Indonesia's Political Future

Summary


As Indonesia's election-season politics heat up, so too are a host of geopolitical challenges to the past 10 years of relative stability. The elections come at a crucial turning point for Indonesia as it faces an economic correction brought on by its need for structural reforms, China's slowdown, Europe's ongoing crisis and the phasing out of U.S. monetary stimulus. Hence in the short and medium term, the country faces a tough transition. However, it does not face a repeat of the near disintegration that afflicted it upon the collapse of former President Suharto's New Order regime in 1998. On the contrary, Indonesia has a chance to benefit from the monumental changes in China and rising U.S. engagement in the Asia-Pacific region.

Analysis


Indonesian elections are never simple. The immediate aftermath of the 2009 elections saw twin suicide bombings at the Marriott and Ritz-Carlton hotels in Jakarta by the militant group Jemaah Islamiyah. Though the Indonesian government has made strides in combating militancy, future attacks cannot be ruled out. Even aside from militant threats, Indonesian elections involve a massive and diverse population spread across numerous disparate islands -- more than 170 million voters will be registered and will cast ballots for hundreds of national seats and thousands of provincial and township seats. Only days ago, Papua and West Papua provinces broke into three new provinces and 26 new districts took shape, reflecting ongoing administrative decentralization. The recent flurry of anti-corruption campaigns, political appointments, rushed legislative bills and plans for strikes and protests show that the country's various political actors are rapidly maneuvering to prepare for April's parliamentary vote and June's presidential vote.



There is no assurance that next year's elections will be smooth, but elections have become more routinized over the years. These elections will be the fourth since the fall of Suharto in 1998, the first of which occurred under different laws and while the nation nearly collapsed amid economic stagnation and secession movements. The 2004 and 2009 elections went to current President Susilo Bambang Yudhoyono, whose 10 years in power have coincided with a return to relative stability and an economic boom that persisted through the global financial crisis. Yudhoyono is barred by term limits from running for a third term, opening the field to other candidates. Though the popularity of the president and his Democratic Party has dropped as post-crisis economic conditions have taken hold, especially over the past year, his legacy will likely rest on this past decade of normalization and growth.
Looming Challenges

The upcoming elections pose the question of whether Indonesia's post-Yudhoyono leadership will be able not only to preserve stability but also to capitalize on it through further economic development. In the broadest sense, new leaders will have to moderate or in some cases roll back the post-Suharto trend of decentralization in order to prioritize national development goals that will require a higher degree of coordination across regions.



However, they will have to navigate choppy international waters. On the back of strong domestic demand and falling prices on exports, Indonesia's current account balance swung negative in 2012-13, for the first time since the 1997 Asian financial crisis. Indonesia is not as reliant on exports as many of its neighbors, but exports remain an essential component of growth -- and they are not looking promising. Total exports have shrunk by 6 percent in 2013 so far. Oil and natural gas exports have made up nearly 20 percent of exports since 2002, but make up only about 18 percent so far this year and have fallen by about 19 percent so far compared to 2012. The export drop is part of a long-term trend of oil production decline, but it is also a result of falling international commodity prices, including other Indonesian exports like coal, natural gas, rubber and palm oil. This drop, combined with Indonesia's strong demand for consumer and capital goods, has driven the irregular current account deficits, weakening the currency and growth.



Three trends show that the export pain is not temporary. First, China's economic slowdown and transition is a leading factor in falling commodity prices. China is Indonesia's top export destination, accounting for nearly 14 percent of the latter's total exports this year. Second, Europe's crisis has also taken a toll -- Indonesian exports to the Netherlands, France, the United Kingdom and Germany have stagnated (these states together make up about 6 percent of Indonesian exports).

Third, expectations of future U.S. monetary tightening have already caused turmoil, playing a part in the rupiah's fall of more than 10 percent this year and the more than 15 percent drop in the stock market. Of course, the U.S. economic recovery -- the motivation for tapering quantitative easing -- is ultimately good for Indonesia, since the United States accounts for 8 percent of exports and is currently (and will continue to be) a top investor in Indonesia. But the transition to an environment of more expensive foreign capital and the rapid rise in dollar-denominated debt burdens as the rupiah falls will require significant adjustment.

These external trends will force a rocky transition period over the short and medium term at the very least, and have impressed upon Jakarta the need to undertake structural reform -- a perennial challenge. Yudhoyono's "master plan" for economic development through 2025 may not survive the election in precisely its present form, but the underlying principles reflect a broad Indonesian consensus about the future growth path. That path requires reducing dependency on raw material exports and shifting investment toward infrastructure at home to ease transport and energy bottlenecks while also developing higher-value manufacturing and sectors like retail, communications, financial services and other services. The country has a vast consumer market, but a range of familiar problems have prevented development: namely, low incomes, rising inflation (above 8 percent this year), poor infrastructure and public services, high regulatory hurdles, protectionist trade policies, constricted labor markets and the peculiar Indonesian mixture of decentralization and state intrusiveness.
Election Outlook

Public discontent over the economy and the aforementioned changes abroad suggest a fair chance that voters may choose to put a different party into power. While Yudhoyono won re-election with more than 60 percent of the vote in 2009, his administration's approval ratings have fallen from the low 50s to the low 40s over the course of this year, suggesting that the incumbent Democratic Party is vulnerable. The party has only been around for a decade, and it remains to be seen how well it can perform without Yudhoyono at the helm. He succeeded by drawing on his experience in the military and in both the Suharto and post-Suharto governments, as well as by holding together a coalition of secular reformers, civil bureaucrats and a number of Islam-centered parties. To demonstrate responsiveness to the public, the Democrats have decided to let voters choose their candidate to succeed Yudhoyono; while this scheme could help the party avoid backing the wrong candidate, it could also signal a lack of leadership and direction.

