Indonesians have reason to be both optimistic and pessimistic coming into 2012. The question is: which outlook is more likely to prevail?

In his New Year message, President Susilo Bambang Yudhoyono (SBY) requested that all Indonesians work to maintain order. Acknowledging that the country’s political landscape is becoming more heated due to the upcoming general election — scheduled for 2014 — SBY urged Indonesia’s political parties and politicians not to inflame tensions.

Yet, problems in Indonesia are mounting. Hoping not to have more heated situations is not enough; the President is expected to do more. In 2011, many persistent problems were not dealt with, and corruption is still the biggest challenge in the country. Though Indonesia’s rating in Transparency International’s Corruption Perception Index improved slightly from 2.8 in 2010 to 3.0 in 2011, deep problems remain. Junior bureaucrats were found to possess billions of rupiahs in their savings accounts; wealth which is largely incompatible with their standard salaries. The wife of a former deputy police chief facilitated billions of rupiahs worth of grafts for members of Indonesia’s House of Representatives (DPR). And the head of a public elementary school stole huge amounts of public money which was supposed to be used for the school.

Mahfud M.D., the chairman of Indonesia’s Constitutional Court, in December 2011 noted that many state institutions appear to have been ‘contaminated’ by corruption viruses. Out of the several judicial authorities dealing with anti-corruption legal actions — the National Police, the Attorney General’s Office and the Corruption Eradication Commission — only the latter stands strong, even though it is also under attack by many lawmakers, who wish to weaken it.

In 2012, Indonesia should look to its neighbours, including Singapore and Australia, in its effort to deal with corruption. Indonesia should not feel awkward about learning from other countries. It is better to ‘lower’ the country’s dignity for some time in order to subsequently reach a more dignified status.

Human rights also demand greater attention, particularly after the recent bloody clashes involving citizens, corporations and police authorities. State authorities have been found guilty of human rights abuses in some recent cases, such that national and international attention remains focused on Indonesia. Some progress has been made, with reforms instituted since 1998 increasing the freedom of the press, and the public have also become more critical of human rights abuses perpetrated by the authorities.

This year may also see a possible breakout among the governing coalition parties, with the potential to shake the foundations of SBY’s government. This could be sparked by the Bank Century saga — the bank for which Indonesia’s previous government authorised a large bailout. Even though Indonesia survived the financial crisis — due perhaps to its bailout policy — some politicians in the DPR remain committed to prosecuting the policy makers responsible for the move, of whom are members of the current government. Interestingly, the strongest critics of the policy are members of the Golkar Party and Prosperous Justice Party, which are both members of the governing coalition. Either way, Indonesian politics will undoubtedly become more heated in 2012. Even though the next general election is two and a half years away, campaigning has already started. Some parties have announced their presidential candidates, whereas others are still in a wait-and-see mode.

Internationally, 2012 will be less hectic than 2011, with Cambodia chairing ASEAN after Indonesia’s stint last year. Another issue that may prove difficult for policy makers is the protection of Indonesian migrant workers abroad. Last year, an Indonesian citizen was beheaded by Saudi authorities, to strong public criticism in Indonesia. The government must nevertheless be commended for its ability to save a number of other workers through its diplomatic missions in Riyadh and Jeddah. But others are still waiting to face court proceedings, with many confronting potential death penalties.

One positive from December 2011 was an increase in Indonesia’s sovereign credit rating. Fitch Ratings increased Indonesia’s ranking from BB+ to BBB- with a stable outlook. The upgrade should provide for increased foreign investment, which in the future can create more jobs. This opportunity shall not be missed or wasted, but it is up to Indonesia’s elites to determine the country’s longer-term direction. Indonesia can move forward, or embrace the status quo. But it is also possible to go backward if care is not taken.

Yasmi Adriansyah is a PhD student at the School of Politics and International Relations, the Australian National University, and Executive Director of Projecting Indonesia. 

1. Markets and corruption in Indonesia
2. Indonesia’s struggle with reform
3. Asia’s mixed outlook for 2012

Indonesia’s economic growth remained strong in 2011 despite continued turmoil in the international financial markets, due to the euro crisis, and weakened global growth.

Significantly, this slow down also affected China, which has become one of Indonesia’s major export markets, but Jakarta was able to see off this risk. In the third quarter of 2011 economic growth reached 6.5 per cent year-on-year for the third consecutive quarter, mainly supported by strong private consumption and exports (although exports were slightly down from the second quarter).

For this reason the Indonesian economy remains relatively well positioned to weather future external shocks, although the World Bank has lowered its 2012 growth forecast for Indonesia to 6.2 per cent — slightly lower than its forecast of 6.3 per cent in October. Still, the growth forecast for 2011 has remained unchanged at 6.4 per cent.

A freezing up of the international financial markets or a severe prolonged global slow down could adversely affect portfolio inflows, the prices of Indonesia’s primary commodity exports, and domestic and external demand. Although so far the impact of weakening global activity on the Indonesian economy is relatively limited, there have been some portfolio outflows. FDI inflows also declined in the third quarter, although they are still higher than the country’s average inflows over the past two years.

