Indonesia’s Surprising Resilience

Last week, The Economist had a fine overview of the surprising resilience of the Indonesian economy, which it nicknamed the “Komodo economy” – tough and resilient, and surprisingly quick. Indeed, Indonesia grew by 6.5 percent in 2011, one of the highest growth rates of any emerging economy, and its fastest growth rate, The Economist noted, since the 1997 Asian financial crisis, which devastated the country. Growth projections for 2012 are similarly rosy, despite labor unrest in several parts of the country, including in Papua; a weak international economic climate that shows little signs of improving; slow progress on cutting trade barriers within ASEAN; and Indonesia’s continuing massive problems with graft and misallocation of capital, some of which is a result of the decentralization program embarked upon over the past decade. Transparency International, in its most recent Corruption Perceptions Index, ranked Indonesia one hundred, tied with far less attractive investment destinations like Malawi. As The Economist notes, all this graft clearly has an impact on public spending – the central government routinely spends less than the amount it budgets for public investment.

And yet the Indonesian economy continues to roll ahead. A positive demographic helps, as does the fact that, in such a large economy that historically has not been so export-dependent, the global economic slowdown has less of an impact than on trade-dependent economies like Taiwan or Singapore. And even when there are hard times, Indonesia’s small businesses and consumers somehow seem better able to tough through them than their counterparts in places like Thailand. Still, until the massive graft problem is solved, these fantastic growth figures are not going to be enough to draw in much foreign investment: For its size, Indonesia attracts just a pittance, and U.S. firms that have given the country a second look in the past three or four years often still have not made major new investments.