The idea of Indonesia leading the third world was not only thinkable half a century ago, it even appeared as reality — briefly.

Since that time there has been some attempt at raising Indonesia’s international profile as a leading Muslim nation, and its visibility and global import have increased. But it is not yet a country that other Muslims look to for leadership. Even in its heyday, there was a direct relationship between the respect accorded to Indonesian Muslims by fellow believers of other nationalities and Indonesia’s political significance on the global stage. Interest in, and appreciation of, Indonesian Muslim culture hardly seemed to follow as a result.

Indonesia’s apparent lack of impact on Muslim thought and action is remarkable, as it is the world’s largest Muslim nation, currently numbering 211 million devotees — more than there are Muslim Arabs. South Asian Muslims jointly number 480 million, twice the number of those in South East Asia, and they have had a much more salient impact beyond their own region. Indonesian Muslims, on the other hand, have always appeared eager to borrow from other Muslim cultures — and many Indonesians consider ‘Arab’ Islam as more authoritative than local versions.

But Indonesian Islam boasts a number of unique features which draw the admiration of foreign Muslim observers. The pattern of associational life is one of these. Both Muhammadiyah and Nahdlatul Ulama (NU) have been around for so long they appear to be part of the societal landscape; but nowhere else in the Muslim world do we find anything quite like them. These two associations enjoy strong legitimacy as representatives of broad segments of the Indonesian ummah (Muslim community). In particular, they prevailed as strong embodiments of civil society throughout the 20th century, and have arguably served as a stabilising force in the democratic transformation of the country. Leaders of the organisations have been invited to various international conferences, but, until recently, neither NU nor Muhammadiyah had played a leading role on the world stage. During the past decade, these associations have shown increasing confidence and taken some initiatives to make their mark internationally through initiatives like the International Islamic Scholars Conference, which was first convened in Jakarta in 2004.

Indonesia has also produced some remarkable Muslim thinker-activists: men as diverse as Tan Malaka, Haji Misbach, Agus Salim, Mohammad Natsir, Kartosuwiryo, Nurcholish Madjid, Dawam Rahardjo, Kuntowijoyo and Abdurrahman Wahid. With very few exceptions, none of their writings have been translated into Arabic or English, and so their work has never made the impact in other parts of the world that many would judge it deserves.

There are a number of possible explanations for the lack of interest in Indonesian Muslim thought, none of which is satisfactory. First, Muslim activists in the Middle East are more interested in the demographic and political weight of the Indonesian ummah than its possible contribution to Islamic thought, because of the perception that Indonesian Islam tends to be syncretistic and less than rigorous. Second, it is believed that much Indonesian Muslim writing specifically concerns the Indonesian context, and is not relevant to other nations. This may be true of the earlier writers, but the work of the Muslim intellectuals who flourished under the New Order, and after, would be relevant to many other Muslim societies.

The reluctance of Indonesian Muslims to search the international limelight is remarkable considering their achievements. For example, in the Muslim feminist movement, there is a broad awareness of the special significance and achievements of the Indonesian experience, but like other thinkers, activists and organisers, its leaders never sought international attention, nor thought of spreading their ideas beyond the confines ofIndonesia. It was thinkers and activists elsewhere who ‘discovered’ them, found their work valuable, and made them into role models and major participants in the international networks. 

Indonesia has not regained the position of political leadership it held briefly among Muslim nations, but its visibility has significantly increased since the fall of the Suharto regime, and there is a new confidence among Indonesian leaders urging them to take initiatives in the international arena. Equally, indonesia’s impact on contemporary Muslim thought still remains minimal, especially when compared to other large cultural regions such as Turkey and South Asia. But perhaps this is inherent to much of what is original in Indonesian Muslim discourse — the defence of pluralism, and variety and local colour in the cultural expressions of Islam — as opposed to the homogenising transnational tendencies seen elsewhere.

Martin van Bruinessen is Chair for the Comparative Study of Contemporary Muslim Societies at Utrecht University.

This is an abridged version of a paper presented at the 2011 Indonesia Update, the Australian National University.