Indonesia’s current account maintained its positive importance in the third quarter of 2011 with a small surplus of US$0.2 billion — but this current account surplus was inadequate to cover the capital and financial account’s deficit of US$3.4 billion. As a result, Indonesia’s overall balance of payments posted a US$4 billion deficit, which reduced the country’s foreign exchange reserves to US$114.5 billion by the end of the third quarter of 2011. This is sufficient for 6.6 months of imports and official external debt service payments. But Indonesia’s balance of payments is forecast to regain a surplus for the whole of 2011, which will continue into 2012, supported by an increasing surplus in the capital and financial account due to strong portfolio and FDI inflows.

During the past year inflationary pressures have also tended to decline in line with global commodity prices. The declining price of gold and the adequate supply of food — due to increased production and imports, better distribution, and lower inflationary expectations — have been instrumental in this process.

In affirmation of Indonesia’s continued economic progress, the Fitch Ratings Agency has recently upgraded Indonesia’s long-term and local currency ratings to ‘investment grade’, a move that will further boost Indonesia’s standing among global investors. To this end, the Indonesian government has worked hard to ensure macro-economic stability. It is crucial that the government continues its reform program and strengthens its macroeconomic fundamentals.

But despite continued growth rates, Indonesia’s growth strategy has not achieved ‘welfare’ in the broad sense of the word. While estimates by the Central Agency of Statistics show that the number of poor people declined to 12.5 per cent of the population in 2011 (or a little more than 30 million people), many in Indonesia are still poor. This is clear from the large number of beggars in the cities, and the amount of workers in the informal sectors — which account for about two-thirds of Indonesia’s total labour force of more than 100 million people.

There is also the fact that males and young male graduates respectively have much better access to education and employment than their female counterparts. Access for the rural poor to basic health care in their villages is also limited or inadequate, if it exists at all. Clean air and water and the protection of biodiversity are inadequate, and similarly for anti-corruption measures. Indonesia’s struggle against the vested interests of the economic elite, which often distorts or adversely influences government policies, is generally ineffective or unsuccessful.

Indonesia’s rapid population growth of 1.5 per cent — in a country of more than 240 million people — also adversely affects quality of life. This is, among other issues, reflected by the UNDP’s recently published Human Development Index, which ranks Indonesiaat number 124 among the 187 listed countries — lower than Bosnia at number 74, or even Palestine at number 114. So in addition to pushing economic growth to higher levels, in 2012 the Indonesian government should prioritise Indonesia’s social development to enhance the quality of economic growth.

Thee Kian Wie is a Senior Economist at the Indonesian Institute of Sciences (LIPI), Jakarta.

This is part of a special feature: 2011 in review and the year ahead.

1. Confidence in Indonesian economy
2. Indonesia: Blessed by strong economic growth and the curse of resources
3. Indonesia’s economy continues to surprise

Agreements achieved in the early morning of 11 December in Durban, South Africa appeared to salvage the UN climate talks — but have also raised questions about the commitment and capability of countries around the world to urgently tackling climate change.

After two weeks of difficult negotiations, governments involved in the 17th session of the Conference of Parties (COP-17) agreed to extend the Kyoto Protocol and negotiate a binding agreement for all countries to cut greenhouse gas (GHG) emissions.

These agreements, known as the ‘Durban Platform’, also include the implementation of the Green Climate Fund, the establishment of an Adaptation Committee, and the further development of REDD+ (helping to reduce emissions from deforestation and forest degradation).

But the results of Durban’s climate negotiations need to be cautiously analysed, since they could potentially have different implications for the planet generally and developing countries like Indonesia more specifically. Whether Durban resulted in decisions which clearly translate into global action to cut GHG emissions — and to financially and technologically support mitigation and adaptation in developing countries — is crucial to Indonesia.

Developing countries in Durban, for instance, managed to have developed countries agree to the inclusion of a second commitment period of the Kyoto Protocol, which will commence in January 2013, as part of the Durban Platform. This will avoid a gap at the end of the Protocol’s first commitment period, ending in 2012. But the Protocol, having set binding targets for 37 developed countries to reduce GHG emissions to 5 per cent below 1990 levels by 2012, may lose its significance in the second period since some countries like Canada, Japan and Russia are reportedly unwilling to take part. And with the US still opting out, the Protocol will likely only achieve small reductions in GHG emissions.

The Durban Platform also included a roadmap to negotiate a new global treaty covering all countries to reduce GHG emissions. Negotiations for this treaty are expected to conclude by 2015, and the treaty will come into force from 2020. But many climate analysts are not convinced by the direction of this particular agreement. Although covering both developed and developing countries, including Indonesia, the projected emissions resulting from this treaty — based on the current pledges made by these countries since Copenhagen COP-15 in 2009 — may lead to a global average temperature rise of more than 3.5 degrees Celsius. This means that the future of people all around the world, and particularly in vulnerable countries like Indonesia, is at stake.

Consequently, new commitments and action to address the ‘emissions gap’ are needed, so the planned treaty can effectively tackle climate change. By the end of Durban, there were no new pledges for stronger emissions reductions. Additionally, waiting until 2020 for the treaty to take effect may be too late; there is a huge risk that the limit of emissions in the atmosphere will already have been reached, such that actions to stabilise the climate will be next to impossible and too expensive.

