Corruption Threatens Indonesia's Economic Rise

IMS says foreign investors who are needed to fund Indonesia's expansion will be cautious until more is done to fight rampant corruption and improve the rule of law.

The International Monetary Fund warned on Sept. 17 that Indonesia must make fighting corruption a priority if it wants to build on its progress as one of the world's best-performing economies.

Southeast Asia's biggest economy expanded 4.5% in 2009, the third fastest in the Group of 20, and is poised for accelerated growth in the years ahead, the IMF said in an annual report. But it said foreign investors who are needed to fund Indonesia's expansion into a regional powerhouse would be cautious until more is done to fight rampant corruption and improve the rule of law.

"A decisive and successful response, as well as a decade of sound policies and structural reform, helped Indonesia recover quickly from the 2008 global crisis," the report said. "However, lingering concerns over weak enforcement of the rule of law, transparency, and governance issues weigh on market perceptions. Addressing these weaknesses should be a priority."

The IMF praised Indonesia's "remarkable achievements" over the past decade, as it transformed from the Suharto dictatorship into a flourishing democracy and recovered from near-bankruptcy in the 1998-1999 Asian financial crisis.

Indonesia was forced into a $43 billion bailout from the IMF in 1998, and only exited supervision by the Washington-based organization in 2003. But the Fund said Indonesia "still faces challenges to preserve financial stability and develop its financial system," especially in areas such as supervision and the development of the non-bank sector. Market participants view Indonesia as a country with great potential, supported by a large consumer base and rich in natural resources."

"Yet, Indonesian securities continue to trade at a discount relative to regional peers and many wealthy Indonesian individuals still prefer to place their savings offshore." As if to prove the point, 26 politicians were banned from leaving the country on Sept. 17 amid investigations into graft related to the election of a central bank deputy governor in 2004.

The Fund's mission chief for Indonesia, Thomas Rumbaugh, said the corruption fight was a "big objective the government has set for itself" and there had been improvement in terms of removing obstacles to investment. Recently we have seen some interest from multinationals moving into Indonesia ... but investors will be watching closely and what happens in this area will say a lot."

Foreign direct investment in the archipelago of 240 million people -- the fourth biggest country in the world by population -- soared 53% on-year to 35.6 trillion rupiah in the April-June period, official figures show.

The local stock market has leapt more than 30% this year to pre-crisis levels thanks to strong offshore interest in emerging markets.

A survey of business leaders from 523 companies by UK Trade and Investment and the Economist Intelligence Unit, published this week, put Indonesia fourth behind China, Vietnam and India as a destination for investment capital over the next two years.

But the country's economic transformation masks glaring social inequalities reflected in indicators such as maternal mortality, which at 228 per 100,000 is considerably higher than its neighbors.

A recent "strategic assessment" of Indonesia's prospects for growth and democratic governance by the Harvard Kennedy School found it was "losing ground" to China, India, Thailand, Malaysia, Vietnam and the Philippines. "Oligarchy and collusive democracy have left Indonesia ill equipped to respond to the challenge of globalization," it said.

Copyright Agence France-Presse, 2010

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