The Indonesian Dragon: Asia’s Next Booming Economy

Via WorldCrunch, an interesting look at Indonesia:

The nostalgic traveler who goes to Indonesia with the idea of walking in the footsteps of Joseph Conrad and living out their own Spice Route literary adventures will be stunned by the sheer luxury of Makassar’s airport.

A symbol of Indonesia’s rapid modernization and economic growth, this city of 1.5 million inhabitants does not look anything like the quaint capital of the old Sultans of Gowa, described by Conrad at the end of the 19th century as the “most beautiful city in Netherlands East Indies.” In its streets, McDonald’s and Starbucks now stand alongside the local shops.

Situated 1,400 kilometers northeast of the Indonesian capital, Jakarta, Makassar is on Sulawesi Island (formerly known as Celebes). It is one of the symbols of the economic rebirth of Indonesia, which is now the fastest-growing economy of the G20 countries after China – 6.3% in 2012. A recent report published by McKinsey Global institute said that with a 8.6% growth rate, Makassar was one of the fastest-growing middleweight Indonesian cities.

Mayor Ilham Arief Sirajuddin is quite happy to explain why Makassar is now so successful: “First, you need to know that Makassar is ideally situated – we have become the ‘hub’ of Eastern Indonesia for both transportation and trade because we are strategically located between Borneo and Papua New Guinea,” he explains.

“From the moment I became mayor, I sensed that Makassar could be a boon for investors.” Makassar, which has been called “the gateway to East Indonesia” must now become the region’s “living room,” to quote Mayor Sirajuddin’s favorite metaphor – it must become a “place to stay, not just a place to stop over.”

To understand Makassar’s rapid growth, it must be placed in a historical context. Indonesia is a young nation – its real independence dates back to 1949, when the Dutch colonizers decided to relinquish control for good. But the country only started to turn itself around in 1998, when President Suharto, a ruthless dictator, was forced out of the post he had been occupying since 1967. The transition toward democracy hailed in a new political and economical era that turned this mostly Muslim (88%) country of 246 million people upside down.

Foreign investors rushing in

According to Sofjan Wanandi, an ex-Suharto crony turned businessman, “Our success started at the beginning of the 2000s, and really grew these past eight years, during which we have benefitted from an unprecedented political stability.”

“About 50 million Indonesians earn between $3,500 and $5,000 a year,” less than China or Thailand but more than India or Vietnam, says Wanandi. “We have a dynamic demography and many agricultural and mineral resources. Our only big problem is the lack of infrastructure,” says the 70-year-old magnate, wearing a colorful batik shirt. “If we had better infrastructure, the country’s growth rate could be higher than 8%,” he says.

The government of President Susilo Bambang Yudhoyono, who will finish his second mandate in 2014, is well aware of that. Last year the government unblocked a $420 billion fund to finance a network of highways, airports and seaports. This is a blessing for the Indonesian industry, which has witnessed in a short period of time the emergence of very powerful companies, such as the one owned by Vice-President Jusuf Kalla, who is building Makassar’s new airport.

Foreign investors are eager to join the party – their investments grew by 37% in 2011, reaching $19 billion, a number the IMF believes could grow to $21 billion this year. “The Japanese and Koreans are by far the top investors but the Europeans are starting to get on board,” says Jean-Pierre Felenbok from Bain & Company, which just opened an office in Jakarta. “The French have been reluctant to invest here since the Asian crisis of 1997, so they’re a bit late to the party, but things are starting to change.” As a matter of fact, some French companies have already been investing in Indonesia for a while: Alstom, Schneider, Total, Lafarge, Danone or even L’Oréal, which inaugurated in September 2012 its biggest factory in the world near Jakarta.

For all foreign companies investing in the archipelago, the objective is double: to benefit from the huge internal demand, but also to use the country as a base for exports in the region. And as an added bonus, Indonesia’s labor costs are relatively low compared to other southeastern Asian nations, and even compared to China. “Today, Indonesian labor costs half as much as Chinese labor in the big industrial cities of eastern China,” says Felenbook.

Bureaucracy and corruption

The only drawback is that democracy brought with it a certain bureaucratic red tape that didn’t exist during the dictatorship. “The decision process is very slow, very complicated nowadays. Every project must be approved by the central government, then the local governments, via the Parliament,” explains Wanandi.
Fauzi Ichsan, one of the directors of the Standard Chartered Bank in Jakarta explains: “We had the choice between two models: India or China. We chose India, by trying to imitate its combination of liberal economy and democracy. Unfortunately the side-effects of our choice include the bureaucratic inefficiency of local governments.”

Another thing foreign investors complain about is Indonesia’s corruption problem. Despite efforts by the government to reduce corruption, it is deeply rooted in the country. In Transparency International’s 2012 list of most corrupt countries, Indonesia fell down 18 places – to 118th out of 176.

The mayor of Makassar dismisses these critics: “Here, we go fast. We speed things up, we can get you a building permit in three days, instead of 12; or an export license in a month, whereas it will take much longer in other provinces,” says Sirajuddin. These kinds of practices are inherited from Makassar’s long history of being a commercial hub. Since the 16th century, Portuguese, Chinese, Arabic, Indian, Javanese, Siamese and Malay traders have been sailing to Makassar to buy gold, pearls, copper and spices.

Makassar is now a modern city, open onto the strait that bears its name. A futuristic-looking mosque, blue and white, looks at the newly-concreted seafront. Along the waterfront, huge red letters spell out Makassar’s big ambitions.

You have to go past the street that leads to the port, with its shady bars and brothels disguised as karaoke parlors, to realize the full measure of Makassar’s fast-growing expansion. In the port, huge cranes are loading containers onto cargos, while further down, passengers embark and disembark from boats headed to Java, Papua New Guinea and Maluku Islands.

In the cargos leaving Indonesia, there is mostly coal – Indonesia is the world’s first coal exporter – oil, gas, gold, nickel, cobalt, rubber, and of course palm oil. All of these resources are fuelling Indonesia’s economic growth and making Indonesian multinationals like Sinar Mas, Wilmar, Golden Agri-Resources (all of them are in the palm oil business), Bumi Resources and Adaro energy (coal) prosper. Wilmar alone, one of Asia’s top agribusiness companies, has 90,000 employees. Its 2011 benefits topped $44 billion.

Indonesia’s exports only represent 25% of the country’s GDP, compared to 70% on average for the rest of Southeast Asia.

The true force of this country is their huge internal market, powered by the fast developing middle class – 50 million Indonesians who earn more than $4000 a year.

“And this figure grows by 3 to 5% every year!” adds Felenbok.

This entry was posted on Tuesday, February 12th, 2013 at 10:34 pm and is filed under Indonesia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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