1. Indonesia: Islamic courts as governance institutions
2. Aid to Indonesian Islamic schools helps undermine terrorism
3. What’s still wrong with Indonesian democracy

The Indonesian economy continues to surprise with its very healthy growth rate through the period of global financial crisis. The growth rate, driven by consumer spending, investment, and exports, has surpassed most predictions at 6.2 per cent during the second quarter of 2010. Domestic consumption is robust, investment figures are encouraging and exports are expanding at least as fast as global growth. While monetary policy and financial regulatory concerns remain, Indonesia is well-positioned for broad-based economic growth.

Perception indicators increasingly support the view that Indonesia’s economy is on an upswing. The Japan Credit Rating Agency has upgraded Indonesia’s investment grade from BB+ to BBB; the first in 13 years. Other credit rating agencies, including Fitch, Standard and Poor’s and Moody’s, have also upgraded Indonesia’s sovereign rating. Last year Indonesia was the only member of the G20 to lower its public debt-to-GDP ratio: a very positive economic management indicator.

What is responsible for Indonesia’s surprising growth performance?

Prices have been reasonably stable although inflation is still a worry. Even so, the inflation rate in August 2010 was lower than previously estimated, at 0.76 per cent month-on-month, or 6.44 per cent year-on-year. A major factor accounting for Indonesia’s generally higher inflation was the increase in electricity tariffs in July. And here, even though the direct impact of this increase was higher than expected, the indirect impact appears to have been relatively mild so far.  For this reason, the Bank of Indonesia’s decision to keep the policy interest rate at 6.5 per cent for the time being seems sensible.

Meanwhile, Indonesia’s banking sector is in good shape and has successfully weathered the global financial crisis (GFC). It was protected by prudential guidelines and sound banking practices, and is strongly solvent, with contained risk exposure, and solid profitability.  The most recent World Bank and International Monetary Fund assessment of Indonesia’s financial system concluded that it is generally healthy, as demonstrated by its success in recovering quickly from the GFC.

On the trade side, there is good news too. Indonesia’s balance of payments during the second quarter recorded a big surplus of US$ 5.4 billion, $6.6 billion during the first quarter. This was due to the good performance of non-oil and gas sectors, a positive natural gas balance, and a surplus in the capital and financial account due to inflows of FDI and portfolio investment.

More specifically, Indonesia’s exports to the developed nations have not substantially weakened, despite apparent signs of a slowdown in these markets. Indonesia also increased its level of imports, with higher capital goods (machinery, mechanical and electrical appliances, and aircraft) inflows.

Unfortunately, green field investment in manufacturing has not mirrored the performance of other sectors. Foreign direct investment (FDI) amounted to US$ 3.7 billion the second quarter of 2010. Near-zero FDI was directed towards manufacturing.

FDI predominantly flowed into the transport, storage and communication sectors (US$ 1.5 billion); mining (US$ 0.6 billion), trade (US$ 0.4 billion) and electricity, gas, and water supply (US$ 0.3 billion). While this is good, more direct investment into the manufacturing sector would lead to higher employment and a faster reduction in absolute poverty. Government estimates identify $210 billion of infrastructure development over the next 5 years, of with almost $100 billion to be funded by the private sector. Strong foreign investment flows are vital Indonesia’s economic expansion plans.

The IMF and World Bank report identified two major issues that urgently need government attention: protection and support of financial regulators, and weak creditor rights.

The creditor rights issue is seen in the ability of large corporate borrowers to challenge contracts through long and arduous court battles. This in turn leads banks to focus on small and medium-scale (SME) lending. Indonesia is ranked 146 out of 183 countires surveyed in the 2010 Ease of Doing Business Index, with outstanding claims taking 570 days to enforce, for 120 per cent of the claim’s cost.

The financial regulator issue specifically refers to the political decision earlier this year to bail out the corruption-tainted Bank Century (now Bank Mutiara). It culminated in the ‘resignation’ of then Finance Minister Sri Mulyani Indrawati, now a World Bank Managing Director). As a result, the pending adoption of the Financial System Safety Net law, which would clarify the responsibilities of various regulatory agencies, is crucial to achieving greater financial stability.

All in all, Indonesia’s economy is in a solid position. While inflationary and regulatory issues remain, with robust growth of the economy  Indonesia is poised for increased economic and political influence within Southeast Asia.

Thee Kian Wie is a senior economist at the Indonesian Institute of Sciences (LIPI) in Jakarta and will be presenting the Economics Update at the Indonesian Update, to be held at the ANU, September 24-25.