A formal structure for the Green Climate Fund — and a work plan by which it will operate, mobilising funds from both private and public sources — was also included in the Durban Platform. A number of countries signalled their readiness to contribute to the fund, but realising their promises may prove daunting — especially in the wake of the global financial crisis. This situation has left many unanswered questions for developing countries, since the fund was created to support policies and actions aimed at addressing climate change in these states.

Also, the negotiations on finance, specifically for the Green Climate Fund, have not resulted in the establishment of a specific funding window for REDD+ at the global level. If agreed to, this would provide significant support for tropical-forest nations, including Indonesia, to further develop their REDD+ programs at national and local levels. Significantly, Durban did produce an agreement exploring a variety of financial sources — ranging from public and private finance to market mechanisms — which could lead to financial support for REDD+. This agreement could not only open the door for new and long-term investments in REDD+, but also help ensure the future of investments already in place. But the rules pertaining to safeguards in the REDD+ decision appear to be weak, especially when it comes to rules on protecting indigenous communities and biodiversity. This may undermine the credibility of REDD+ and make it unattractive to investors.

Another positive decision reached in Durban, especially for vulnerable countries like Indonesia, is the establishment of the Adaptation Committee, which will coordinate adaptation activities on a global scale.

Overall, the Durban climate talks have provided mixed results for developing countries like Indonesia. There was some marginal progress, but huge questions remain. Political promises and weak agreements will hardly reduce GHG emissions. Only strong decisions and real action can demonstrate the level of seriousness in addressing climate change. It is therefore imperative that Indonesia continues to work hard, unilaterally and with other countries, on climate change mitigation and adaptation. Without this, the nation’s survival and the fate of the planet looks uncertain and grim.

Fitrian Ardiansyah is a PhD student at the Australian National University, and the recipient of the Australian Leadership Award and Allison Sudradjat Award.

A version of this article first appeared here in the Jakarta Post.

1. Measuring the success of Indonesia’s involvement in Durban
2. Durban: where success will mean the avoidance of failure
3. Climate change: Where are we at globally now?

The slow resolution of the European debt crisis has evolved into a liquidity problem which threatens the global financial system.

And these long-drawn-out efforts to address the sovereign debt problems have heightened uncertainties about resolving the crisis and induced speculative activities, threatening the survival of many European banks. In an effort to contain financial disaster, central banks of the world’s major economies have taken a concerted emergency action to provide cheaper dollar funding to these troubled banks at the end of November 2011. Further, the President of the European Central Bank (ECB) recently pledged readiness to act more aggressively in averting a deeper financial crisis.

This serious threat of financial crisis is not new to the global economy. Triggered by different factors, the world has observed two similar crises within the last decade; the burst of the dotcom bubble in the early 2000s and the beginning phase of the global financial crisis through 2007 and 2008, which culminated in the bankruptcy of Lehman Brothers and the freezing up of global finance. In both cases, aggressive policy easing took place in the leading industrial economies, sending real interest rates to a very low level.

The current situation inEurope may still lead to a global economic slowdown if the debt problems are not resolved, propelling the global financial system into another deep crisis comparable to that of 2008. The policy reaction this time should not be much different from 2008. At the very least, the ECB and central banks should relieve pressure on banks and the financial sector by cutting interest rates further to ensure that affordable liquidity is available for the financial sector. As observed in both the burst of the dotcom bubble and the global financial crisis, such action would result in a low international interest rate environment.

Given the integrated global financial system, any such shock would have implications for small, open economies elsewhere. For emerging ASEAN economies (Indonesia, Malaysia, the Philippines and Thailand), the two episodes of internationally originated financial shocks in the past decade seem to have insignificant effects unless coupled with a global recession that pushed their domestic output down at the same time. To better understand the effects of adverse international financial shocks, however, it is useful to isolate these shocks and analyse their impact on the macroeconomic performance of these economies. This type of structural analysis typically suggests the shock’s effects on inflation and output tend to be largely similar and relatively small. An isolated negative shock in international interest rates would tip the ASEAN economies toward an environment with lower inflation and higher output volatility, albeit generally small in magnitude.

Although small, the impacts of purely international financial shocks on ASEAN economies tend to be long lasting, with implications for the management of future macroeconomic stability. It seems the larger the size of the international financial shock, the greater the consequences of maintaining future economic stability for ASEAN countries.

How should emerging ASEAN economies react to an isolated adverse international financial shock? Typically, to counter a drop in the international interest rates, a country may reduce its domestic interest rate. This discretionary policy action may counter the short-run inflation effects from the international financial shock, but would aggravate the short-run impact on the country’s output gap at the same time. Consequently, the country would end up facing greater volatility in its domestic output. In this way, the cure may worsen the illness. Discretionary monetary policy action may only be sensible when the global financial shock is accompanied by a global recession that also reduces domestic output at the same time. In this case, the cure will have the desired short-run impact of limiting the global shock’s effect on both domestic inflation and output.

