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Inside Asean 

Neo-liberalism a dirty Indonesian word

11 June 2009
By Megawati Wijaya
Asia Times

JAKARTA - Indonesia's presidential election campaign has swung towards economic policy debate, with challengers to incumbent and frontrunner Susilo Bambang Yudhoyono raising questions about his government's commitment to neo-liberal capitalism and offering voters an alternative "people-based economics", known locally as ekonomi kerakyatan.

Hopefuls for the first round of voting on July 8, Jusuf Kalla, the incumbent vice president, and Megawati Sukarnoputri, a former premier, have both taken critical aim at Yudhoyono's neo-liberal credentials, claiming his pro-market policies have cow-towed to Western business interests at the expense of grassroots Indonesians. Should either manage an electoral upset, Indonesia could see a surge in economic nationalism under their leadership.
Kalla's and Megawati's criticism has been mainly motivated by Yudhoyono's surprise decision in mid-May to tap Bank Indonesia governor Boediono, who is not affiliated with any political party, as his vice presidential running mate. A respected technocrat, the Wharton business school-trained Boediono has earned kudos for his handling of the Indonesian economy, both as Yudhoyono's coordinating minister for the economy and as central bank governor, a post he took up in May last year.

As a minister, he oversaw reforms to Indonesia's outdated 1967 Foreign Investment Law that have facilitated greater foreign participation in the economy. The new law, passed in 2007, simplified the former 150-day investment permit process to a one-stop, 30-day registration process, gave stronger and longer property rights to investors, expanded tax incentives, provided greater guarantees against investment expropriation, and allowed for the free repatriation of expatriate capital.

As central bank governor, his monetary easing, including six interest rates cuts since December, has helped to cushion the impact of the global economic meltdown and promoted more spending at home. While Southeast Asia's more export-geared economies tumble towards recession and negative growth, Indonesia's gross domestic product (GDP) expanded 4.4% in the first quarter this year and is expected to grow at 4.5% for all of 2009.

Last week the International Monetary Fund (IMF) revised up Indonesia's projected growth to 3%-4% from its previous 1-2% forecast, a strong foreign endorsement of the economy's management in tough times. Boediono also served as a finance minister in Megawati's administration and was widely credited with restoring macroeconomic and currency stability after the country went spectacularly bust in the wake of the 1997-98 Asian economic crisis.

At the same time, Boediono's selection has sparked political ripples, including a sense of pique among Yudhoyono's committed coalition partners. The Islamist Prosperous Justice Party (PKS), the United Development Party (PPP), and the National Mandate Party (PAN) have all launched attacks on Boediono's selection. Djoko Susilo, deputy chairman of the PAN faction in the House of Representatives, said Boediono's "neo-liberal Western economic perspective" was not suited for Indonesia's economic situation and that PAN is "suspicious of possible American interference behind the decision" to choose Boediono.

Those criticisms have since been echoed by Yudhoyono's election rivals. Golkar party candidate and incumbent vice president Kalla said that Boediono's neo-liberal tendencies, including the sale of national assets to foreigners, could cause the collapse of the Indonesian economy and turn Indonesians into "migrant workers in their own country". Kalla has instead proposed a "people's economy" approach, entailing grassroots involvement in managing the economy, encouragement of traditional markets and providing micro-finance facilities for small- and medium-sized enterprises.

Meanwhile, Megawati and her running mate, former soldier Prabowo Subianto, have likewise jumped on the populist bandwagon, saying if elected they will emphasize improving the livelihood of those at the bottom of the national income scale, including farmers, fishermen, and small traders at traditional markets. They have vowed to achieve double-digit GDP growth of 10% (compared to Yudhoyono's promised 7% and Kalla's 8%) with "minimum foreign loans and investment".

Yudhoyono's team has defended itself against the opposition's politicized charges. At a press conference arranged by Yudhoyono's election team, his supporters boomeranged the neo-liberal slight onto Megawati, who they noted sold the country's top telecommunications company Indosat and offshore tanks of state-owned national oil and gas company Pertamina to foreign investors during her presidency, which spanned from 2001 to 2004. They also highlighted Kalla's big business background and deals he's brokered with big foreign investors.

IMF legacy

The neo-liberal versus pro-people economy debate has its ideological roots in Indonesia's hard-knocks experience during the 1997-98 Asian financial crisis. The onerous conditions attached to the IMF's US$43 billion bailout package remain hugely controversial due to lingering perceptions they favored foreign over local interests.

Those measures included sovereignty eroding demands to privatize state enterprises, liberalize domestic markets to more foreign competition, and implement trade and tariff reforms that were hugely unpopular among the local commercial elite and economic nationalists. Average Indonesians, meanwhile, faced galloping inflation and lower spending power from a sharply depreciated currency.

