Indonesia Rising, Philippines Waning

What could be the reason for their divergent paths?

The September update of the Asian Development Bank’s Asian Development Outlook 2011 painted a contrast between the two most liberal ASEAN democracies Indonesia and the Philippines. Based on these countries’ first half performance, the Bank gave a slight upgrade to Indonesia and issued a slight downgrade to the Philippines.

Here is what the ADB had to say about Indonesian prospects:

Forecasts for economic growth are edged up from April’s Asian Development Outlook 2011 reflecting a strong performance in the first half of 2011 and a positive outlook through this year and next. Increases in fixed investment, private consumption, and net exports boosted the first-half result [emphasis added].

Meanwhile, its report on the Philippines was summarized as follows:

Growth for the first half of this year was hampered by weaknesses in exports and government spending, though private consumption and private investment remained strong. A better overall performance is projected for July–December, but the GDP growth forecast for the full year is trimmed from April’s Asian Development Outlook 2011 [emphasis added].

The update concludes that Indonesia’s economy is set to grow by 6.6% in 2011 and 6.8% in 2012, meanwhile the Philippines is set to experience a rise of 4.7% in 2011 and 5.1% in 2012. In assessing the risks, the Bank noted the preparedness of Indonesia to manage the impact of any sudden reversal of foreign capital, while it highlighted the weakness of investor sentiment in the Philippines if “no progress is seen on the government’s reform efforts, including public-private partnerships.”

It was not too long ago, that Indonesia was considered a basket case. The pain it suffered after the Asian financial crisis with riots erupting in the streets, the independence of East Timor, the secession in Aceh, a tsunami and the terrorist activities of Jemaah Islamiyah left the growth and stability of the Suharto years in tatters at the start of the third millenium.

The Philippines in contrast experienced a second “peaceful revolution” in 2001 and was for once outperforming until recently its southern neighbor in the pace of its economic uptick (see Figure 1). Ten years later, Indonesia is once again outperforming the Philippines on many fronts. It joined the Group of 20 nations that convened at the height of the Global Financial Crisis and is considered to be the only other country in our region to have considerable clout in economic affairs after China and India.

So what was it that changed the fortunes of Indonesia in the latter half of the previous decade that has allowed it to regain its stature in the world community while the Philippines remains locked into a slower growth trajectory?

Some would say it was the emphasis on anti-corruption and good governance that produced such sterling results. The election of its president Susilo Bambang Yudhoyono back in 2004 (the first directly elected president after ammendments were passed in Indonesia’s constitution) on the back of an anti-corruption platform, many say heralded a new era of clean and honest government, which is credited with restoring Indonesia’s fortunes. If this is true, it would provide some reassurance to the current Philippine president who was given the same mandate in 2010.

To assess the validity of this argument, we would have to turn first to investments in both countries during this period. Figure 2 shows gross capital formation as a percentage of GDP for both nations from 1960 to 2009. What we find is that after falling off a cliff following the 1997 crisis, Indonesian investments were already on an upward V-shaped trajectory even prior to 2004 having gone from 11% in 1999 to 26% in 2003. In 2009, investments were simply restored to their previous levels in the 1990s during the height of Suharto’s crony capitalism.

Investments in the Philippines on the other hand tracked a continuous descent from 1997 onwards. Even during the high growth years of the Arroyo administration, it continued to plumb the depths not seen since the mid-1980s after the Aquino assassination.

While it is true that during SBY’s first term from 2004 to 2009, a very vigorous anti-corruption campaign was launched which successfully prosecuted many high profile figures including a former central bank deputy governor and the president’s son’s father-in-law, corruption continues to persist. In fact since his re-election, some of the powers of the anti-corruption agency have been clipped or put under the supervision of their legislative assembly.

Recent US diplomatic cables uncovered earlier this year by Wikileaks in fact seem to indicate that Yudhoyono’s reputation for cleanliness and good governance may not be as justified as the public thinks (although none of this is substantiated with evidence at this point). Given all these factors, why is it that investor sentiment does not seem deterred?

Mining and Military

The usual suspects in explaining this are the growing demand for minerals and greater political stability. Unlike the Philippines whose electronics sector comprises the bulk of its exports, the Indonesian economy is still heavily dependent on oil and other commodities. Mining projects account for a large bulk of capital formation in the latter, while expansion into higher value sections in the electronics supply chain has been hindered by a highly liberal trade policy and incoherent investment incentives in the former.

The military establishment from where both Suharto and Yudhoyono hailed has served to steady political institutions in the past and provide a measure of coherence in government policy despite the high incidence of corruption. After a spell of political risk and uncertainty following Suharto’s fall, stability has been restored with a strong elected executive. Meanwhile in the Philippines political instability continued to hound the presidency of Mrs Arroyo.