Yet, confronted with the external shock’s long-lasting effects, the short-lived domestic interest rate shock will only work for containing short-run volatility implications and will leave domestic policy makers with a hanging problem of managing volatility in the medium to longer term. In this regard, efforts to manage the domestic economic implications of a single, large shock in the international financial system would entail not just a simple short-run policy response in emerging ASEAN countries, but more complicated adjustments to their overall economic structure.

To deal with the effect of an adverse international financial shock, individual authorities in emerging ASEAN economies should opt for policies which provide longer-term structural adjustment to their economy. To this end, emerging ASEAN authorities should support the current efforts to restructure the global financial system in order to reduce future risks of more volatility. In addition, the similar pattern of effects on emerging ASEAN countries highlights the need for enhanced policy coordination and cooperation among these countries to better deal with such disturbances.

Arief Ramayandi is an Economist at the Asian Development Bank. The views are solely of the author’s and do not necessarily reflect the views or policies of the Asian Development Bank.

1. ASEAN economies on the slide?
2. An Asian perspective on financial crises
3. An Asian response to international financial reforms

The global climate change negotiations — underway from 28 November to 9 December in Durban, South Africa — have people asking once again whether countries around the world will agree on solutions to tackle climate change.

It is also an appropriate event to assess the involvement of developing countries like Indonesia, and particularly to understand whether their involvement in this UN climate conference will significantly contribute to a successful outcome.

Durban, hosting the 17th session of the Conference of Parties to the UN Framework Convention on Climate Change (UNFCCC), will certainly pick up from where last year’s UN climate change negotiations in Cancún, Mexico, and the subsequent inter-sessional meetings left off.

But now the central challenge is to see whether governments involved in Durban will build on the progress achieved in Cancún or withdraw from this promising path and allow short-term national interests to shroud the negotiations. The Cancún Agreements form the basis of the largest collective effort to reduce greenhouse gas (GHG) emissions to date, with national plans formulated under the banner of the UNFCCC, thus helping ensure accountability.

The package encompasses finance (with the Green Climate Fund and fast-start financing), the Cancún Adaptation Framework, a Technology Mechanism (to support action on mitigation and adaptation, and facilitate low-emission economies) and a formal incorporation of REDD+ (stating clearly that the framework to address deforestation is not only about reducing emissions but also halting and reversing forest loss). It is critical that governments involved in the negotiations, especially Indonesia, lock in the progress of the Cancún Agreements and push for their implementation.

Indonesia, as a resource-rich country striving to develop its economy, alleviate poverty and deal with climate change, has a lot at stake through its involvement in these climate change negotiations. For instance, it is critical to Jakarta that further implementation of the Cancún Adaptation Framework is negotiated. Ensuring the establishment of the Adaptation Committee is the first step toward this. The committee’s establishment will send a strong signal to vulnerable countries affected by climate change, including Indonesia, that governments around the world are serious about helping these countries confront the impacts of climate change.

Indonesia also needs to work hard with other parties to negotiate the realisation of fast-start finance and the Green Climate Fund. The former incorporates pledges made by developed countries to mobilise new and additional resources, amounting to US$30 billion for the period 2010–2012, to help mitigation and adaptation in developing countries. The Green Climate Fund will support projects, programs, policies and other activities in developing countries, using thematic funding windows. But with a number of developed countries facing short-term financial challenges, negotiations on finance are likely to be difficult. Specific to the Green Climate Fund, Indonesia must work together with other tropical-forest nations and like-minded countries to lobby for a special window for REDD+ under this fund.

Tropical-forest nations such as Indonesia have already piloted REDD+. The Indonesian government has produced several policies and strategies to guide its development and implementation, including the introduction of a moratorium on new permits to convert forests and peatlands to other land uses. But this may not be sufficient. Tackling deforestation involves different actors, sectors and layers of governments. These entities are known to have competing interests over land use. Without the provision of clear incentives, it is a Herculean task to persuade these actors to change the patterns of land use in Indonesia. A special window of funding for REDD+ at a global level would certainly provide more than a moral boost for tropical-forest nations to advance their REDD+ development at a national level and on the ground.

Adding to already tough negotiations on finance, Indonesia and other developing countries must also remind parties at the Durban conference about the importance of identifying sources of long-term finance, which are needed to cut GHG emissions and support the adaptation efforts of vulnerable countries. Climate change is going to be a long-term phenomenon and countries like Indonesia will suffer if mitigation and adaptation efforts are formulated only with a short time frame in mind.

And with the need for long-term commitment and action on climate change, Durban is crucial to producing an agreement — or at least a convincing direction — toward a second commitment period for the Kyoto Protocol. This is especially urgent as the Protocol’s first commitment period — which regulates developed countries’ commitment to cutting their GHG emissions — will end in 2012. The agreement on a second commitment period to the Kyoto Protocol will also help persuade big emerging economies and other countries to set out a clear mandate for a comprehensive and legally binding agreement.

In Durban, the climate talks are at a crossroads. Governments, including that of Indonesia, and other parties have a long road ahead if they are to demonstrate their seriousness about addressing dangerous climate change. The costs of climate change — socially, environmentally and economically — are high. A delay to act will prove ruinous. Indonesia’s delegation has no choice but to commit to continuous hard work and provide real leadership to guarantee a successful outcome in Durban’s climate negotiations.