Meanwhile, polling over the past year suggests that the country is leaning toward a young businessman and political upstart rather than the host of other candidates who have run in previous elections. Though not officially a candidate yet, Jakarta governor Joko Widodo (widely known in Indonesia as Jokowi) has been outpacing the others in popularity. Jokowi is a young populist and former furniture salesman who has become a champion of people's livelihoods and an outspoken critic of government corruption. He is a member of the opposition Indonesian Democratic Party-Struggle, led by former President Megawati Sukarnoputri, the daughter of Indonesia's first president Sukarno. Megawati may run again in 2014 -- which means that internal party politics could hinder the Indonesian Democratic Party-Struggle's bid for the presidency -- but Jokowi's popularity suggests the party would have better luck with him as either president or vice president.

Behind Jokowi in the polls stands Prabowo Subianto, a controversial former special operations forces soldier with nationalist leanings who formed his own party (the Great Indonesia Movement Party) for the 2009 elections. Prabowo has criticized the excessive concentration of wealth and power in Jakarta and claims to be keen on expanding infrastructure and economic activity to outer regions. He is a charismatic politician and cannot be counted out, though he has not proved successful in previous elections.

The other leading candidates mostly come from Golkar, the official ruling party under Suharto. The party's fortunes have suffered in recent elections, and the 2014 candidate, Aburizal Bakrie, is already struggling for support within his party as it reels from a corruption probe that has taken down several prominent officials. But the party still has enough weight to make a difference when it comes to forming party coalitions.

Thus all of the major candidates, including Jokowi, represent one of the country's well-established political parties. The number of parties in the parliament has dwindled over the years; small parties remain popular when taken in the aggregate, but individually they fail to cross the threshold for national representation. Even the national parties will have to form coalitions, since most are unlikely to get enough seats in the legislature to field a presidential candidate on their own, let alone govern. Coalitions will remain opportunistic, not built around ideology or policy platforms so much as around party interests and expediency.
Preparing for the Future

Major structural reforms are unlikely to happen for the next year or two. They are inherently difficult during an election year, and the next administration will need to establish itself before it can try to push its agenda. Even beyond the transition period, expectations of reform should remain sober. Giving more weight to domestic-oriented private enterprise, in manufacturing and elsewhere, is easier said than done since the government budget depends heavily on energy, agriculture, mining and other core industries, which traditionally enjoy state privileges. The state-driven model of development, slow and overlapping bureaucracy, and frequent labor strikes will remain concerns for foreign investors.

Yudhoyono's own policy struggles reveal the difficulties in implementing reform. While he managed to push through electricity price hikes in 2011 and fuel price hikes in 2013 to cut the ballooning cost of subsidies in the public budget, a comprehensive and sustained program of price reform nevertheless is unlikely. Subsidy cuts have occurred sporadically in order to manage the budget rather than as part of a grand plan to eliminate them entirely. Yudhoyono's attempts to revise his own mining law in order to better coordinate mining permits after devolving authority to the regions also point to the broader struggle Jakarta faces in attempting to reassert central leadership over economic development. On the energy front, oil production continues to fall beneath consumption, power generation is lagging and the government is considering blunt export controls to keep coal supplies at home. The country has yet to coordinate the investment, infrastructure and price reforms necessary to manage its balance of payments while simultaneously securing domestic energy supplies.

Despite facing a rocky political and economic transition ahead, Indonesia retains advantages. While China's rebalancing may harm exports, it gives Indonesia a chance to attract leading investors within the region such as Singapore, Japan and Korea as they diversify away from China and look to expand infrastructure exports and long-term investments in fast-growing emerging economies. Indonesia's vast and expanding consumer market sets it apart from its Southeast Asian neighbors, especially as long as its leaders address social and regional grievances adeptly enough to consolidate socio-political stability and international perceptions of it.

Indonesia also retains a leadership role within the Association of Southeast Asian Nations, whose members are integrating more tightly as well as forming more extensive ties with trade partners in the region and with more distant partners like the United States, India and Russia. Lastly, as the United States re-engages the region, it not only offers high-quality investment but also defense and security cooperation that will enable Indonesia to maintain its focus on economic development, even as regional security threats intensify.

Going forward, Indonesia's leaders will focus on maintaining economic growth, but they will remain lukewarm on liberalization and privatization reforms, preferring instead to reinforce their bases of power in state industries, the bureaucracy and the military. Reform will continue to be occasional, piecemeal and technocratic, but populism is rising and leaders will make use of energy subsidies, protectionist import and export policies and other state tools as they deem it necessary, despite the market distortions and inefficiencies that result. The critical challenge in the post-Yudhoyono period will be reversing the excesses of decentralization, since it plays to the country's inherent geographical fragmentation and weaknesses. Recentralization does not entail rebuilding Suharto's repressive authoritarian regime, but it will involve nationalist, populist and protectionist policies.

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