1. Indonesia: Blessed by strong economic growth and the curse of resources
2. The Indonesian economy in 2011: a precarious balance
3. Indonesia to grow at 8%?

Recent years have seen Indonesia achieve significant political reforms with consequent international recognition. A lesser known achievement of the Susilo Bambang Yudhoyono (SBY) administration has been its concerted efforts to reduce poverty and disadvantage.

This quiet revolution has immense significance for future generations, providing a counterweight to Indonesia’s frequent natural disasters and their debilitating effects for the poor. Consequently, the 2010 Indonesia Update conference) takes as its theme ‘Employment, Living Standards and Poverty in Contemporary Indonesia’.

There are big challenges for tackling both the ‘hard core poor’ (those people little touched by development programs), as well as mass poverty. Given per capita incomes of around US$1000, those below the national poverty line (around $1.50 a day) account for around 13-15 per cent of the population. Many more are vulnerable to minor shocks, let alone major disruptions such as the GFC. Nearly half of the population survive below a $2 a day international standard and are likely to remain vulnerable for some time, given less–than-stellar economic growth rates (recently 4-6 per cent p.a.). By contrast, higher growth rates reduced mass poverty significantly under Soeharto.

The task is daunting. Indonesia lags well behind China on a range of welfare indicators. Even countries with lower per capita incomes, such as Vietnam, are now ahead on many basic measures of poverty; Indonesia’s maternal mortality rate of around 300 per 100,000 live births is still amongst the world’s highest.

It is promising then, that innovative, direct approaches to alleviating poverty having their genesis in the Asian Financial Crisis (AFC) of 1998, are being rolled out. Under Soeharto, the main focus was on growth and the national spread of infrastructure, education and health. Crisis management during the AFC sought to deliver free and subsidised food, medicines and school facilities direct to the poor, even if somewhat haphazardly.

These crisis-staving efforts have created a second generation of policies as attention moves to the supply side. The second-generation programs have ensured services are able to meet newly subsidised demand from the poor. They include compensatory cash handouts, and have involved the decentralisation of rural infrastructure and the giving of micro credit to sub-districts throughout the country, under the national community empowerment program. Wasteful free health services and schooling subsidies for the poor have been renovated.

Drawing on international experience (and with some support from international agencies, such as the World Bank and AusAID), Indonesia is now introducing a third phase of ‘conditional’ cash transfers (CCT) aimed especially at hard core poverty. This scheme makes cash handouts to the poorest households (with greater female participation) conditional on their children continuing to participate at school, and also depends upon their making regular use of basic health care services.

While CCT are still in their infancy, they are already in operation in over half of all provinces and a fifth of all districts. CCT are placing greater pressure on habitually recalcitrant district governments, who are now responsible for the bulk of spending. These councils have been forced to allocate more funds for social development.

The central government has further committed 20 per cent of the total budget to education, and has made significant steps forward in participation in secondary schooling, after universal primary attendance had all but been achieved a decade earlier. Both this and the rural infrastructure programs target mass poverty more broadly.

There are some major problems. ‘Leakages’ occur at low but damaging rates. Because of Indonesia’s historically dismal performance in rural infrastructure, cost of delivery and access are high. The quality of services remains a major issue. And the plight of the poor in small island communities, such as Maluku, or in isolated villages in the highlands of Papua, remains deeply problematic. Paradoxically, the province with the highest rate of poverty (over 30 per cent) is resource rich Papua.

A final difficulty relates to ensuring cheap rice in periods of national food scarcity. Such periods are a recurring problem following the AFC. There is a high level of distrust in some political circles of a policy framework that guarantees systematic recourse to imports of rice in times of need. In this context, current trends towards rising global food prices once again augur badly for the poor in Indonesia.

Nevertheless, despite muddle-headedness over the importance of low rice prices for the poor, the new approaches appear broadly successful. Poverty rates declined in almost all provinces for the third year in a row to just over 13 per cent, according to the national yardstick. This is a far greater fall than in earlier in the decade. Targeting has also improved, with programs directed at the poor attaining success rates of frequently over 50 per cent. A concerted effort is now being made to improve program success by establishing a unified database and a national targeting system.

Support from the top is crucial. The recent creation of the National Team for Poverty Reduction chaired by the Vice-President is an indication of the government’s determination. Unlike other hotly contested areas of public policy, there is a widespread consensus to move forward on poverty programs, with strong Presidential support.

