Ailing Indonesia in dire need of reforms

Indonesia has been one of the five strongest sources of global growth since the global financial crisis hit in 2008.

Indonesia has been one of the five strongest sources of global growth since the global financial crisis hit in 2008.

But after failing to reform its economy and tackle its infrastructure backlog, it has taken a hammering on global markets as its economy slows, and inflation and its trade deficit rise.

And with a new parliament and president to be elected next year, the future of one of the world's biggest developing economies could be clouded for some time, the Australian National University's annual Indonesia update has been told.

Indonesia's new Finance Minister is ANU economics graduate Chatib Basri, who said last year that Indonesia's three top priorities were "infrastructure, infrastructure, and infrastructure".

But Jakarta economist Moekti Soejachmoen said little had been done to improve the country's ports, roads and rail, while President Susilo Bambang Yudhoyono's government still spent more on fuel subsidies than it did on education and health combined.

Bambang Haryamurti, editor-in-chief of the acclaimed Tempo magazine, warned a claim by unions for a 50 per cent rise in the minimum wage was adding to pressures slowing the economy and lifting prices.

The head of federal Treasury's domestic economy division, Jason Allford, just back from two years in Jakarta, said growth had slipped to a three-year low, while inflation had jumped above 8 per cent. The rupiah had slid more than 15 per cent, and the current account deficit is a record $US40 billion ($42.3 billion) a year.

But Mr Allford advised calm, saying the Indonesian economy was still strong, after a decade of growth averaging 6 per cent a year.

He said private and public debt was much lower than it was before the 1997 Asian financial crisis, and fiscal and monetary policy were well managed.

He blamed the rupiah's slump partly on the markets themselves - "Did the financial markets not know that the US was going to have to normalise monetary policy at some point?" he asked - and partly on Indonesia's failure to reform its spending priorities, labour markets, competition policy and state-owned enterprises, to make its economy "more robust" in whatever circumstances it faced.

Dave McRae of the Lowy Institute said Indonesia's new president would probably be a reformer. Popular Jakarta governor Joko Widodo is the frontrunner, ahead of ex-general Prabowo Subianto, who is banned from the US after kidnapping student protesters in 1998. But it was still unclear what any of the candidates' policies would be.

Dr McRae said it was also unclear whether Mr Widodo will be allowed to run, since his party was controlled by former president Megawati Soekarnoputri. She had yet to rule out standing again, and other party leaders also had presidential ambitions.

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