Fitrian Ardiansyah is a PhD candidate at the Australian National University and the recipient of the Australian Leadership Award and Allison Sudradjat Award.

1. Durban climate talks bring mixed results for Indonesia
2. Durban: where success will mean the avoidance of failure
3. Cancun COP16: A ‘six-pack’ for long-term cooperative action

In the aftermath of the Arab Spring, commentators on East Asia Forum have highlighted the moderate character of Southeast Asian Islam.

Bahrawi argues that contested interpretations of Islam are democratising Islam in Southeast Asia — but similar contests seem to be ineffective in countries like Pakistan. And van Bruinessen argues that large, resilient Islamic organisations are stabilising Indonesian democracy — but comparable organisations are failing to play such a role in other Islamic countries. So are local factors playing a bigger role in Southeast Asia than is usually suspected? Islamic countries in Southeast Asia can be treated as valid role models for other Muslim countries only if non-local factors can explain the existence of moderate Islam in Southeast Asia.

There are six major Muslim communities outside the Arab world: the immigrant Muslim communities in the West, Persian, Southeast Asian, South Asian, Sub-Saharan, and Turkic Muslim communities.

Since the 19th century, Arab Islam has claimed moderate Islam in northern and western parts of South Asia. But Islam in rest of South Asia continues to be moderate so that we can still speak of an Eastern Islam to refer to Islam in both Southeast Asia and parts of South Asia. Sub-Saharan Muslims are rarely taken seriously on ideological issues, and moderates within immigrant communities in the West are often denounced as sell-outs.

This leaves just four potential role models within the Islamic world — Arab, Persian, Turkic and Eastern Muslims, which can be further classified into two broad groups: those who use Arabic language and/or script for daily communication and those who do not. So far only the latter have proven to be largely moderate and conducive to relatively stable democratic states. Thus it is not surprising that, in the aftermath of the Arab Spring, moderate Muslim-majority countries in Southeast Asia are often suggested as role models for Muslim-majority countries in other regions.

Muslims in countries like Turkey, Bangladesh and Indonesia, and in provinces like Paschimbanga and Tamil Nadu in India, are ethno-linguistically rooted and only use Arabic for prayers and specialised religious studies. In these places, Muslims are more likely to read translations of the Quran in their mother tongue (and in a non-Arabic script). This has four salutary effects reinforcing the ethno-linguistic rootedness of believers.

First, the majority of people in these Muslim communities cannot directly participate in the religious discussions within the Arab world, and are less affected by such discussions.

Second, clerical control over religious discussions is largely confined to specialised debates. The routine debates most believers are exposed to are conducted in a linguistic medium which the clerics cannot claim exclusive control over. This helps limit the role of clerics to the religious sphere and isolate them from secular affairs.

Third, the favourable position of local language among the believers helps maintain links with local cultural heritage.

And finally, local languages allow engagement between believers and non-believers. Non-believers can access activity within the local Muslim community through a common language and make creative contributions.

These effects reinforce ethno-linguistic roots by strengthening the bond between the believers and their local cultural heritage, as well as the bond between the believers and non-believers who share that heritage. Ethno-linguistic rootedness in turn dampens the quest, if there is any, for global ideological and cultural dominance à la the jihadists. And secular bonds between believers and non-believers, and the marginalisation of clerics, shield the state from communal religious pressures.

Ethno-linguistically rooted communities in Pakistan have proven to be resilient to Wahhabi influence. Indian provinces like Paschimbanga and Tamil Nadu, where non-Muslims and Muslims alike use regional languages, are less prone to religious riots. Bangladesh, which separated from Pakistan to protect Bengali language and heritage, is actively contesting radical Islam and is known for democracy and the empowerment of women. In contrast, the Deobandis, who are the major ally of Wahhabis in South Asia and dominate the Pakistani military establishment, are opposed to all non-Deobandi Muslims and promote Arabic — ‘the religious and official language of Islam’ — at the expense of South Asian languages and scripts. The Taliban, who destroyed the cultural heritage of Afghanistan and adjoining parts of Pakistan, are products of Pakistani Deobandi seminaries.

The contrast between the Arab-dominated strains of Islam and Eastern Islam cannot be starker — a divide that is unlikely to be bridged. This divide is reinforced in West Asia and North Africa by the dominance of Arabic, which has long ago erased the linguistic and, to a lesser extent, cultural diversity of the region. To that extent, the moderate Eastern Muslim communities cannot serve as role models for the Arab world. The Arab world has to find its own solutions.

Vikas Kumar is Assistant Professor at Azim Premji University, Bangalore.

1. Worlds at stake in Arab Reform
2. Moderate Islam in Southeast Asia and Egypt
3. After the Arab Spring: A role for Northeast Asia?

The Indian government presented its National Manufacturing Policy (NMP) to the nation in early November.

Presumably, the announcement was timed to demonstrate that reform is alive and kicking before parliament reconvenes later this month. With the final text now available on the Department of Industrial Policy and Promotion website, it is possible to take a considered view of the policy’s goals, the means proposed to achieve them and the probability of success. It is also possible to speculate on the unintended consequences and possible collateral damage.