Chris Manning is Joint Head of the Indonesia Project at the ANU.

The 28th Indonesia Update Conference on ‘Employment, Living Standards and Poverty in Contemporary Indonesia’ will run on September 24-25 at the ANU.

1. New ideas on chronic poverty for Indonesia
2. Indonesia to grow at 8%?
3. Targeting by social background vs. economic status in anti-poverty programs in rural India

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.

First, the objectives of those involved in the relief effort were disparate. The very large number of different donors involved in the delivery of assistance following the Asian tsunami, as well as other actors such as the media and policy makers, had many differing objectives. The effective delivery of humanitarian emergency relief was one of these objectives, but only one.

Second, the fastest response was usually provided by local communities. The key role that local communities play in providing fast relief needs more recognition; strategies to improve the capacity of local communities to cope in times of disaster should receive high priority.

Third, the overall coordination of the tsunami aid effort was often very difficult. A large number of different agencies was involved. The early establishment of credible national and international agencies with recognized standing can help improve coordination arrangements.

Fourth, responses, and the role played by different actors, varied over time. In planning, it is important to distinguish between the relief, rehabilitation, reconstruction and post-assistance stages.

Fifth, donors often tended to be supply-oriented rather than demand-responsive. Mechanisms are needed to ensure that local communities affected by a natural disaster have adequate opportunities to indicate what they see as their priority needs.

Sixth, the details of arrangements for the provision of international finance were often problematic. The performance of the international donor community sometimes fell below the standards generally expected in the delivery of international aid in terms of speed and scale.

Seventh, Local Dutch Disease effects, reflected in sharp increases in some costs for items in short supply, occurred in some areas after the tsunami. Aid planners should allow for sharp cost increases, particularly in the construction activities, when drawing up assistance programs.

Eighth, assistance following the Asian tsunami was delivered in many different ways. The way in which aid is provided has many implications for, amongst other things, the speed of delivery and effectiveness of the assistance. Donors should consider carefully the best way of providing help; choices include whether the aid should be in cash or in kind, and what form in kind aid might take.

All of these require elaboration and critical comment. Sisira Jayasuriya and I have spent the last six months bringing together a set of studies on the impact of the tsunami, and the large assistance effort that followed the disaster. This book, which will be published in 2010 by Edward Elgar with the support of the ADB Institute in Tokyo, is the first detailed study that we know of about the assistance effort following the tsunami.

This collection of papers on the topic of disaster relief in the Asian region is timely and important for our region given the onset of global climate change and the increase, by association, in the regularity of severe weather events.

1. How to play a ‘responsible great power’ role: China’s post-tsunami assistance to Aceh
2. The political and policy fall-out from the Japanese earthquake and tsunami
3. Natural disasters in Indonesia: Strengthening disaster preparedness

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).

Despite greater success in the polls, however, he has still decided to opt for ‘rainbow cabinet’ with an eye to getting bills passed in the DPR, the lower house of parliament. The new cabinet reflects these compromises. The majority of the 37 portfolios have gone mostly to party people. Overall SBYs grand coalition of Muslim parties received twelve, Golkar three and SBY’s own party seven. The balance has gone to professionals, most notably in the field of economics.

Consistency in economic policy and a clear agenda for policy reform were two stumbling blocks for the previous administration. This time it might be different. Unlike the previous Vice President, Jusuf Kalla, Boediono can be expected to provide greater coherence in economic policy. Working with him will be three highly accomplished women, all with doctorates in economics.

Sri Mulyani Indrawati, an able, tough and outspoken Finance Minister, continues in that position, and is certain to want to continue her wide-ranging reform agenda.

Mari Pangestu, like Boediono an Australian graduate, and the most knowledgeable trade minister in the region, retains her post. One item already on the bilateral agenda is the Australia-Indonesia Free Trade Agreement which Minister Pangestu (who has written widely on the benefits of an open trade regime) is committed to completing. She is likely to strike a tough but reasonable bargain on sensitive issues such as agriculture.

They will be joined by a newcomer, Armida Alisjahbana, as planning minister, who should give that agency a much-needed boost in its main task of coordinating development policies, after several years in the doldrums.

