indonesia
Business Management

Swings and Roundabouts in Resurgent Indonesia

Amid the ballyhoo surrounding the MINT phenomenon, so named by former Goldman Sachs chairman Jim O’Neill and so widely publicised by the BBC to chime with recent radio broadcasts, Indonesia has generated a characteristic mix of scepticism and optimism.

‘Characteristic’ in two senses. First, that all the MINT component countries (Mexico, Indonesia, Nigeria and Turkey) have garnered supporters and sceptics as to whether they can join O’Neill’s famous ‘top table’ of economic forces. Second, that Indonesia has long been the source of glass-half-full, glass-half-empty commentary based on the attractions of its low cost base and large population – with 250 billion, it’s the world’s fourth most populous country, between the US above and Brazil below. O’Neill also notes a demographic skewed in favour of the young with a median age of about 29.

However, viewing this south-east Asian republic as a shoo-in for future prosperity might be a victory for optimism over knowledge and its prospects are as fragmented as its archipelago of over 17,000 islands.

Professor John Sidel of the International and Comparative Politics at the London School of Economics says that O’Neill is repeating a mistake “made time and time again” in building up Indonesia’s prospects.

“First of all, Indonesia’s growth and attractiveness to investors over the past decade has stemmed largely from natural resource endowments and commodity chains, but without any progress on what economists call ‘industrial deepening’ [finding more complex, often technological and/or capital-rich sectors], as the World Bank and other observers have noted with growing concern. The export manufacturing sector in the country has not improved on the performance achieved under Suharto in the 1990s, and this is a serious problem.

“Second, the two-term presidential administration of Susilo Bambang Yudhoyono has been lionised as ‘reformist’, providing not only stability and security but also a broader policy environment favourable to growth and investment. But this bright picture is both highly exaggerated with regard to the past decade under Yudhoyono and short-sighted with regard to future prospects. With the upcoming elections, Indonesia may be entering a period of political instability, and without solid institutional foundations for promoting sustainable growth and development. The country is haunted by serious problems of corruption and social inequality, a bloated state bureaucracy, and national markets dominated by cartels and oligopolies. The infrastructure problem cited en passant by Mr. O’Neill is very real – the Yudhoyono administration’s failure on this front is quite striking, and there is little reason to expect that a successor government will do much better.” 

Jonathan Pincus, visiting Professor of Economics at the University of Adelaide in Australia, is cautious also.

“Of course they all have a chance,” he says of the MINT countries. “But assessment of their chances should be informed by careful political and economic analysis and good understanding of globalisation. I think the acronyms are meant to sell bonds and shares.”

Professor Pincus suggests that predictions might be more informed after Indonesia’s election that is scheduled for 9 July this year, given that Yudhoyono is constitutionally prevented from running for a third term.

“Indonesia … is at a bit of a crossroads. We will have an important national election this year after 10 years of stable but ineffective government. The results are far from certain. The most popular candidate is not yet running for office, and even he has not put forward a coherent economic programme. Some of the other candidates are flirting with populism and protectionism. I am not saying that things will get worse but we just don’t know yet what will happen.

“Meanwhile most people are predicting softer commodity prices in 2014. If that does happen then Indonesia will continue to have balance of payments problems. The currency is about 20% weaker than a year ago so there are some opportunities to promote exports but infrastructure is poor and red tape remains a big obstacle to foreign direct investment in manufacturing.”

IDG Connect contributor An Ismanto is also sceptical although he also sees grounds for optimism.

“I am not too sure yet that we will be able to achieve the 7% [target cited by O’Neill] growth in the foreseeable future, but it may be possible in longer period. At least since the end of the last year, [Indonesia’s rupiah currency] has been weakening [and] we have general election too in April-June 2014, with potential safety concerns for business - and also political conflicts which can be serious obstacles for economic growth. But this may be only for a span of one or two years, and for longer period Mr. O'Neill's prediction may come true, especially because he mentions some potential points such as the youth-dominated demographic and commodities from crude palm oil to gold and copper.”

Deep ties to China may also serve Indonesia well, he says.

“Indonesia is a greedy consumer of China goods. We even coined a relatively new term in vernacular, namely hape cina. Hape is an abbreviation for ‘hand phone’ (mobile phone), and cina of course refers to China. ‘Cina’ here is used rather pejoratively to refer to mobile phones with low-price labels and poorer quality compared to branded mobile phone such as Nokia, Samsung and LG.”

Neither the knowledge economy nor ICT hold out great prospects.

“The country is very weak on this front, and in terms of ‘human capital’ it is far behind Malaysia and Thailand, and now even the Philippines by some key measures, in terms of shifting into services and the like, and ICT,” says Professor Sidel. “The so-called ‘middle income trap’ [where a company gets stuck at a certain income level] is the future I see for the country rather than something brighter.”

However, as in so many countries there is a developing web startup scene, many of them focused on access from mobiles that are more popular access devices than laptops and desktops. Among them: Bornevia, a cloud-based helpdesk outfit; Bilna, a baby products seller; foodie sites like Qraved and DapurMasak; jobs board KerjaDula; and games maker TouchTen.

There are also the usual roadshows designed to bring innovators together and venture funds like Ideosource keen to help local companies grow. Ideosource points to a GDP heading towards US $1 trillion, investment-grade credit ratings and that young, (and majority urban) population. Most notably, Ideosource notes that low levels of digital adoption today leave plenty of headroom for expansion.

Strong growth is also making Indonesia an increasingly attractive hub destination and the technology focus is backed by the Indonesian government’s support for incubation programmes at four universities. Small businesses more generally are assisted through PENSA (Programme for Eastern Indonesian Small and Medium Enterprise Assistance), an effort to educate entrepreneurs and make business growth less bureaucratic. Research and technology minister Dr. Gusti Muhammad Hatta has said that he wants to see Indonesia produce four million entrepreneurs.

Telecoms remains a work in progress in such a fragmented country. Indonesian telcos recently using Batam Island near the coast of Singapore to extend connectivity and there is useful competition in cellular links, leading to about two-thirds of the population having mobiles. Some islands are forced to rely on satellite. Only about 15% of the population have broadband subscriptions but the numbers are close to doubling year on year.

There is also some use of new technologies to solve ancient issues: one project is intended to solve land claims using GPS, helping to preserve hugely important forests and the rights of aboriginal peoples.

Even in tech, however, there are challenges. Few Indonesians aspire to start their own businesses and there is no great tradition of entrepreneurialism. Also, credit-card fraud is through the roof, leading to blacklisting of the country or constraints being applied by some ecommerce sites.

A mixed picture then, in a complex country, but the prospects are intriguing.

 

Learn more about Marketing in Indonesia here.

 

Martin Veitch is Editorial Director at IDG Connect

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Martin Veitch

Martin Veitch is Contributing Editor for IDG Connect

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