Building U.S.-Indonesia Mutual Understanding Since 1994

Indonesia: 2014 and Beyond

Indonesia has been persistent in its long and unrelenting search for a political-economic system that can effectively integrate and accommodate the diversity of the nation, giving power to both the center and the regions, as well as allowing for popular participation. Its successful transition into a stable and peaceful democracy has led many observers to consider Indonesia as an exemplary model for democratic reform.

To gain a deeper understanding on Indonesia’s future outlook, on October 14, 2011, USINDO hosted an Open Forum with Dorodjatun Kuntjoro-Jakti, a professor emeritus of Economics and Chairman of ICPPS, at the University of Indonesia. Professor Kuntjoro-Jakti, spoke on the role Indonesia’s geography, demography, history, and political economy have played, and are likely to play, as well as the internal and external drivers of change in determining Indonesia’s nature and outlook beyond 2014, when Indonesia holds general elections for a new president.

Professor Kuntjoro-Jakti began with an overview of the current facts that gave rise to the importance of geography, demography, and history as outlook parameters in Indonesia.

The 2014 general elections, the third direct presidential election in Indonesia, will be in a staggering scale. The number of registered voters is expected to be close to 200 million, and the administration of the election presents a major logistical challenge given the size and geography of the country. In 2014, the proportion of Indonesia population below 29 years old will be more than 50 percent, with many first-year high school students voting for the first time.

The year 2014 will mark the rise of the 21st century generation. The impact of information technology will increase significantly. It has happened in almost every instance, from the use of social media for mobilizing civic engagement to the increasing role of online and mobile communication in commerce, both in urban and rural areas. Global activism is increasing. Assertive citizenship through election is expected, though the outcome remains to be seen.

With regard to geography, Professor Kuntjoro-Jakti pointed out that four major sea lines of communication pass through Indonesia.  The most strategic one is theStrait of Malaccawhere hundreds of ships passing through each day. Four countries are currently patrolling the area –Thailand,Malaysia,Singapore and Indonesia. Traffic passing through Indonesia is likely to grow exponentially, and therefore the safeguarding of these SLOCs is critical to the prosperity of the region.

Indonesia is also one of the largest mineral producers, both on- and off- shore. Exploration of natural resources is ongoing.Northern Indonesia, for instance, becomes increasingly more attractive for plantation.

With a population of 240 million people, Indonesiais currently the world’s fourth largest nation. It has been successful in the implementation of its family planning program, reflected by its current population growth at 1.4 per annum.  Indonesia’s net reproduction rate is expected to reach 1 percent per annum in 10 years time, and to eventually arrive at zero population growth in 2040 with around 300 to 350 million people.

Indonesia, Professor Kuntjoro-Jakti noted, will enjoy a demography bonus. The dependency ratio will be below 1 for quite some time, and better quality education is required to seize this opportunity. He cautioned, however, that Indonesia’s statistics bureau (BPS) might have underestimated the country’s population growth. New regions (districts/kabupaten) are emerging as a result of decentralization, and BPS district offices are still missing in these regions.

Throughout Indonesia’s history, there have always been pressures from both central and regional levels; these pressures sometimes led to political upheavals. Professor Kuntjoro-Jakti asserted that Indonesiahas managed to survive each upheaval. The “Indonesian Spring” in 1998, as the most recent example, has ushered in the “reformasi” era. It is not easy to understand how the 1998 spring has enabled Indonesia to do three political exercises (democratization, reformation, and decentralization) at the same time. President SBY, however, has decided to issue a moratorium on the formation of new regions, as the current system cannot cope with the burden of decentralization.

Indonesia survived the 1997 financial storm. Despite the downgraded credit rating, the non-oil/gas sector performed very well during the crises. The real sector from non-oil/gas has played and continues to play an important role. Oil, mineral and gas generate only a quarter of Indonesia’s revenue. The real sector performance combined with decentralization and democratization, provide a solid base for the country’s long-term development.

Professor Kuntjoro-Jakti argued, however, that real sector development has to be accelerated, particularly in agriculture, mining, and manufacturing sectors. The manufacturing sector faces an increasing competition with China, due to the appreciation of Indonesian Rupiah. To grow faster Indonesia must develop infrastructure and create a credible banking system and financial institutions. He cautioned, however, that Indonesia’s growth might be underestimated due to the limited capacity of the statistics offices to capture growth in the new regions.

Indonesia’s deficit in budget is currently regulated by the Maastricht rule (less than 3 percent deficit to GDP ratio). The goal is to eventually adopt the German golden rule (less than half percent deficit to GDP ratio). Foreign ownership of Indonesia’s debt instruments is significant, demonstrating foreign investors confidence inIndonesia’s economy. Interest payment, however, is a major concern. Indonesia borrows money a lot from domestic as well as outside, and still recovers the cost of financial crises. Decentralization also requires more money to be sent to the regions, which currently takes up about a third of the national budget allocation.

2014 expects internal pressures for greater autonomy, deeper democracy and wider reformation. Pressing regional issues will likely involve cross-border regional cooperation and ASEAN economic community.

The deciding core combination in the government will likely include the numerous political parties, the military as the most organized, a relatively weak academia, and many NGOs. The business sector plays a relatively passive role, despite efforts from political parties to gain their support. The middle class is getting stronger and their number will likely rise.

Indonesia has excellent terms of trade in the long term. This, however, has to be complemented with the development of infrastructure, better education, and an increasingly credible political system. The time is now while Indonesia is enjoying the demography bonus.

A question and answer session followed Professor Kuntjoro-Jakti’s presentation.

