Region shares Indonesia's worries

Lim Say Boon, Director OCBC Investment Research Pte Limited, The Straits Times, Asia News Network, Singapore

Jakarta's actions to date against suspected terrorists are unlikely to restore international investor confidence.

Sadly, the theater of the absurd surrounding the detention of Abu Bakar Ba'asyir -- the suspected spiritual leader of Jamaah Islamiyah -- has only reinforced the perception of Jakarta's political weakness.

The delays in bringing Ba'asyir in for questioning on grounds of ill-health; the standoff outside the hospital; the deferential attitude of the police; the radical cleric's dictation of terms to the police on how he is to be questioned -- this is not the stuff that will inspire confidence.

Jakarta's criticism of Australia for its moves against suspected terrorists within its own territory adds nothing either.

Indeed, the actions needed of Jakarta to restore confidence extend beyond cracking down on terrorist suspects; they go to the heart of law and order in Indonesia.

And whatever the more polite of international observers say, the damage done by the Bali bombings is likely to have been serious and regional in scope.

Recently, IMF chief economist Ken Rogoff said one should be careful not to over-dramatize the economic impact of the Bali bombings. He may have been trying to play the gracious guest to the region -- that is, he may have wanted to avoid doing more damage to Southeast Asia by further alarming foreign investors.

But for those who live in the region, I regret the damage has been done -- the dangers that numerous analysts and leaders have been warning about have become tragically clear and present.

Some economists may view the Bali bombings as having imposed the equivalent of a terrorist-risk tax on the region; slowing growth by the amount that taxes do.

That is, it increases the costs of doing business in the region -- raising the cost of building insurance, shipping insurance, transport, specific security and general defense spending.

And presumably, you could factor all these increased costs into a model and churn out a result that says the impact would be the loss of, oh, some portion of one percentage growth in gross domestic product.

But that perspective would be too narrow -- one based on the assumption of ceteris paribus, or all other things being equal. But all other things are not equal now. The bombings have thrown everything else off their trajectories.

The recent underperformance of the Southeast Asian markets vis-a-vis the S&P 500 and even North Asia is no coincidence -- investors are telling you what they think.

From its Oct. 9 low, the Standard & Poor ratings 500 had rallied, at the time of writing, some 14 percent. The Jakarta Composite index is still in negative territory from Oct. 10, as is the Philippines Composite Index. Malaysia, which had taken tougher and earlier action against terrorist suspects, fared better with its index up 3.5 percent; and Singapore did a bit better still with a gain of 6.3 percent. Thailand saw a gain of 7.4 percent on its stock exchange.

The S&P/IFC Asia index, buoyed by the North Asian markets, did better with a gain of nearly 13 percent. Korea's Kospi was up 11 percent, and Taiwan was up some 17 percent.

The loss of confidence is not just about the Bali bombings per se. More damage was incurred through the equivalent of an "after shock" -- through confirmation of how politically fragile Indonesia had become.

Analysts and regional leaders had warned the Indonesian authorities for months that lack of action against suspected terrorists within Indonesia could result in just such a disaster. But what the rest of the world got was denial -- sometimes angry, indignant -- and inaction. And, subsequently, death and destruction.

The butchers of Bali would most likely have also calculated this follow-on damage through the confirmation of the political weakness of Megawati Soekarnoputri's administration -- and may have wanted to simultaneously embolden other radicals and force the President into action against Islamic radicals.

In short, they want to trigger a confrontation. So confrontation becomes inevitable, whether Megawati has a stomach for it or not.

Now, they have presented her an economic challenge as well. This is a region that has yet to get itself firmly on its feet from the shocks of the late 1990s Asian crisis.

Indonesia, Malaysia and the Philippines are still struggling to bring back foreign investment. Indeed, data for foreign investment applications approved in Indonesia shows a massive slump from nearly US$30 billion in 1996 to only $9 billion last year.

And this was before Bali.

Then, it was more about the inability to obtain judgments from the Indonesian judiciary that made any sense to international investors than about the lack of transparency, the weak institutions of law and order, and the government's apparent inability to ensure investors' property rights.

It was about the Dharmala Manulife saga, which required Canadian government intervention before investors saw anything resembling an internationally acceptable legal decision.

It was about the circus surrounding the Tommy Soeharto trial. It was about the failed Chinese tycoons running rings around the government on debt repayment.

But underlying all that was the same political impasse facing all post-Soeharto governments -- the electoral-college system, the splintering of the parliamentary forces, the endless political horse-trading, and ultimately administrative and political paralysis.

Yes, Indonesia is looking at 3 percent to 4 percent gross domestic product growth per year but it needs 6 percent to absorb the 2.5 million job seekers entering the work force each year.

So the ranks of the unemployed and underemployed, which may be anything up to a third of the work force, will continue to swell. And it wouldn't take much for a terrorist to figure out that by further undermining confidence, you accelerate the growth of the army of unemployed.

And you thereby increase the pool of the discontented from which you can recruit. And all that against the background of China's massive supply of cheap labor and exports -- sucking up foreign direct investments destined for emerging markets.

The prospects are worrying for Indonesia. And to the extent that Indonesia's problems are the region's problems -- witness the haze -- it is immensely worrying for the region as well.