September 29, 2020

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September 29, 2020

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September 28, 2020

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Indonesia — Why Its Choices Will Affect Our Peace and Prosperity

While it is far away and little known, we should all be paying more attention to Indonesia, even beyond its important elections this week.  It is the world’s fourth most populous country (home to one-fifth of the world’s Muslim’s) and the third largest democracy.  By some accounts, Indonesia’s economy is already in the world’s top ten, but it most certainly makes the top 20 — ahead of the likes of Turkey, Taiwan, Australia and Saudi Arabia — and it is gaining steam, with annual growth still topping 5 percent.

Indonesia is a founding member of ASEAN and one of the G-20 major economies group.  It has the world’s second highest level of biodiversity and an immense natural resource base, but also plays a major role in climate change.  Indonesia’s resources have enabled it to be active in global trade since at least the seventh century and to grow quickly in recent years.  Its resource wealth also has made Indonesia vulnerable to foreign intervention, conflict, domestic corruption and political crony-ism.  Moreover, Indonesia’s demographic diversity and spatial fragmentation are unparalleled, which make its transformation to a modern market-based democracy very complex.

Across an archipelago of over 13,000 islands, Indonesia’s population comprises hundreds of distinct native ethnic and linguistic groups.  Yet, the national motto “Bhinneka Tunggal Ika” is “Unity in Diversity” or literally, “many, yet one.”  That, however, remains to be seen.  It is an open question whether Indonesia continues its recent movement toward political and economic freedom and inclusion, enabled by political and religious pluralism and moderation.  Ultimately, Indonesia’s path will affect us all, and have near-term impacts.

The challenge is starkly illustrated in the degree to which the next President of Indonesia will press forward with democratic reform and economic liberalization, or fall back further into the authoritarianism, protectionism, corruption and crony capitalism from which the country has just begun to emerge.  The press has widely covered the dichotomy between the two candidates who faced off in an extremely tight race — only the second direct Presidential election in its history — on July 9.  Indonesia will either go forward with a reputedly authoritarian former general (Prabowo  Subianto) — the wealthy and well-connected former the son in law of long-time President Suharto — or a successful, self-made entrepreneur/exporter (Joko Widodo) who served as the Governor of Jakarta but lacks Subianto’s extensive military and economic connections.

Subianto’s statements reportedly include disavowing direct elections as “…not in accordance with our own culture” and telling crowds that “the wealth of Indonesians has been stolen, stolen, stolen from the people” by foreign investors who make Indonesians their “lackeys.”  Yet, his family actively trades in oil and gas, palm oil and mining and as Suharto’s Finance Minister, his father helped to open the country again to trade in the 1960s and some believe he could be “good for business.”  Nonetheless, Indonesian markets reacted positively to news that Joko Widodo, the populist outsider who has made clear his support for the institutions (market and political) which have enabled his own success, likely won by a narrow margin.  International investors have signaled in some surveys a greater comfort level with their likely prospects under a Widodo Presidency, but Indonesia’s ambivalence towards FDI is real, and must be addressed.

In truth, each candidate has spoken to deep-seated concerns at home that outsiders have exploited Indonesia’s resources and meddled in its affairs.  Widodo, however, has reportedly been more temperate, committing to respect existing contracts with foreign investors despite criticism of foreign investment.  Both candidates are seen as more nationalistic than the current President.  Even if he wins when the official results are released on July 22, Widodo will not have a strong mandate to undertake the painful reforms needed to address twin fiscal and current account deficits (e.g. by cutting popular fuel subsidies) while expanding much-needed infrastructure investment.  He will have to tap popular sentiment and international support to combat the corruption and cronyism which benefit powerful vested interests in Indonesia.  The new President must also woo international investors, but without being seen to knuckle under to outside pressure.  He will also need to tamp down popular frustrations while maintaining stability and defending against division and extremism.  It is a tall order, and the new President will need substantial international support.

All the while, Widodo would face powerful, well-resourced opponents and the headwinds of tapering by the U.S. Federal Reserve and weak international demand for Indonesia’s commodity exports.  The business community and international leaders could do much to help raise the prospects that Indonesia weathers these challenges and continues to evolve as a moderate, majority Muslim democracy that can be a good global partner on issues such a climate change, security and global growth for allies such as the United States (one of its biggest trade partners) .  Indonesia will need attention, understanding and support to avoid being a barrier to these goals, or far worse, turning sharply away from economic and political inclusion and openness.  Given its size, population mix, and critical role in global dialogue, Indonesia’s path will matter to us all.

© 2020 Covington & Burling LLPNational Law Review, Volume IV, Number 192


About this Author

Stuart Eizenstat, international trade attorney, Covington
Senior Counsel

Ambassador Eizenstat heads the firm’s international practice.  His work at Covington focuses on resolving international trade problems and business disputes with the US and foreign governments, and international business transactions and regulations on behalf of US companies and others around the world.

During a decade and a half of public service in three US administrations, Ambassador Eizenstat has held a number of key senior positions, including chief White House domestic policy adviser to President Jimmy Carter (1977-1981); U.S. Ambassador to the European...

Anne Pence, International Advisor, Covington Law Firm
Senior International Adviser

Constance Anne Pence, a non-lawyer, is a senior international advisor in Covington’s Washington, DC office. As a policy-oriented economist for over 20 years, Ms. Pence has tremendous experience advising sovereign and corporate clients, as well as coalitions in both domestic and international policy settings. Before joining Covington, she was the special advisor to the newly-created USG Millennium Challenge Corporation.  Ms. Pence also served with the U.S. State Department for 16 years.  For eight of those years she was the Department’s G8 Summit policy coordinator in the Office of the Under Secretary for Economic, Business and Agricultural Affairs.  Ms. Pence worked closely with two administrations on a broad range of international economic and national security issues involving the White House and US interagency process, the G8, the UN and other international organizations, and developing and emerging economies.