Overall, the economics team is arguably the most highly credentialed in the Asia-Pacific region and signals a commitment to conservative macroeconomic management, an open foreign trade and investment regime and an active role in regional and international forums. Their Australian counterparts will find them to be natural allies on a range of regional and global issues, from the G20 to the East Asian Summit.

Greater consistency in economic policy is also likely to result from the appointment of a special Presidential Unit for Management of Reform (Indonesia’s ‘West Wing’) under the respected Kuntoro Mangkusubroto, former Head of the Aceh Nias Reconstruction Agency.

Two businessmen who join the cabinet as head of the Department of Industry and the Investment Coordinating Board can both be expected to promote the interests of domestic business strongly. But this is unlikely to accompany any significant increase in restrictions on foreign trade or investment.

Other professional appointments have been made to the important ministries of foreign affairs, home affairs, education, health and public works. SBY has dropped some controversial ministers, including the protectionist agriculture minister and the conspiratorial health minister. The removal of both bodes well for greater international cooperation.

The President’s desire for a more activist role for Indonesia in regional and global affairs should be furthered by the appointment of Dr. Marty Natalegawa, as Foreign Minister. Dr. Natalegawa is an eloquent and internationally respected former Head of the Indonesian Delegation to the United Nations (and also an Australian graduate).

This has been a very good year for Indonesia. A decade ago, the economy was on the ropes, there was nasty ethnic conflict, and the possibility of territorial disintegration could not be discounted. Twelve months ago there was great uncertainty, both about the effects of the global financial crisis and the conduct and outcome of the parliamentary and presidential elections. In the event, the former has had a surprisingly mild effect while the latter went off smoothly. In the economic field, at least, SBY’s new cabinet can be expected to consolidate these gains. It would be a pity if the Australian media focus on boat people and Balibo distracted our attention from these hugely important developments.

Hal Hill and Chris Manning are economists with the ANU’s Indonesia Project.

This article first appeared in the Australian Financial Review.

1. Indonesian President Yudhoyono’s second term cabinet
2. Indonesia’s new cabinet: reshuffling the problem
3. Indonesia: cautious optimism

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?

First, it is too early to tell, of course, but it is possible that the speech will come to be seen as a landmark speech for Obama. Quite a few speeches by presidents, princes and kings are pro forma events which recycle bland messages. Not the Cairo speech. The address is very substantial both in length (55 minutes in delivery) and in content. All of the indications are that Obama himself put a lot of work into preparing the speech and felt a high degree of ownership of it. The speech should thus be seen as an important statement of the president’s own views on how the United States should work with Muslim countries.

Second, the overall tone of the speech marks a very sharp change in direction from the hectoring stance too often evident during the Bush administration. The word ‘terrorism’, for example, does not occur once in the entire speech of 6,000 words. Moreover, Obama and his speechwriters have obviously worked very hard to reach out to many different groups. The address is full of symbolic and carefully crafted references to different religions, different groups, and different interests (including, of course, to interests back home in the US).

Third, the speech is really a series of observations on seven distinct sub-topics. And the attention devoted to each sub-topic varies significantly as well: violent extremism (about 900 words); relations between Israelis, Palestinians and the Arab world (1030 words); nuclear weapons and Iran (330 words); democracy (370 words); religious freedom (340 words); women’s rights (240 words); and development and opportunity (550 words).

But fourth, it needs to be recognised that President Obama was really talking just as much about America’s problems in the Middle East as about Muslim issues in other countries. Meidyatama Suryodiningrat, writing in The Jakarta Post in a comment headed ‘Obama speaks to the Arabs, not the Muslim world’ says that the address ‘felt more like a call to the Arab world which represents 20 percent of the world’s 1.2 billion Muslims, than the Muslim world in general.’ Suryodiningrat argues that the presentation in Cairo ‘was a confusion of Arabism with Islam’ and contained ‘the dangerous mixing of politics and religion.’

And, furthermore, only some of the seven topics have resonance for Muslim countries like Indonesia. As Suryodiningrat notes, ‘At least three – democracy promotion, religious freedom and women’s rights – of his seven points are more relevant to a region whose governments are bastions of despotism than the average Indonesian.’