Q: Bank Indonesia’s (BI) recent decision to drop the interest rate took a lot of economists by surprise. What do you see as the divergence of opinion between politicians and the Central Bank towards the global slowdown and how does politics influence the Central Bank’s policy-making decision?

Nobody can intervene with BI. Indonesia no longer has monetary authority (BI, Ministry of Finance, and Ministry of Trade) as in the past. The discussion between fiscal and monetary managers is fairly informal. Some politicians have tried to influence, but I never see them successful. We have been successful in controlling the budget deficit. On the monetary side, however, despite our anti- inflationary stance, we are sending more money to the regions due to the pressure of development. But most of the time the money is used to buy BI certificates, and not for infrastructure expenditure. This is annoying to BI, and is probably the reason they reduce the interest rate. The cost of funds is still high. Big companies rarely want to invest in the long term. BI wants to force banks to lend more money because we have excess liquidity.

Q: With Indonesia’s growing economy, how can you avoid the trap of disappearing raw materials, such as palm oil and mineral resources?

Indonesia is not only successful in palm oil production, but also in cocoa, rubber, and to a certain extent, in pulp and paper production. Industrial forestry is also on the rise. We have unbelievably empty spaces as the population stops growing.

Our problem is that we are a price taker. The price level is controlled by the world commodity market. We have been discussing this for more than three decades in IMF.  It is difficult, but it can be done on a large scale.

Q: Only a small percentage of Indonesians go to college, and school tuition is also rising. What is the role of government beyond 2014 for higher education?

The government has amended the constitution to require 20 percent budget allocation for education. We will see what we can actually implement in the next five years. The amendment needs to be institutionalized. We may need to revamp the education department to make it more effective. But the private sector is building many universities. They may be expensive, but we need them to take up the slack.

Q: There are continued efforts of civil service reform in the country, but they did not seem to work that well. How do you see that?

In 2004, we finally ended the bureaucratic type of expenditure used by Suharto for such a long time. We are now moving from simple financial audit to performance audit, and to eventually move to a management audit. With a performance audit, we can identify defunct offices so we can close/reduce them. The new public finance law promulgated in 2003 is designed for this. President SBY has issued a moratorium on the hiring of civil servants, but we do not know for how long.

Three things are important: 1) reform the bureaucracy, 2) reform the police force, and 3) reform the district attorney offices. These are the trending topics among the younger generation. What they want is not to change the government, but to improve/reform it to be more transparent and accountable.

Q: Indonesia faces a problem of a growing workforce with a rising expectation of getting quality jobs, but a high percentage of present and new jobs are in the informal sector. How are some of the plans going forward going to address that?

The informal sector remains the largest portion of Indonesia’s economic activity. The main challenge in shifting the workforce from the informal to the formal sector is confidence building – how to convince them that they are eligible/bankable. We have developed a model that uses technology and simple interview instruments to demonstrate their bankability. Given the large number of the informal sector workforce, however, it is difficult for banks to capture all of them.

Q: Given the external drivers you mentioned, what should be the priority in 2014? What advice would you give to the young people?

First, do not be tempted to buy in short term. This is the mistake of Suharto’s era. Our short-term debts were bigger than the national reserve. Short term is tempting because it can be rolled over. We now move to long term borrowing by selling bonds.

Second, continue to have fiscal discipline. Our current deficit is now only 1.7 percent to the GDP, down from 4-5 percent to the GDP in 2001. This is possible because we follow the Maastricht rule/criteria.

Q: Where will Indonesian new leaders be coming from (which sectors)?

Technocracy will, most likely, continue to be from the academia to ensure independent fiscal and monetary decision makers. The second source is the most organized sector, the military.  Currently two political parties, splinters from Golkar, are created by retired military generals. Armed forces and the police force were peacefully removed from the parliament in 2003, as all seats would be directly elected (not appointed as in the past).

The third source is the regional groups. An increasing number of regional representatives are moving to Jakarta through political parties. Many demand that independent candidacies should be allowed in the election. DPD (the regional council of representatives) is currently their only political outlet as independents (parliament seats require political party affiliation).

Other sources include NGOs, sometimes celebrities. Political parties threshold and independent candidacy will be among the big election debates.

Q: In the past, members of the military were not allowed to vote. How about now?

The military and the police still do not have the right to vote. They can do so only after they retire.

Q: How does the Indonesian government plan to increase infrastructure spending and in what areas do they prioritize?

The Indonesian government is using the public private partnership (PPP) platform and it is quite challenging. We have been successful in some projects, but not so much in many others.

Land (topography) is a major issue in building roads. Some areas are mountainous; others are swampy. Many airports cannot accommodate big planes. The best way is probably to return to ferries for inter-island transportation. Indonesia inter-island sea condition and weather is relatively calm as it is circled by a mountainous ring. But we will need additional hundreds of seaports.

Q: The voting age in Indonesia is 17 years old. These are high school students who have never had real history or civics. How do you expect them to vote?

Voting behavior is likely sociological in the big cities. In the regions, it is more anthropological, representing regional, ethnic, or religious interests. With many of the local dialects disappearing, unfortunately, the role or the capability of parents in passing on information in Bahasa Indonesia is increasing. We may need another generation to finally have an informed democracy.

Q: Some people are under the impression that Indonesia will likely face population problem due to decentralization. What is the current statistics of Indonesia population and where can we find it?

It took Indonesia 25 years to reduce its population growth to 1.4. If regions neglect family planning policy, it may take them another 25 years to control population growth. It is difficult to get a clear picture of the statistics. The capacity of the statistics bureau to go down to the regions is still very limited.

Kuntjoro-Jakti 10-14-2011