democracy, and a matured middle class, offering high margins for those who navigate the local ecosystem effectively.