The preface of the NMP refers to ‘concern about the stagnant and low share of the manufacturing sector in India’s GDP’ as providing prima facie justification for policy intervention. In the body of the policy, this goal is further justified by reference to the superior manufacturing performance of other Asian countries, and by the employment challenges that India faces. This is a rather dubious basis for intervention.

On this rationale, the quantitative target is to raise the share of manufacturing value-added in GDP from the current 16 per cent to 25 per cent by 2022, implying that manufacturing needs to grow appreciably faster than overall GDP over the next decade. This will become progressively harder as the share of manufacturing rises in overall GDP. Given the shares of agriculture, services and industry (of which manufacturing is the dominant part) must add up to 100 per cent, it is also not clear from the policy which of the other two sectors is expected to give way within an aggregate growth target of nine per cent. This information will only become available when India’s 12th Five-Year Plan is finalised early next year; presumably, much of the ‘space’ will be ceded by agriculture.

The main positive instrument proposed to achieve this growth acceleration is the creation of national investment and manufacturing zones (NIMZs), to be developed as integrated industrial townships. The policy envisages that ‘the NIMZs would be large areas of developed land, with the requisite ecosystem for promoting world-class manufacturing activity’. In contrast to existing special economic zones, with their focus on exports, such NIMZs are envisaged as industrial townships of a minimum size of 5000 hectares.

Each NIMZ will be managed by a special purpose vehicle (SPV), which will exercise the powers conferred by the policy. The policy specifies that the SPV’s CEO must be a senior central or state government official. So, in principle, these townships are to become publicly run corporations for the benefit of the private sector, free from the political and governance failures that plague India’s existing urban local bodies. The aim is to permit both clustering and concentration of infrastructure. In many ways, this is a return to the past, except these townships are designed to facilitate manufacturing by a cluster of smaller units, rather than being dominated by a single large employer.

Is this a solution in search of a problem? Apart from India’s still stunningly low per capita income compared to all other G20 members, it seems there is no tight linkage between levels of income and a ‘natural’ share of manufacturing when G20 countries are compared. It is true that India’s Asian peers — Indonesia, China and South Korea — have a much higher share of manufacturing than India, but there is little reason to think they represent a ‘norm’ to which India should aspire.

Two conclusions follow. First, there is no analytical reason to conclude that India’s ‘low and stagnant’ share of manufacturing reflects major distortions in its economy. Second, if it is to privilege manufacturing through special, potentially costly, measures, such actions need to be justified for reasons other than merely to raise its share. By the same token, a blanket commitment to raise the share of manufacturing at any cost risks leading India into the same blind alley of interventionist industrial policy from which it so painfully exited.

These concerns emerge from several of the policy’s provisions that are not necessarily linked with the NIMZs. Particularly disturbing is the looseness of the formulation on trade and investment policy and government procurement, and the stress on specific industry verticals. By way of example, paragraph 1.22 contains the extraordinary statement on regional trade agreements that ‘it will be ensured that such agreements will not have a detrimental effect on domestic manufacturing in India’. What on earth is the point of such agreements if not to put competitive pressure on India’s domestic producers?

The policy’s authors will undoubtedly cite the new wave of academic thinking associated with Hausmann, Rodrik, Stiglitz, Ann Harrison and the like to justify a return to activist industrial policy. I would remind them that this literature finds very little reason to favour manufacturing as such, but strongly supports the long-term productivity benefits of outward exposure.

Suman Bery is Country Director, India Central, International Growth Centre. This article first appeared here in the Business Standard.

1. Can India match East Asia as a manufacturing powerhouse?
2. Is India in need of a new investment policy?
3. Reviving India’s manufacturing industry

The US recently participated in the East Asia Summit (EAS) for the first time — a decision that has wider implications for US–ASEAN relations.

The decision to join the EAS is part of a recalibration of US foreign policy vis-à-vis ASEAN-led multilateral institutions. This shift in policy reflects a broader attempt by the US to re-engage with Southeast Asia — after years of perceived indifference — and is equally related to China’s growing influence in the Asia Pacific region.

The current US policy toward ASEAN also represents an attempt at complementing and deepening bilateral ties with Southeast Asian countries — especially Indonesia and Vietnam. The Obama administration wants to encourage the formation of a multilateral security architecture in Asia that will include the US and complement its bilateral defence and foreign policy commitments.

Unlike Obama, the Bush administration was seen as being largely uninterested in actively fostering East Asian cooperation, and the US was not invited to join the EAS when it was established in 2005. At the inaugural EAS summit in Kuala Lumpur, the latest ASEAN Plus institution was pitched as a predominantly Asian forum concerned with community building and regional issues. And before its formation, the Bush administration repeatedly indicated its preference for flexibility and mobility rather than formal and institutionalised arrangements.

But the Obama administration signalled a renewed interest in East Asian regionalism as driven by ASEAN. The US held summit meetings with ASEAN leaders during the APEC forum and the opening of the UN General Assembly in November 2009 and September 2010 respectively. The Obama administration also acceded to ASEAN’s Treaty of Amity and Cooperation by presidential decree in July 2009, opening the door for US membership of the EAS.

