New President has to focus on job creation

New President has to focus on job creation

Hans W Vriens, Jakarta

The winning candidate in the run-off of the presidential
elections in Indonesia on Sept. 20, will have to focus on
creating millions of jobs. There can be little doubt that
Indonesia's most pressing problem is creating jobs for its 40
million citizens who are either un- or under-employed out of a
total population of 235 million.

Only through massive job creation can the president uplift
half the population that is surviving on less than US$2 per day.
As a result more than 100 million Indonesians are undernourished,
according to the World Food Program. It is encouraging that for
the first time, job creation has become an issue during an
Indonesian election campaign.

The good news is that the answer to how to create jobs is
straightforward. Indonesia needs investment -- lots of it. And
fast. Indonesia has the dubious honor of being the only country
in Southeast Asia still suffering from a net capital outflow
seven years after the Asian financial crisis struck, meaning more
Indonesian and foreign investments leave than enter the country.
And we are not talking about the stock market here.

This is about building factories, roads, trains, power
stations, mines, etc. In other words: Jobs. Negative investment
is a sign of no confidence in Indonesia. That is bad news.
According to the Asian Development Bank Indonesia needs to
attract $150 billion in the next ten years to upgrade its
dilapidated infrastructure of poorly maintained (and sometimes
non-existent) roads, railroads, power stations, ports, airports,
subways, etc.

Why are many Indonesian and foreign companies bypassing
Indonesia to invest in China and other countries instead? Why has
Indonesia fallen off the investors map? Two main reasons: There
is little appreciation overseas of the level of political and
social stability Indonesia has achieved since the overthrow of
President Soeharto in May 1998.

Our research in Europe, the U.S. and Australia shows that
perceptions about Indonesia are predominantly formed by incidents
like the Bali and Mariott bombings, armed clashes in Ambon, Aceh
and Sulawesi and a long list of bizarre court rulings. Indonesia
is suffering from what could be called the CNN-syndrome: TV-
pictures, but no analysis to put these pictures into a proper
historical context. As a result, a demonstration of 50 jilbab-
wearing Muslims in front of the U.S. embassy in Jakarta can lead
to frantic queries from the U.S. if it is really safe to live in
this "terrorist invested country".

Another reason why only determined investors seem to
understand the opportunities Indonesia offers is that a
substantial part of the Indonesian political elite is ambiguous
about attracting foreign direct investment as an engine for
economic growth. I have been struck by senior government
officials and members of parliament, who talk about foreign
direct investment as if it is a zero sum game.

Even President Megawati, who, without a sense of irony,
declared 2003 the Year of Investment, warned members of
parliament a few months later about how foreigners have robbed
the country instead of created jobs. This rhetoric shows painful
resemblances with her father's presidency (1945-1966) during
which massive foreign capital outflows and nationalizations led
to economic disaster.

Before we answer the question what the next President should
do to attract investment, and thus create the desperately needed
jobs, we first have to recognize that Indonesia is experiencing a
degree of political stability and an economic growth (4.3
percent) that few would have predicted when Soeharto's New Order
Government crumbled during the May riots in 1998. Despite
achieving macro economic stability, bringing down interest rates,
and government debt, many foreign investors prefer to stay away
from by far the biggest consumer market in Southeast Asia.

While it might be easy to be pessimistic about the lack of
foreign investment Indonesia has been able to attract in the last
few yeas, investors could give Indonesia more credit for the
remarkable way the country has dealt with the change from one-man
rule to democracy while in the meantime implementing sound
economic policies that led to a continuing recovery of the
economy. An achievement that few developing countries have
mastered before.

A case in point is the banking system that has been
successfully overhauled since the Asian financial crisis struck
in 1997. The number of banks has been substantially brought down.
Some of the most successful banks like BCA, BII and Danamon are
now fully or partially managed and owned by foreign investors
from Singapore, and the U.S. This would have been unthinkable
pre-1997. Banks have become real banks instead of deposit taking
machines that almost exclusively lend to subsidiaries of the
owning family.

Some Indonesian policy makers are confused why foreign
investors are not coming back in droves now the country has
achieved macro economic and political stability. They don't seem
to realize that it is a competitive market out there.

More and more countries are aggressively wooing foreign
investors. That is why Indonesia badly needs to improve its
international competitiveness, which is currently ranked closer
to Nigeria and Yemen than to fellow ASEAN member states like
Malaysia, Thailand and Vietnam.

To achieve this, the next president should set an ambitious
target of achieving 8 percent economic growth within two years.
He/she would be wise to follow the advise 34 economists of the
University of Indonesia gave: Prioritize investment growth;
accelerate economic growth by strengthening the country's
industrial competitiveness and productivity; develop a realistic
blue print for economic development, clean governance, and
synergy between the central and the recently empowered regional
governments. And spent to improve infrastructure and education.

After the President has decided in favor of massive job
creation the cabinet should follow suit with reversing some
disastrous policies that led to a fall in investments in the
crucial oil, gas, mining, manufacturing and agricultural sectors.
It is an unfortunate paradox that Indonesia became OPEC President
at same time the country became a net importer of oil for the
first time in decades.

It is difficult to explain to the outside world that the
government after three years of negotiations still hasn't
approved a $3 billion investment by ExxonMobil in the largest new
field in Indonesia in decades that the American company
discovered in East Java.

Many other countries would have given Exxon the red carpet
treatment. The development of the Cepu-field would have saved
Indonesia the embarrassment of being the only member of OPEC that
is net-importer of oil. After all, OPEC is a cartel of oil
exporters not oil importers.

Defeatism about the competitiveness of the manufacturing
sector is misplaced. Indonesia is still a major manufacturing
center of footwear and textiles. However, time is running out.
The next President badly needs to put the right policies in place
to stop the exodus of plants and jobs. Only with a President
focused on creating millions of jobs through investment will
Indonesia be able to keep pace with its more successful
neighbors. Indonesia cannot afford to fall behind any further.

The writer is Managing Director of PT APCO Indonesia a wholly-
owned subsidiary of APCO Worldwide, a Washington-based firm
specializing in government relations and politic risk analysis.