Waking up the Asian Tiger

Waking up the Asian Tiger
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Of late, I have taken to remarking to my friends that the period we are entering reminds me of the late 1980s-1990s.

It was a period of recovery in the US as challenges from Japan, Taiwan and South Korea ran out of steam (but only after taking away large chunks of the American electronic and automobile manufacturing industries).

Indonesia was then an “Asian Tiger”, notching impressive growth numbers. On a micro level, substantial wealth was created here although it went mostly to the few. But for most people outside the region, Southeast Asia was largely irrelevant despite the growth.

The US is once again recovering and this time a burst of Chinese growth is running out of steam (but only after taking away even larger chunks of manufacturing industries). How is Indonesia positioned in the current environment?

Indonesia attracted significant attention recently in an era of rising prominence for emerging markets. But, matters seem to have suddenly taken a turn for the worse in a few short months.

The US Federal Reserve’s actions may have been the trigger but other inherent weaknesses, easily overlooked in good times, are now coming to the forefront.

After Indonesia became an oil importer in 2004, its balance of payments did not immediately suffer largely due to rising export volumes and buoyant prices for some commodities such as coal, palm and a few metals, and financing deficits was feasible due to global money flow, leading to complacency.

Now that the commodity boom has ended, a lack of globally competitive value added industries is showing up in key indicators such as the current account and, consequently, in the exchange rates.

Interest rate hikes can help stabilize the rupiah somewhat in the near term but will clearly impact on economic growth and domestic consumption.

It appears that policymakers have accepted this reality for the short term. Even if growth were to revive to an extent, how to go beyond the cycle of self-congratulation followed by panic, both of which are due to turns in market sentiment from the Fed’s actions. Are there steps to take now to make Indonesia globally relevant in a meaningful way in the years to come?

The ingredients that fed the hype are still there — a young and large population, abundant natural resources and a strategic location. Coal, palm, cocoa, metals and forestry products will continue to play a significant role in the economy.

But that clearly is not sufficient for the next phase in Indonesia’s development. The infrastructure deficit and inefficient logistics are well documented.

However, I am also consistently surprised by how many goods, even those for which Indonesia seemingly has a competitive advantage, are imported into Indonesia.

Imports by themselves are not bad as long as a liberal trade policy allows competitive pricing. But, restricted import licenses and collusion keep costs high in critical products.

While this is a politically sensitive area, every well-meaning Indonesian should increase his or her awareness in this matter and push for change. These supply side changes are especially critical to contain inflation.

The other side of the coin is important: Can Indonesia develop globally competitive value added industries? Periods of economic booms in other countries have created global champions in sectors that require significant human skills, for example, Toyota, Honda and Sony in Japan; Samsung and Hyundai in Korea; Huawei and Lenovo in China; and Tata Motors, Infosys in India — and there are several more in these countries.

These companies were willing to compete with global firms outside of home markets.

The skills and competencies of their domestic workforce have been enhanced as a result.

Indonesia’s business leaders need to have similar aspirations and confidence to transform their companies and workforce. The transformation is easier where the country has some natural advantages.

Agro-products are an area in which the country has significant potential. It must be a “beyond plantation” vision where the country’s natural advantages can be exploited far better throughout the value chain right up to the consumer’s dining table around the world.

Textiles have been part of Indonesia’s DNA. There is the opportunity to go beyond outsourced manufacturing to the creation of textile firms with a portfolio of global brands.

International acquisitions will be essential to such plans, be it in food or textiles, and Indonesian banks will have to play a key role by supporting Indonesian business groups just as Thai, Chinese and Indian banks have done.

Natural gas remains a consistent earner of foreign exchange for the country and increasing gas production should remain a high priority. There is also no shame in domestic market obligation — even the US is considering it. The first of US gas exports is expected to reach global markets by 2020.

Indonesia should use this window to encourage development of an ecosystem of downstream industries with gas as a feedstock. Such industries must be world class in scale and operations. The other major gas producers — the Middle East, Australia and Russia — already have these industries.

This “ecosystem” is also possible with (now plentiful) coal as feedstock, provided it can be environmentally and cost competitive with gas.

While it is tempting to take the stance that government should just step out of the way, the track record in Indonesia across many industries is one where corporations have been content with healthy margins in a collegial, competitive environment.

There is a need for a degree of facilitation by the government to develop such industries.

Of course, all are easier said than done.


By Anandh R. Haridh

The writer is chief investment officer at Bakrie & Brothers. The views expressed are personal.


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