Two Cheers for the Thinking General

Indonesia has great potential, with a cheap, 112 million–member workforce and rich stores of resources such as natural gas, coal, palm oil, timber, and minerals such as gold, copper, and nickel. Yet the country still punches well below its weight. This is by no means all SBY's fault—for example, Indonesia was devastated by the 1998 Asian financial crisis, which caused a 25 percent contraction in GDP. Though the country has recovered in many ways, one legacy that SBY inherited is a woefully inadequate infrastructure thanks to a decade of underinvestment. The huge archipelago, which includes 6,000 inhabited islands spread over an area the width of the continental U.S., has only 608 kilometers of toll roads, and officials estimate that 1,500 kilometers are needed on the densely populated island of Java alone. Yet when SBY took office, barely 4 percent of the national budget was dedicated to this sector. He more than doubled this figure, but it remains too low, and building efforts have also been hamstrung by decentralization and problems with land acquisition. Meanwhile, energy shortages were so bad last year that rotating blackouts were implemented throughout Java and Bali, forcing SBY's government to launch a crash program to quickly increase the energy supply. The state-owned investment bank Danareksa calculates that to sustain 6 percent economic growth, the country must improve its power generation by 11 to 12 percent a year, but even the government's new plan aims at only 9 percent.

SBY inherited other, equally damaging legacies. In order to appease labor unions who had helped bring down Suharto, Megawati had adopted labor laws mandating very high severance pay for workers; as a result, the country remains a far less attractive destination for labor--intensive industries than its neighbors Vietnam or China. Last year Indonesia drew a paltry $2 billion in net foreign direct investment, which is far below Thailand, for example, at $7 billion—despite the fact that Thailand has a population four times smaller, has far fewer natural resources, and was suffering political turmoil. SBY tried to reform the labor law in 2006, but the nonconfrontational general quickly backed down in the face of strong union opposition.

The 1998 Asian crisis also triggered a powerful and lingering nationalist backlash that SBY has done too little to fight. During the crisis, the International Monetary Fund imposed strict conditions on loans to Indonesia that many locals felt were both humiliating and actually deepened the crisis. This led to anger toward all foreign interference, which Suharto cronies have manipulated to preserve their dominance. Last year, for example, SBY failed to stop the passage of a new mining law that discriminates against foreign investors in various ways. As a result, Indonesia's mineral riches remain underexploited: in 2008, amid the global commodities boom, Indonesia's resource sector grew by only half a point. "We missed a tremendous opportunity," says Jakarta-based consultant James Van Zorge.

Memories of the crisis, when the country's debt-to-GDP ratio shot above 100 percent, also help explain Yudhoyono's reluctance to spend. This past January, in response to the global financial meltdown, he introduced a $6.3 billion stimulus package. But this consisted mostly of tax cuts, not government spending, and SBY refused to take on more than a 2.5 percent budget deficit (versus 4 percent in China), despite Indonesia's very healthy debt-to-GDP ratio of 30 percent—less than half that of the United States. "I understand prudence, but that's over the top," complains Van Zorge.

SBY's caution probably also reflects his knowledge that Indonesia's inefficient and highly corrupt bureaucracy is unable to quickly disburse funds. Indeed, at the end of May, $18.7 billion in stimulus and -regular budgetary funds were still sitting in the Bank of Indonesia's coffers, waiting to be spent.

That points to another key area where SBY has failed to break from the past: reform of Indonesia's kleptomaniac civil service. Under Suharto, one of the most corrupt leaders in the world, graft was the only way to get things done. SBY has scored points by encouraging the work of the Corruption Eradication Commission. But the commission was actually created in 2002, before he came to office, and its work is totally independent of the state. And while it has successfully prosecuted some very high-ranking officials, including ambassadors, ministers, members of Parliament, a governor of the central bank and even one of SBY's in-laws, "you could put 1 million people in jail and still have another 2 million committed to corruption," says Todung Mulya Lubis, director of Transparency International in Indonesia. Thus the commission "can't be the only answer," says Todung, who advocates far more thorough bureaucratic reforms, including creating a system that guarantees transparency and accountability.