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.