Author: Peter McCawley

It is now almost five years since December 2004, when the great tsunami swept across more than a dozen countries in Asia. More than 230, 000 people died across the region. The cost to human life was mainly borne by Indonesia, in Aceh, where perhaps 170, 000 people were swept away. Five years later, the pain is still evident across Aceh. Many thousands of families will forever carry the memory of family members who were lost. The human cost was immense.

There are many lessons to be drawn about disaster relief policies in Asia from the experience of the 2004 tsunami. Below I list eight key lessons that need attention above all others. Read the rest of this entry »

Author: Hal Hill and Chris Manning, ANU

President Susilo Bambang Yudhoyono (universally known as SBY) announced the cabinet for his second five-year term shortly after his inauguration on October 20. Its composition and quality provide one of the best indications of the president’s policy priorities, as well as his political strategy.

SBY’s Democrat Party emerged as the major, though minority, party at the April parliamentary polls, while he had a resounding victory in the July presidential election. He is therefore in a much stronger position than in 2004. In May, he made a surprising choice of Dr Boediono as his vice presidential running mate, a ‘non-politician’, a respected economic policy maker (and also an Australian graduate). Read the rest of this entry »

Author: Peter McCawley

Last Thursday president Obama made his much-awaited speech on United States–Muslim relations at Cairo University in Egypt.

In the words of The Economist, ‘he sought to project an openness to Islam, a sense of shared values, support for Muslim aspirations and a determination to use American power to help fix the problems that most trouble them.’ The speech went well. The Economist’s view was the President ‘used his oratory to superb effect.’

But oratory aside, what messages did President Obama have for Muslim countries beyond the Arab world? Indonesia is the world’s largest Muslim country; what was the significance of president Obama’s speech for Indonesia?

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Author: Chris Manning, Indonesia Project, ANU

It’s all but official, yet still a surprise. Economic analyst, manager and academic, Dr Boediono, the current Central Bank Governor, has been named as President Yudhoyono’s choice of running mate for the first round of Presidential elections in July.

Some nine political parties have been jostling for influence in Indonesia’s emerging political make-up for 2009-2014. Many, especially in the main Muslim parties, would dearly have liked their leader to be selected by the popular President as the ‘CA-WA-PRES’, SBYs Vice Presidential running mate. In return, they would surely pledge their political support.

So why select a technocrat? Is SBY hankering for the bad old Soeharto days, when technocrats proposed and the President decided on policy, seemingly oblivious to social forces around him?

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Author: Ross McLeod, ANU

Some of the world’s most reputable banks have been found to have insufficient capital relative to the risks they were carrying, and are now being taken over and recapitalised by their governments. This raises the question: should Indonesia’s regulations on capital adequacy be strengthened?

The reported average capital adequacy ratio in December 2008 was twice the regulatory minimum of 8%, so a doubling (say) of this minimum would not be a problem for the average bank.

Banks with relatively less capital would be obliged to inject new equity or to cut back their lending. Read the rest of this entry »

Author: Peter McCawley

Hillary Clinton’s visit to Jakarta last week was presented as extremely successful. She said all the right things, and her Indonesian hosts made all the right moves in return. But what do we make of it? Answer: Hard to say, really, because the visit was basically a honeymoon visit. One U.S. blogger even called the visit a “lovefest.”

It is interesting that the Obama Administration decided to have Secretary of State Clinton make Asia the destination of her first international visit.

Three points are worth noting.

First, the symbolism of the order in which the countries are being visited – Japan, then Indonesia, and only then Korea and China – is of some interest. The decision to visit Japan first (something of a contrast with the priorities of the Rudd Government here in Australia a year ago) underlines the key importance of the U.S.-Japan bilateral relationship in bolstering stability in Northeast Asia.

Read the rest of this entry »

Author: Peter McCawley

Imagine my surprise, doing a quick early morning check of the New York Times front page on Tuesday 16 December, to see the word “Indonesia” listed on the NYT’s Op-Ed site.  The world’s largest Moslem country, and the world’s third largest developing nation, is generally invisible in the U.S. media so I immediately followed the link to find out what was going on.  But the article was by an Australian rather than an American commentator.  It was the Lowy Institute’s own Michael Fullilove making a strong pitch for President-elect Obama to choose Indonesia as the site of his promised first Presidential speech at a “major Islamic forum”.

It’s a great idea.  Let’s hope it happens.  But in most countries, a good deal of foreign policy is drawn up to play to domestic audiences.  Sadly the suggestion isn’t likely to take on, is it?  Consider the arguments that Obama’s staffers will likely wheel out against the idea.

Read the rest of this entry »

Guest Author: Gerry van Klinken, KITLV

The promise to do something about corruption was one of the two reasons Indonesians gave an overwhelming mandate to Susilo Bambang Yudhoyono in 2004. The other was security. He ended the war in Aceh, and spectacular arrests by the Corruption Eradication Commission (KPK) have made headlines for years now. He will campaign hard on these successes ahead of the first round of direct voting for president on 6 July 2009. His strongest opponent is expected be Megawati Sukarnoputri, whose party PDIP is in opposition.

Read the rest of this entry »

Author: Ross McLeod, ANU Indonesia Project

Along with the monetary authorities in many other countries, Bank Indonesia and the government are now acting to increase liquidity in the Indonesian economy, in the hope that this will protect against the possibility of a recession.