And in April 2010, the US’ possible inclusion in the EAS, along with Russia, was discussed at the 16th ASEAN Summit in Hanoi. Significantly, US Secretary of State Hillary Clinton made clear America’s willingness to join the EAS to her ASEAN counterparts. This message helped overcome a split within ASEAN between those who supported the expansion of the EAS, and those who proposed an ASEAN+8 meeting every two years to coincide with the APEC Leaders’ Meeting. The latter proposal was to address concerns about the difficulties involved in having the US president visit Asia more than once a year.

The ASEAN states all believed the US and Russia’s inclusion would enhance the value, weight and influence of the ASEAN Plus bloc. This reflects ASEAN’s desire to engage outside powers peacefully within a framework where it remains centrally engaged in the development of Asia’s regional architecture.

By joining the EAS, the US is seizing an opportunity to reverse the perceived American disengagement from the region, which has allowed China to play a larger role in East Asian regional platforms. In contrast to the Bush years, the Obama administration is demonstrating a clear interest in multilateral organisations, based on the premise that deepening key bilateral ties and engaging multilateral institutional structures go hand in hand.

From the Southeast Asian perspective, US participation in the EAS serves to balance China’s increasing assertiveness in regional affairs, and ASEAN capitals have welcomed signs of more active US participation in East Asian regionalism. An active US participation — combined with an accommodative Chinese involvement — may be the best possible scenario for ASEAN in the years to come.

But US participation in the EAS raises the important question of how the summit can complement existing cooperative arrangements and contribute to the emerging security architecture in East Asia. Specifically, there is a risk that the EAS and APEC could end up competing or even cancelling each other out, which would benefit the ASEAN+3 grouping — a forum involving China, Japan and South Korea — but which would exclude the US. The challenge for Southeast Asia will be to continue leading the EAS in such a way as to make it both acceptable to Beijing and relevant to Washington.

Dr Ralf Emmers is an Associate Professor and Head of the Centre for Multilateralism Studies at S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.

An earlier version of this article was first published here on the S. Rajaratnam School of International Studies website.

1. How the US plays into the East Asia Summit for ASEAN
2. Chinese multilateralism: implications for Sino-US relations
3. The United States and the East Asia Summit: a new beginning?

The sixth East Asia Summit (EAS) will take place on 19 November in Bali, with its newest members — the US and Russia — breathing new life into the forum.

While the Summit’s original objective of serving as a forum for dialogue on broad strategic, political and economic issues remains important, the US and Russia’s inclusion has now opened an opportunity for greater geopolitical security dialogue. Earlier this year, President Susilo Bambang Yudhoyono commented that Indonesia planned to ‘narrow the agenda of the upcoming summit on security and political matters to allow heads of state to solve pressing problems within the region’, while he also proposed that APEC could tackle economic issues. The fact that international financial institutions are not invited to the EAS this year adds to the premise. There now seems to be three specific issues driving the dialogue between leaders: regional cooperation on disaster management, connectivity and maritime cooperation.

The EAS will be preceded by the 19th ASEAN Summit and related meetings, beginning on 13 November, where ASEAN leaders will endorse the Bali Concord III. This agreement, which envisions an ‘ASEAN Community in a Global Community of Nations’ by 2022, will be adopted as ASEAN’s new vision for the future. For its part, the EAS will consist of two two-hour sessions: a plenary session where leaders present speeches reviewing the current direction of the EAS and outlining their thoughts on its future direction, and a retreat session where leaders are given a ‘blank check’ to exchange views on regional and international issues. The Chairman’s statement from the Foreign Ministers’ Consultation in Bali on 22 July provides a background on the ‘old’ agenda of finance, energy, education, avian-flu prevention and disaster management.

During the summit, Indonesia will launch an unofficial commentary, or non-paper, on a ‘Practical Approach to Enhance Regional Cooperation on Disaster Rapid Response’, and Australia will also release one on ‘Disaster Management and Response in the EAS’. Indonesia’s Minister of Foreign Affairs, Marty Natalegawa, will also initiate a real-time information-sharing portal stationed at the ASEAN Coordinating Centre for Humanitarian Assistance on Disaster Management that will link to all EAS member states and international agencies like the UN. In this vein, the EAS will seek to address bureaucratic bottlenecks on disaster-relief efforts, including visa, customs and quarantine issues. But despite these initiatives, the challenge remains as to whether the region can be better equipped to withstand ‘megadisasters’ like Japan’s triple disaster earlier this year, the 2004 Indian Ocean tsunami or Myanmar’s Cyclone Nargis through such measures? With all EAS member states supporting these disaster-management initiatives, concrete deliverables are possible.

Connectivity is another area on which regional leaders are expected to focus. A successful implementation of the Master Plan on ASEAN Connectivity is in the interest of both ASEAN and non-ASEAN EAS member states. Regional (and also global) growth potential will not be optimised without it. Physical-connectivity discussions will potentially look beyond the scope of the Master Plan to include connectivity between ASEAN and non-ASEAN states. Maritime connectivity between ASEAN and Australia or New Zealand is one example of this. Negative effects on regional connectivity like transnational crime, terrorism and pollution will also be a part of this agenda. Meanwhile, institutional connectivity (including trade facilitation and trade financing) and people-to-people connectivity will remain internally discussed within ASEAN.