So whilst the Cairo address is a quite remarkable attempt by President Obama to reach out to the Muslim world, the messages it conveys are of more relevance to Arab Muslim countries than to Muslim countries elsewhere. But in one symbolic sense at least, the speech is certainly important for Indonesia: Obama takes time to single Indonesia out for specific mention four times in his address, carefully noting his own personal links with the country! This must surely be the first time in many decades that any US president has given such attention to Indonesia on the global stage. This is a welcome acknowledgement by Obama of Indonesia’s place within the broader Muslim world.

1. Indonesia and Obama: thinking past the honeymoon period
2. President Obama to speak in Indonesia?
3. Indonesia’s Obama, Washington’s Indonesia

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?

The announcement has come after several weeks of intense speculation as to who would be chosen by SBY. Although the Democrats are expected to be the largest party in the new parliament, they will hold only around one quarter of all seats. SBY will need the support of several minor parties to govern effectively.

Why then select a seeming rank outsider to the political game, who might seem to offer little in terms of bolstering the stocks of the President in the parliament?

An obvious answer might be that it’s the economy, stupid. SBY expects the Indonesian people to find comfort in the selection of a highly regarded and experienced manager as their Vice President, in the context of the global economic crisis. Boediono could thus be expected to bolster SBY’s popularity in the Presidential race at a time of uncertainty, even if he contributed little to shoring up political support in the parliament.

Such an interpretation would suggest that SBY is thinking more about the short term advantage, rather than winning the longer term battle of pushing reform through the legislature.

But there is a catch. The Indonesian economy has been doing remarkably well, amidst the tumbling fortunes of its neighbours. Prices have actually fallen, including those of important staples, for several months in 2009. SBYs popularity is high precisely because of the seeming economic success of government policies (and a little bit of luck). One can also point to the impact that Boediono’s calm and steady leadership of Bank Indonesia has had on confidence in financial markets, during a difficult time.

So why change a winning formula? Perhaps the answer to the puzzle lies in two other key areas, rather than in the economic credentials that Boediono brings to the Presidential ticket. The first relates to the role that the current Vice President, Jusuf Kalla, has had in policy making, and his relationship with SBY in the past five years.

While Kalla was often seen to be given a free reign in pushing key economic policy decisions (such as the oil price hike in 2005), his impetuous, can-do style, fashioned from years of experience as a businessman, is said to have grated with the President.

Further, not infrequently SBY was forced to share the limelight with his Vice President. And there was always a sense that the Vice President was ready to cut corners to get the job done, sometimes undermining the carefully crafted image of rules-based government projected by SBY.

Boediono could be expected to offer equally valuable advice on the economy. But he is likely to do so in a more measured fashion and away from the cameras, as he did for several years as the Economics Coordinating Minister. As many have been quick to point out, he has shown no sign of political ambition, which cannot be said of many other potential contenders for the Vice Presidency. And he is pronounced by all to be squeaky clean.

It is also worth pointing out that although Boediono is not a politician, he certainly does not appear politically naïve. He has laboured hard in selling the government’s economic policies to cocky and often self interested parliamentarians, since his elevation to Finance Minister in the Megawati government in 2001.

Second, selection of Vice-Presidential candidate from any one of the Muslim parties risked alienating the others. Representatives of all the Muslim parties (and especially those of PKS and PAN) have mouthed their disapproval of Boediono’s selection, rather than a choice of one of their own candidates. Nonetheless, if another Muslim party candidate had been chosen by SBY, one senses the disenchantment of the others would have been much deeper and politically harmful to the President’s would-be coalition with the Muslim parties. The case is different for a politically neutral candidate. It is less likely that any of the parties will risk being sidelined simply because their leader was passed over by SBY in his choice of a running mate.

Time will tell, in politics as well as in policy, whether the President has made the right choice. Selecting a reliable lieutenant with a similar cautious bent, another Javanese, might seem to go against the grain in Indonesian politics. But if he is elected for a final term, perhaps having a soul mate in the Palace will give SBY more leeway and greater confidence to take stronger stands on big policy issues, both nationally and internationally, in his second and last term in office.

Of course, he still has to be elected. But at the time of writing few political pundits are betting on the opposition teams.

Dr Boediono was a strong supporter of the establishment of EABER and launched it in Bandung Indonesia in 2005 when he was Minister for Coordinating Economic Affairs.

This article was originally published on ANU’s Indonesia Project blog, and may be found here.

