Why Indonesia outperforms RP

NOT TOO LONG ago, Indonesia was Southeast Asia’s basket case. Within the region, it was the hardest hit by the 1997-1998 financial crisis and subsequently plunged into a cycle of political and social unrest and economic decline. Today, however, under its current political and economic setup, Indonesia has attained levels of stability and prosperity few would have imagined possible just a decade ago.

This was the conclusion reached by scholars of Indonesian studies at a recent First Indonesia Forum held at the Kyoto University Center for Southeast Asian Studies.

Political recovery

Historian Takashi Shiraishi, Japan’s most distinguished Indonesianist, attributes the country’s remarkable recovery to three factors: (1) a successful decentralization program (2) the containment of religious and ethnic conflicts at the local level and (3) a strong nationalist imprint traceable throughout the country’s history.

Economist Kosuke Mizuno, on the other hand, notes the ability of the Indonesian economy to weather the worst effects of the 2008-2009 global economic meltdown by keeping a balanced financial and current accounts while increasing employment.

The devolution of political power saw the channeling of 60 percent of public works funds to local governments. This has resulted in the proliferation of local governments through the creation of new districts and an increase in the number of local political parties.

Decentralization

Professor Shiraishi sees these developments as positive for two reasons: (1) local governments have become more important, and (2) more local people now have a greater stake in the running of local governments. Local parties are also able to extend their influence to national politics by joining major coalitions.

Decentralization has led to the containment of ethnic and religious conflict at local levels. Thus the “politics of identity” has now been relegated to the backstage leading to the rise of the “politics of economic growth.”

Shiraishi says Indonesians now look at politics as a way of achieving economic growth rather than as a vehicle for asserting one’s ethnic or religious identity. As for the Islamist groups, Shiraishi says they are now reduced to dwelling on issues such as pornography as part of their national agenda.

Nationalism

The third factor has to do with what Shiraishi calls Indonesia’s “robust sense of nationalism” which has been nurtured over the past decades.

The Indonesian military, for one, is not ethnic-based and culls its leaders from among the country’s various ethnic and religious groups.

The rakjat (people) factor has always been present throughout history and a heterogenous elite class is far more aware of the masses than its counterparts in other Southeast Asian societies. Even the much-maligned Suharto regime
had to combine political repression with economic delivery.

At present, democracy and decentralization may have led to a fragmented local political scene but it has not jeopardized the sense of national identity or “Indonesianess.”

Alternative model

For his part, Professor Mizuno sees the Indonesian economic resiliency as offering an “alternative model of development” that contrasts with the East Asian experience of export-based authoritarianism.

Instead, investments focused on expanding a domestic market to take advantage of high levels of consumption among the public. Rather than relying mainly on financial instruments tied with the global system, the country leaned on what Mizuno calls “vernacular financial networks.”

Ironically, these self-finance initiatives were the outcome of a “weak bank lending and a weak bond market” which have characterized Indonesia’s economy since 2000.

Unemployment was held in check as “own account and family workers increased.” Furthermore, family businesses and an informal sector “absorbed the employment shock generated by the global financial crisis.”

Mizuno reports that recent financial data show a balanced growth for Indonesia particularly with its financial and current accounts. He concludes that Indonesia’s strength lies in its “balanced and open economy that relies heavily on a large domestic market, strong private consumption, vital family businesses and vernacular financial networks.”

Unquestioned legitimacy

Other than the above observations, it is also important to note that Indonesia’s national leadership has enjoyed a level of legitimacy not found anywhere else in Southeast Asia.

Indeed, until the May election of Philippine President Benigno Aquino III, Susilo Bambang Yudhoyono stood alone in the region as a head of state whose legitimacy was unquestioned. Not bad for a country that, upon the advent of democracy in the post-Suharto period, looked to the Philippines on how to conduct free and fair elections.

Back to barracks

It may also be added that the Indonesian military, once the bulwark and chief enforcer of Suharto’s orden baru, has, for all intents and purposes, returned to the barracks. Its dwifungsi (dual function) role has been severely curtailed, its once all-pervasive business interests dissipated and its guaranteed block of Parliament seats abolished by law.

In his keynote speech at the Kyoto University Forum, Shiraishi made pointed references to the Philippine experience and contrasted this with the Indonesian case. What makes for the disparity between the two Southeast Asian neighbors?

Philippine case

The Philippines had basked briefly in the glory of its 1986 Edsa uprising that toppled the Marcos dictatorship and inspired similar “people power” revolutions in other parts of the world.

In the long run, however, the country failed to effectively cash in on its hard-won democratic opening. A government decentralization program succeeded only in exacerbating the worst features of patronage politics as local government units became even more dependent on the central government for their internal revenue allotments.

All these were especially evident during the nine years of Gloria Macapagal-Arroyo’s turbulent tenure as president. With her 2004 election marred by serious charges of a manipulated count, Arroyo had to fend off continuous challenges from both the political opposition and reformist military officers.

Scandals

Allegations of high-profile corruption scandals involving Arroyo, her family and cronies further eroded her popularity which plunged to the lowest ever for a sitting Philippine president.

Furthermore, human rights violations reached a scale that rivaled the Marcos martial law years. The last months of Arroyo’s term was appropriately punctuated by the horrific Maguindanao massacre allegedly perpetrated by her close and loyal political allies.

Not surprisingly, her party’s presidential candidate suffered a humiliating electoral debacle in the May elections.