The last apparent area — maritime cooperation — is more subtle. It consists of diplomatically sensitive issues, including the South China Sea, and less-sensitive issues like piracy, people smuggling and transnational crime. In its simplest form, the EAS aims to transform conflicts into cooperation, tensions into peace, and threats into partnership. As a ‘benign’ organisation that ‘threatens none, but comforts all’, ASEAN is a key multilateral organisation. And the ASEAN-led EAS is important in bringing together China and the US, two countries whose relationship is often characterised by tension, let alone other regional players. This is not to say that ASEAN itself is free of conflict. But its stability as an institution for over 44 years and its visible maturing over this time is testimony that ASEAN serves as a regional power-broker and conciliator. Its maintenance of a ‘dynamic equilibrium’ in the region by avoiding the hegemony of any power also supports a successful and fluid regionalism, including the emergence of fora like the EAS.

ASEAN members should not miss an opportunity to contribute toward regional prosperity, peace and stability at this year’s EAS. And the EAS, in turn, must avoid becoming a simple ‘talk shop’ but develop into a key regional platform complying with common global rules, norms and principles, reinforced by deepening economic cooperation. A sense of community, solidarity and unity — ASEAN’s greatest offering — must not be lost; it must be promoted beyond the organisation. Asia is one of a handful of regions that remain economically prosperous, peaceful and socially stable, and every effort must be made to maintain it this way.

Maria Monica Wihardja is a Researcher at the Centre for Strategic and International Studies, Jakarta, and a Lecturer at the Department of Economics, University of Indonesia.

1. 2011 East Asia Summit: New members, challenges and opportunities
2. The East Asia Summit: ASEAN’s forum for maintaining peace
3. Will the US commit long term to the East Asia Summit?

After a long-drawn-out process, Susilo Bambang Yudhoyono finally announced his decision on 18 October to reshuffle the cabinet.

This will be the first and last major reshuffle in his second term as Indonesia’s president.

His landslide election victory two years ago indicated the weight of public expectation on Yudhoyono — which he has so far failed to live up to. In fact, many have characterised his second term as no different from the first: Yudhoyono is seen as more rhetoric than substance, and prone to indecisiveness and weak leadership. These characteristics are most clearly visible in the context of three fundamental issues facing Indonesia today: widespread corruption, stalling bureaucratic reform and the need for greater religious freedom. Yudhoyono often prefers the ‘middle way’ in order to avoid conflict, even if this means making no decision. In light of this demeanour, it is not surprising that his approval rating has plummeted from as high as 90 per cent to as low as 40 per cent.

When approval ratings are low, a cabinet reshuffle can be an effective tool to improve public standing. In his first term, Yudhoyono reshuffled the cabinet twice when his approval rating was low, each time resulting in increased public approval. Still, the public’s renewed hope cannot last if this latest reshuffle is not followed by significant changes to the government’s day-to-day activity.

The sheer length of the reshuffle process is seen by critics as emphasising the president’s inability to deal with political pressure. But the problem lies not only in the conduct and the outcome of the reshuffle, but in the reshuffle itself. Of Yudhoyono’s 19 deputy ministers, 13 are new in their posts, and 12 of his 34 ministries will also see new leadership. This significantly changes the cabinet — and shows Yudhoyono’s lack of anticipation, his failure to consider the outcome of possible scenarios, and his inability to put the right people into the right jobs. This is even clearer considering he had already replaced Sri Mulyani Indrawati due to political pressure.

When a president establishes his cabinet for a five-year term, he should expect the cabinet to hold for this entire period. Five years is not a long time to implement reforms in a country as big and as problematic as Indonesia. Such reform requires massive effort, planning and coordination, so a major reshuffle is something any president should avoid. In reality, the working period of any ministry is four rather than five years, as in a competitive political atmosphere there are many distractions as election time approaches. Or in other words: establishing a strong, highly qualified cabinet in order to avoid major changes in the future is crucial to the success of any government.

When Yudhoyono formed his initial cabinet in 2009, the political environment was such that he was forced to negotiate with other parties to fill these positions. But he only negotiated the number of ministries and posts to cede: each party then provided Yudhoyono with its preferred names — and he did not reject them. In light of this questionable backdrop, it is not surprising that the cabinet failed to satisfy both Yudhoyono and the public who gave him such a strong mandate.

Each of the new ministers will now have to deal with at least five challenges: political interests which persistently attempt to penetrate government resources; the political and ineffective nature of the current bureaucracy; the coordination problem across ministries; time limitations; and structural factors, such as a lack of public confidence, intense public scrutiny and high public expectations. Not to mention the uncertainty of the current global economic situation.

Under these conditions, and considering Yudhoyono’s weak leadership style, one can only sympathise with the new ministers — and look forward to minor, if any, breakthroughs in the next 2-3 years.

Sunny Tanuwidjaja is a Research Fellow at the Department of Politics and Social Change at the Centre for Strategic and International Studies, Jakarta.

1. Indonesia’s cabinet reshuffle: how low can it go?
2. Indonesia’s new cabinet: A boost for economic policy and reform
3. Indonesian President Yudhoyono’s second term cabinet