1. Boediono, a safe and prudent choice as Indonesia’s VP
2. Indonesian politics: prospects for the coming presidential election
3. Indonesia’s new cabinet: A boost for economic policy and reform

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. This would be entirely appropriate in current circumstances. Encouraging relatively weak banks to expand their portfolios is a risk not worth taking at this time of global financial crisis, notwithstanding the need to stimulate private spending.

Already one small bank has failed, so the authorities also need to be prepared if they should be confronted with a bank run. One alternative to the mooted blanket guarantee of bank liabilities would be immediately to freeze the operations of any bank facing large-scale withdrawals, and to appoint an independent temporary management team. This team would undertake a quick, conservative estimate of the value of the bank’s assets, and if this was less than its liabilities the shareholders would be required to inject new equity without delay.

Failure to do so would result in the issue of new shares to depositors and other creditors in return for a debt ‘haircut’—a write-down of the value of their exposure to the bank—sufficiently large to restore capital to an acceptable level. This would allow banks’ solvency to be restored immediately, thus removing the cause of the run. Accumulated losses up to that time would be borne by bank shareholders and creditors rather than ‘innocent bystanders’—the general public—as would be the case with a government guarantee.

This post is a digest of the APEC Economies Newsletter for March 2009, which may be found here [.pdf].

Ross McLeod is Associate Professor, Research School of Pacific and Asian Studies, ANU and Editor of the Bulletin of Indonesian Economic Studies.

1. A post-GFC international framework for finance and banking
2. Monetary policy running off the rails in Indonesia
3. Is China a military threat to Australia? The Babbage fallacies

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.

Second, it is notable that Clinton took the trouble to make a 6,000 km detour to the south across the equator to visit Indonesia next. Exactly why the visit to Indonesia was given this priority is hard to say. The other three countries are all conveniently located close to each other so clearly a judgement was made that it was symbolically important to travel to Southeast Asia. U.S. Indonesia-watcher Lex Rieffel remarked last week that ‘the agenda for Jakarta is harder to bring into focus’ than the topics to be addressed in Northeast Asia.

Rieffel suggested that issues of regional architecture need attention, particularly the U.S. role in ASEAN and Indonesia’s role in the G-20. As Rieffel sees it, ‘ASEAN is at the centre of Asia-wide regional cooperation’ while ‘for many Asians, the Pacific-oriented APEC forum is a Cold War relic that stands in the way of a more mature relationship between the United States and Asia.’

Third, the U.S.-Indonesia bilateral relationship is a tricky one. Both sides are keen to have good relations. However, priorities on each side differ markedly. The relationship is essentially a North-South one. During her visit to Indonesia, Secretary Clinton emphasised northern topics such as support for democracy, human rights, and environmental issues. On the Indonesian side, interests reflect Indonesia’s strong links with the Muslim world and with resource transfers from the North. U.S. policy in the Middle East is of much concern to Indonesia as is the likely impact of the global financial crisis. Indonesian policy makers are currently working to put together a $US5 billion line of international credit for Indonesia to draw on if needed. The matter was apparently raised by the Indonesian side during the Clinton visit.

The Clinton visit was seen as very successful on both sides. But the visit was just the first step in the U.S.-Indonesian bilateral relationship in a post-Bush world.

1. Anticipating Obama’s visit to Indonesia and Australia
2. US gives a long overdue nod to Indonesia
3. Obama’s visit to Indonesia and Australia and the TPP

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.

First, given the importance of Middle East issues on the domestic American stage, it would not be well-received in the U.S. for President Obama to go wandering off to some strange and distant land in Southeast Asia to talk about key Islamic issues.  The hardheads in Washington would quickly argue that the new and inexperienced President clearly doesn’t know what the globe looks like.

Second, there’s the personal angle. Precisely because Obama went to school in Jakarta until he was ten he is vulnerable to the charge that he is soft on Indonesia.  Critics would say that just when he should be building a new image of America across the world, he reveals his true priorities by taking time off to visit the relatives back home.  Kevin Rudd can earn lots of marks speaking Chinese but the last thing that Barack Obama can afford to do is be heard speaking Indonesian anywhere near an American microphone.

Weighing it up, the chances are that President Obama can’t afford to take the risk of visiting Southeast Asia too early into his presidency.

1. Indonesia and Obama: thinking past the honeymoon period
2. Obama, Islam, and Indonesia
3. Obama and Indonesia-US relations