Part II - Decoupling the economy and politics

Milestones to political stability

SINCE THE DOWNFALL OF THE AUTOCRATIC RULE OF SUHARTO IN 1998, Indonesia has introduced a series of electoral reforms.

Though the process has not been smooth and easy, some progress has undeniably been made in the transition from an authoritarian to a democratic government in Indonesia. The first significant progress was to achieve a relatively peaceful transition of power in 1999 and 2004.

President BJ Habibie made the first breakthrough by conducting democratic general elections in 1999, the first since the 1955 elections. Although these elections cost him his presidency, it paved the way for the creation of a more democratic society in Indonesia.

In 2004, President Megawati Sukarnoputri added another milestone by successfully implementing the first direct presidential election. Duplicating the fate of former President Habibie, the direct presidential election also took her presidency away.

There were three elections in 2004, namely the parliamentary election in April, the first round of the direct presidential election in July and the second round of the direct presidential election in September.

Interestingly, the huge amount of money spent on preparations, campaigns and voting in these three elections created a “season of feasts” among Indonesians and their multiplier effect may have significantly contributed to economic growth in 2004. (more…)

Any country heading into an election period is always at economic risk. Any setback on the political front will undermine business confidence and negatively affect investment and growth. How far has Indonesia gone in reducing the political risk to its economic growth?

A MID THE ROAR OF THE GLOBAL ECONOMIC CRISIS, the world recently saw how Thailand has become more deeply mired in political turmoil following the political standoff that led to bloodshed and crippled major economic activities.

The situation was predicted some months before it actually erupted when Tarisa Watanagase, Thailand’s central bank Governor, said that political uncertainty was a bigger risk to the nation’s growth outlook than the global financial storm.

Investors are not only concerned about the economic performance of a given country but also about its relative political stability. Research conducted in 2003 by Aon Corporation, a Chicagobased risk management consultancy, revealed that uncertainty surrounding political risk cost the world economy more than $800 billion in reduced corporate spending, investments, and growth.

lndonesia’s economy has grown at an average of about 6% on a quarterly basis since the end of 2006. The country expected foreign and domestic investment to hit a new record in 2008 and this year, driven by demand for new infrastructure including power plants and toll roads.

Muhammad Lutfi, head of the Indonesian Investment Coordinating Board (BKPM), said he is optimistic that total domestic and foreign direct investment would rise 15% to nearly $16 billion in 2008, up from a record $13.8 billion in 2007, and surge to $20 billion in 2009. (more…)