When Megawati took over the premiership in 2001, she handed the economic reins to Boediono, who served as her finance minister. In a politically risky maneuver, he shunned economic nationalists in parliament and moved forward with the IMF's neo-liberal prescriptions. Ever since Boediono has overseen Indonesia's deepening market reforms, spanning both Megawati's and Yudhoyono's administrations.

He currently serves as the IMF's governor for Indonesia, a position that gives him the power to vote on IMF decisions and responsibilities for implementing the Fund's policies towards Indonesia. While his dual role and potential for conflict of interests has sparked the opposition campaign against his candidacy, the opposition criticism has been misleading, say some economic analysts.

Since former dictator Suharto's tenure, Indonesia's economic policy has always been a mix of market forces and state intervention, where calibration has always been "a fine tuning process", according to Yohannes Eko Riyanto, a lecturer in economics at the National University of Singapore. Yudhoyono has endeavored to accelerate market reforms, including through the rationalization of the banking and telecommunication industries and overhaul of the Foreign Investment Law.

As a member of the World Trade Organization (WTO) and signatory to various free trade agreements, Indonesia is legally required to dismantle tariff barriers and promote free competition across various local industries. Despite the populist posturing, neither Kalla nor Megawati is poised to drag the country back to the protectionist 1960s, when import substitution and infant industry protection were en vogue.

Ikhsan Modjo, executive director of Jakarta-based think-tank Institute for Development of Economics and Finance Indonesia (INDEF), notes that Yudhoyono's government has incorporated various pro-people policies into its economic mix. He points in particular to the government's direct cash assistance program, fuel price subsidies, and programs that have aimed to encourage economic empowerment, job opportunities and financial independence for grassroots villages.

Both Modjo and Riyanto raise red flags about Megawati's and Kalla's call for more so-called people-based economics, including unaddressed questions about how such policies would be implemented and financed. They also note that the personal backgrounds of both presidential aspirants have historically been more pro-business than pro-poor, despite each candidate's best efforts to cast themselves on the hustings as sensitive to the country's large number of people living under the poverty line.

Some analysts and investors raise concerns about the anti-Western sentiment in both Kalla's and Megawati's campaign message. To be sure, many Indonesians still believe the IMF's neo-liberal prescriptions plunged the country deeper into crisis and prolonged the period of economic suffering. The economy whipsawed from positive 7% growth to negative 13% at the height of the 1997-98 meltdown.

"Indonesians do not want to taste the same bitter pill again,'' said former finance minister Rizal Ramli. "It was an economic depression on a scale we had never experienced since independence from Dutch in 1945," he added.

Economic and financial analysts believe Indonesia is better positioned to weather the current global downturn. Analysts note that Yudhoyono was confident enough in the country's fundamentals to refuse an IMF US$2 billion short term lending facility offer to boost the country's flagging currency at the time of the G-20 meeting in Washington last November. On several measures, Indonesia has weathered the current global crisis better than many of its wealthier, more export-oriented regional neighbors, including Singapore, Malaysia and Thailand.

Although the neo-liberal versus pro-people economic debate is largely politicized, they also reflect your average Indonesian's worries about the economic future, say analysts. While economic growth has held up relatively well, due to resilient local markets, local industries such as steel and textiles have repeatedly asked the government to tighten import barriers and encourage "buy local" provisions to help them survive the downturn.

More significantly, the gap between rich and poor has recently widened and Yudhoyono has plainly failed to meet key economic targets set in the beginning of his tenure. Both Yudhoyono and Kalla promised to reduce unemployment, which peaked at 9.9% in 2004, to 5.1% when their term expired. The current unemployment rate still stands at 8.5%. Meanwhile the percentage of people living below the poverty line is stuck at 15.4%, down from 16.7% in 2004, but lagging badly behind their set goal of 8.5%.

Yudhoyono kicked off his campaign for a second term last week by saying that a "just and equitable" economy will be his priority if re-elected. He also introduced a new catchphrase to counter the neo-liberal mudslinging, a policy approach he referred to as the "middle-way" economy. Indonesia will not surrender everything to the free market, he said, but would embrace the efficiencies of a well-functioning market mechanism while ensuring more equitable wealth distribution.

According to opinion polls, Yudhoyono has hit the right economic notes. A recent poll conducted by the Indonesian Survey Institute showed that Yudhoyono's popularity now hovers around 70%. To narrow that gap, Kalla and Megawati are expected to attack his economic record during the three rounds of upcoming presidential debates to be telecast live on national television.

Pollsters and analysts say Indonesians are concerned mainly with bread and butter issues that directly affect their livelihood and are unlikely to be swayed by abstract philosophical debates over neo-liberal and people-based policies. And if the preliminary polls have it right, the election is Yudhoyono's to lose.

"Rather than debating on economic philosophy, the challengers should concentrate on elaborating their own concrete policies to fight the country's most urgent problems: poverty and unemployment," said Modjo.

By Megawati Wijaya

Megawati Wijaya is a Singapore-based journalist. She may be contacted at

(Copyright 2009
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