With just a fortnight to go for the year to wind down, Bare Talk will offer some reprieve to global central banks. It shall but dedicate just a few lines of this piece to criticizing them. In fairness, these challenges are as much about managerial and leadership strengths as about economics. Leadership should come from politicians. But their interests are perhaps too much intertwined with that of the financial sector for them to focus on larger issues. Bare Talk shall have plenty of opportunities to revisit these issues in the new year.
Bare Talk would turn its attention to two countries in the South-East Asian comity of nations. One has been in the news for the wrong reasons in India. That is Malaysia. Malaysians of Indian origin have been protesting against discriminatory treatment meted out to them over the years. Some of them have appealed to India to intervene. Some noises have emanated from India. That is not wholly appropriate, as it is an internal problem. Malaysia might have used this as an opportunity to snap back at India. Its attitude towards India has been one of hostility and fear at India’s competitive threat, mixed with grudging acceptance of India’s rising stature. In the larger scheme of things, it makes sense for India to focus on Indonesia, a much larger, a more genuinely democratic and moderate Islamic country.
Indonesia is poised on the edge of economic take-off as India was in the 1990s. The country is slowly recovering from the years of authoritarian abuse of power by the former president Suharto. Its current President, although from the army, was elected in a genuine democratic election. He looks set to be re-elected next year. He is trying to effect economic change through consensus building. It is as slow and frustrating as it is in India. But the difference is that he is trying.
The country is full of resources and it is populous with more than 230 million people and growing. It is the world’s largest Muslim majority nation. The Islam that is practiced in Indonesia is more moderate than in neighbouring Malaysia. The country has backed off from some changes in introducing the sharia. For instance, men still have to take permission from their first wife before marrying more. There is also declining opposition to women becoming president. Fewer provinces are enacting fewer sharias. The Indonesian public is not keen on transforming the country’s constitution into one based on sharia principles alone. Further, Indonesia’s policy of favouring its citizens is not race-based but based on birth. Thus, there are many healthy elements in Indonesia’s constitutional framework. They need to be nurtured and encouraged.
For that, Indonesia needs to grow. Economic growth in excess of 7% would create employment for the country’s growing and young population. Such a growth rate is not impossible. The country is rich in minerals— coal, copper, oil and other natural commodities. It needs a lot of resources to develop and extract mines.
The country also needs enabling laws that provide the right incentives for investors to pour in money. It is a typical venture capital situation. The Indonesian government is the “entrepreneur” who has the resources. It needs to part with some equity in the enterprise to attract funding. At the same time, it is neither necessary nor proper to part with the crown jewels entirely to investors. The purpose of attracting investment is to develop resources, not to transfer ownership of them to foreigners.
In the short term, Indonesian growth might face some challenges. It has benefited from five years of strong global growth and capital inflows into its financial market. It is not clear if investment in the right areas has happened. Further, Indonesian macro-economic policy is not independent of the election cycle. Elections are due in 2009. There is a risk that the central bank might ease monetary policy just as inflation threatens to go into double digits. If this happens, the currency would take a big hit as was the case in 2005. It would feed further into inflation, thus turning into a vicious chain.
It would not be an exaggeration to say that how Indonesia manages its economy would impact investor sentiment towards emerging economies.
For global stability and peace, it is important that Turkey at the edge of Asia and Indonesia in its heart should be economically prosperous and socially stable. To the extent that the government and businesses in India share experiences, knowledge and invest in return for access to resources, India would not only be investing for its growth but in Indonesian growth, too. South Korea in the north and Indonesia in the south are important for India. The government needs to concentrate its mind on forging strategic ties with the archipelago-nation. It can only be a win-win situation.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore.These are his personal views and do not represent those of his employer. Your comments are welcome at email@example.com