Over in Europe, the PIGS have expanded into the PIIGS, but not for the best of reasons. Perhaps we should add an “I” to the BRICs, for reasons much more positive for the global economy.
The extra “I” would stand for Indonesia, a country that often gets forgotten amid all of the attention lavished on China and India. I’ve been wondering for some time if Indonesia deserves to graduate into BRIC-dom. With nearly 230 million people, Indonesia is the world’s fourth-most populous nation, and it shares the same great potential as Brazil, Russia, India and China.
But what has held Indonesia back is that potential has stayed, well, mainly potential. There was a time, in the 1980s and 1990s, when Indonesia was a rising Asian giant and one of the most desirable of emerging markets. But then things got a bit rocky, especially after Indonesia toppled into the 1997-98 Asian financial crisis. The end of Suharto’s authoritarian regime led to a period of political uncertainty. The country became better known among investors for terror bombings than smart economic policies. Overbearing labor laws and confusing regulation scared off foreign investment. For about a decade, Indonesia was economically adrift.
But that’s changed. Indonesia showed tremendous resilience during the Great Recession, with enviable GDP growth of 4.5% in 2009, driven to a great degree by domestic private consumption. The political system has stabilized into a very solid democracy. Foreign investors are returning. A recent report from HSBC said that Indonesia is in a “sweet spot.” The bank expects growth to accelerate to 5.8% in 2010, and the country’s sovereign rating to reach investment grade by 2011.
So why isn’t Indonesia a BRIC already? The problem is that the economy is still probably not reaching its full growth potential. That’s because important reforms needed to boost investment continue to come along very slowly. Infrastructure development remains abysmal, while more permissive labor laws will be necessary if the country is to attract the kind of export industries that create lots of jobs. Expectations had run high last year after Susilo Bambang Yudhoyono won his second term as president in a landslide that reforms would come fast and easy, but that hasn’t been the case. His administration has been distracted by political battles, the latest one over a controversial 2008 bank bailout. (Sound familiar?) The HSBC report was somewhat gloomy on the prospects for major reform, but still positive overall:
Economic reform is not at all a lost cause. While the recent political development does not portend well for the hope of any big structural shift in the country’s growth rate through outsized improvement in its investment climate, it appears to us that incremental changes remain within reach and, gradually, we would see a more significant pick-up in investments into the country.
If I had to vote today, I’d anoint Indonesia BRIC status. The potential there is just too huge to be ignored. The country survived the recession in better shape than Russia; all of the BRICs have some kind of political or economic reform issues hanging over them. I first starting writing about Indonesia in 2001, and when I look at the progress the country has made since then, politically and economically, it’s quite remarkable. It’s about time Indonesia gets the attention it deserves.