It would be possible to increase liquidity simply by reducing the quantity of SBIs (central bank certificates) outstanding. Although BI signalled this as a possibility last week (i.e. increasing liquidity through open market operations), more recently it has announced an alternative policy of reducing the minimum reserve requirement, which determines the amount of funds the commercial banks need to place at the central bank. Until now, calculation of minimum reserves has been absurdly complex, depending on both the size of the bank (four different categories) and its loan to deposit ratio (LDR) (six different categories). Theoretically, the ratio of reserves to deposits could be anywhere in the range 5 to 13%. The average level is currently about 9.1%, and BI has announced that the new reserve ratio will be a flat 7.5%, with no adjustment for bank size or LDRs.

Read the rest of this entry »

Author: Peter McCawley, ANU Indonesia Project

Stephen Grenville pushed a piece in the Australian Financial Review last week on one of the most difficult issues of current public policy in Indonesia – corruption. Stephen considered the possibility of tackling corruption with a “big bang” approach but decided that this was impractical.

Stephen notes that the judicial system (and, indeed, much of the rest of the public sector) is “market-based”.  And this, indeed, is surely part of the core problem – that the line between “non-market goods” on one hand, and “market goods” on the other, is blurred in Indonesia and in many other poor countries.  This is an enormously complex problem to which there is no easy answer. Read the rest of this entry »

Author: Ross McLeod, ANU Indonesia Project

Indonesia’s inflation rate is now well over twice as high as the central bank’s target of about five per cent. There are two convenient scapegoats: big increases in both oil and rice prices. But the real explanation, as always, is unduly loose monetary policy.

Such an assertion will seem implausible, perhaps, to most observers. After all, Bank Indonesia has increased interest rates in recent months, which seems to suggest a tightening of monetary policy. That can hardly be denied, but the fact remains that monetary policy still remains quite loose. The best indicator of this is the growth of currency in circulation, which has accelerated significantly over the last several months, and is now running at rates of almost 30% annually. Read the rest of this entry »

Author: Ross McLeod, ANU Indonesia Project

The fourth amendment to Indonesia’s Constitution requires both central and regional governments to allocate at least 20% of their budgetary spending to education. Though it attracted little attention at the time, the absurdity of this amendment is now becoming more apparent. The entirely arbitrary 20% level far exceeds typical levels of expenditure on education in the past, and so this minimum requirement has simply been ignored by central and regional legislatures in the years since the amendment.

Perhaps not surprisingly, a group of teachers has brought a case before the Constitutional Court, asking it to rule on the validity of the central government’s current annual budget, in view of the fact that education spending remains well below the mandated minimum. The court had no choice other than to agree that the current budget violates the amended Constitution, but it was not prepared to go so far as to annul the law in which that budget is contained. Read the rest of this entry »

Author: Ross McLeod, ANU Indonesia Project

It was reported last week that the government intended to continue to maintain ownership of Merpati Nusantara Airlines, even though the airline is losing over US$2.2 million a month on average. Indonesia’s airline industry has been growing at a remarkably rapid rate of around 16% annually during the last several years, and yet Merpati has seen its fleet shrink from 90 planes to just 19, suggesting clearly an inability to compete with new private sector entrants.

This is a good example of the true rationale for privatisation: the desire to increase efficiency in the use of productive resources. State-owned airlines such as Garuda and Merpati were able to survive in the past because the private sector was not permitted to compete with them on an equal footing. Since the airline industry was deregulated several years ago, many new firms have been established, and there has been an explosion of domestic passenger traffic—to the extent that flying has become an attractive alternative to traveling by rail or bus. Indonesia’s taxpayers have every reason to question the logic of keeping companies like Merpati in government hands when it is blindingly obvious that the private sector can do a better job. Read the rest of this entry »

Author: Peter McCawley, ANU Indonesia Project

Although measured levels of poverty have been falling in Indonesia in recent years, mass poverty remains a major public policy issue in Indonesia. And there is much discussion within Indonesia as to the best policies for tackling poverty.

The debate about mass poverty in Indonesia could usefully draw on material in the important “Chronic Poverty Report 2008-09″ released recently. The report (with a helpful summary) is available here.

The main points of the report are very thought-provoking. Read the rest of this entry »

Ross McLeod, ANU Indonesia Project

The rationale for privatisation of state enterprises is not well understood in Indonesia. Most seem to think that the objective is to generate extra revenues for the government, but the government can easily issue more bonds if it needs to generate more funds.

The true economic rationale is in fact the desire to increase the efficiency with which productive resources are used—thus raising national income—and to avoid undesirable redistribution of income, through corrupt practices, in favour of those already well off. Privately owned firms have no scope for shifting funds from the general public to particular individuals, because they do not have the power to impose taxes. And they are almost always better managed than those in the hands of the state, for several reasons.

The first is that they have much stronger incentives for efficient management. If they fail to achieve this, their owners will make losses, and they will respond by replacing the managers. By contrast, the ultimate owners of state enterprises—namely, the general public—are in no position to replace managers, regardless of how bad their performance. Nor do they have any opportunity to divest their ownership in order to avoid future losses.

Read the rest of this entry »