The Philippine economy continued to hew closely to the now discredited neo-liberal agenda of trade and investment liberalization and government deregulation. While growth rates were registered, it was what economists called a “jobless growth.”

Malls

Traditional rent-seeking business concerns and landed elites have retained their pre-eminence while skewing manufacturing and agricultural investments in favor of “quickie” ventures such as property development and shopping malls. The result was a collapse of industries and the stagnation of agriculture, particularly food production.

The 2009 statistical data graphically tell the story of how Indonesia now outperforms the Philippines (See table). Indonesia’s per capita GDP, at $2,362, was 35 percent higher than the Philippines’ per capita GDP of $1,750. Its GDP growth rate of 4.5 percent was four times higher than the Philippines’ measly 1.1 percent performance. Inflation was kept at a low 2.8 percent while the Philippines struggled with a 4.4-percent rate.

From 2005 to 2008, Indonesia had a higher unemployment rate (8.4 percent against 7.4 percent) but by mid-2010, Indonesia had improved with a 7.14 percent rate while the Philippines fell behind with 8.0 percent.

As a percentage of GDP, Indonesia’s budget deficit of 2.3 percent was more manageable than the Philippines’ 3.9 percent. The strength of Indonesia’s economy was shown by a gross domestic investment inflow that was 31 percent of GDP while the Philippines turned in an anemic 14 percent.

Foreign investments

Despite Indonesia’s inward-looking policy, foreign investments poured $14 billion into its economy for 2008-2009 while the Philippines had to make do with only $3.5 billion.

While the UNDP human development index for 2009 shows the Philippines with a higher ranking of 105th to Indonesia’s 111th, the more important indicators show the latter to be ahead.

Poverty rates in Indonesia are lower—53.8 percent of Indonesians living under $2 a day compared with the Philippines’ ratio of 57.4 percent. Indonesia also has a lower birth rate of 18.7 per 1,000 persons compared with the Philippines’ 25.8 percent.

In terms of income and wealth distribution, the Philippines registers a higher measure of inequality with a Gini index of 44.5 while Indonesia has only a 34.3 index.

Human development

The human development indicators where the Philippines performs better are in life expectancy (71.7 years against 70.7 years), infant mortality (23.1 deaths per 1,000 births as against 26.6), and the education index (0.89 vs. 0.83). These advantages, however, are slight and unless the Philippines stages a remarkable comeback within the next few years, they could disappear quickly.

Given the much improved political and economic situation, the number of tourist arrivals in Indonesia last year, placed at 6.4 million, was more than three times higher than the Philippines’ 2.7 million.

Less corrupt, happier

The biggest surprise was a Transparency International assessment of Indonesia as being less corrupt than the Philippines. For whatever it is worth, the Happy Planet index also ranks the Indonesian people as happier than Filipinos.

In only 12 years, and despite bumps along the way, Indonesia has managed well the transition from centralized authoritarianism to a vibrant and stable democracy, a feat none of its Southeast Asian neighbors have been able to achieve.

Future

Its economy still lags behind the top regional performers—Singapore, Malaysia and Thailand—but it appears, for the moment, to have its fundamentals figured out. How long will this rosy picture last? Shiraishi expects Indonesia’s current upsurge to continue for the next 10 years.

As for the Philippines, 24 years after the historic Edsa revolt, its political life remains spineless and its economy brittle. It remains to be seen whether Mr. Aquino, riding on the wave of a landslide electoral victory, can rectify the overindulgence of the Arroyo years, invigorate the economy, restore confidence in government, and steer the country and its people forward.

(Eduardo Climaco Tadem Ph.D. is a professor of Asian Studies at the University of the Philippines Diliman. He is currently a visiting researcher at the Kyoto University Center for Southeast Asian Studies.)

Comparative Indicators
Indicators————————————————————————————Indonesia ————–Philippines

1. Economic
GDP at current prices (2009, in US$B)——————————————–546.4———————–182.7
Per capita GDP (2009, in US$)——————————————————–2,362———————-1,750
Growth rate of GDP (2009)————————————————————4.5————————-1.1
Inflation rate (2009)———————————————————————–2.8 ————————4.4
Unemployment rate (2005-2008)—————————————————-8.4 ————————7.4
Unemployment (2010, World Factbook)—————————————–7.14 ———————–8
Budget deficit as % of GDP———————————————————— 2.3 ————————3.9
Gross domestic investment as % of GDP——————————————31————————-14
Foreign investments inflow (2008-2009, US$B)———————————-14.2 ———————–3.5

2. Human development

Poverty index (% living under $2/day)———————————————-53.8————————-57.4
Birth rate (2005-2010, per 1,000 persons, UN)———————————18.7————————-25.8
Income inequality (2009, UN; Gini, 0 = perfect equality)———————34.3 ————————44.5
Life expectancy (2005-2010, UN)—————————————————70.7 ————————71.7
Infant mortality (2005-2010, UN) deaths/1,000 births————————26.6 ————————23.1
Education index (1 = perfect education attainment)————————-0.83————————–0.88
Literacy rate——————————————————————————–92.0————————–93.4

3. Other

Corruption index (2010, higher rank, less corruption)———————- 110th——————–134th
Tourist arrivals (2009, in million arrivals)—————————————–6.45———————–2.71
Happy Planet index (Higher rank, more happy)——————————-14th———————-16th

–Eduardo Climaco Tadem, Philippine Daily Inquirer