While some regard the period between 1986-1997, the era of “freeing markets” in Indonesia as the peak in investments, it should not be overlooked that it was the period of “reform through planning” from 1965-1986 that improved Indonesia’s position from a poor investment destination in the early 60s to an attractive one in the 90s (see Figure 2).

In other words, a more robust and coherent state successfully steered Indonesia to take advantage of its natural endowments better during the early stages of its development. In fact, Figure 1 clearly demonstrates the superior growth performance of Indonesia prior to 1986 compared to the period after it.

Although a high level of inequality still persists, Indonesia with a population of 230 million has a poverty headcount ratio about half that of the Philippines (13% compared to 26%). It has an average per capita income of $2,300 compared to $1,752 for the Philippines. It is ranked 44 out of 139 in the Global Competitiveness Index compared to 85 for the Philippines.

Long-term Vision

In August the maiden issue of the Strategic Review ran as its cover story a piece by SBY entitled Indonesia in 2045: A Centennial Journey of Progress. It outlined his long-term vision for the country. This is perhaps the non-technical version of the government’s Master Plan for the Acceleration and Expansion of Economic Development 2011-2025. The time frames of these documents indicate just how far-sighted the government is.

In this statement, SBY identifies three basic pillars on which to build a national development project. These pillars are: (1) a strong and just economy (poised to become the world’s fourth largest economy of around $20 trillion by 2045), (2) a stable, strong and mature democracy adhering to the rule of law (achieving “geopolitical maturity” with a strong military), and (3) a thriving civilization and an open society having adopted the world’s major civilizations (Islamic, Oriental, Hindu, Buddhist and Western) and exporting its unique blend of culture.

From reading the document, one senses a quiet confidence of a nation unafraid of the challenges posed by increasing globalization and eager to take on the reins of regional and global influence presented to it. This expansive view contrasts with the very introspective and paranoid one that presently occupies the Philippines. There is no sense of animosity towards the dispensations that preceded it. Although it talks a lot about change and reform, one gets a sense of continuity rather than disjointedness.

Divergent Histories

Of course one could hypothesize that the reason for this divergence of temperament arises from the different colonial experiences of both countries. At the time of the European Renaissance, Java and Sumatra had been the site of Hindu and Buddhist states for over a thousand years. Their conversion into Islam only strengthened the cohesiveness of these states.The Philippines was merely a hinterland of these sultanates at the time of Magellan’s arrival.

The relative weakness and lack of cohesiveness among the tribal chieftains in the Philippines made it much easier to colonize. In contrast, the Portuguese failed to extend their influence across much of Indonesia beyond present day East Timor. Only with improved military technology did the Dutch extend their rule in the 19th century over the Javanese states.

One could argue that in Indonesia a strong state was present all along. After having had such a proud tradition of statehood, Indonesia is only now beginning to introduce reforms that strengthen the rule of law and accountability of government. The Philippines on the other hand is still building a coherent and effective state despite the outward trappings of formal democracy.

Although Suharto was just as corrupt, perhaps even more so than Marcos, governance by the state still led to sustained economic growth because corruption did not prevent the state from implementing coherent plans and policies. In the Philippines, the centralization of authority by Marcos did not produce a similar outcome. So Filipinos tended to scorn the state for failing to provide solid economic growth and sought to increase the rule of law and government accountability without creating solid foundations for the state.

This is perhaps why the Philippines finds itself in its present predicament. Even with all the best intentions in the world at instituting rule of law and good governance, it will still fall short of its dream of delivering a better future for its people because it still lacks what the Indonesians already have, and that is a strong and dependable state.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • simple facts, bigger countries are should much bigger and richer economies. why? it is very simple to create fortunes and money if the country’s territory is bigger. There much lumbers, woods, land of coconut, rice, corn in indonesia. than the philippines. Your common sense should tell you that indonesia mush richer than the philippines due its vast natural resources and land to plants. Not because indonesia better and efficient than the philippines. Your analysis, telling tha Ph is lousy. But it is NOt, your analysis is LOUSY. There are many countries bigger Size and get easy futunes, Like USA,CAnada, Russia, AUSTRALIA, BRAZIL, Suadi arabia, and that include indonesia. indonesia is much behind, compared to Big Countries, bcoz it considered as very poor. I have nuch admiration in japan, south korea, singapore taiwan. these are small countries but able to make wealth, vast export. in 2020 philippines is much bigger economy than of indonesia then, and beyond. Philippines, largest economy is asean

  • dull analysis, you are inefficient and NOT real Economist. I am much has know in economy than you are.. you better get diploma from the philippines and back to grade 1

  • GabbyD

    In fact, it would be an interesting exercise to draft a few key ideas, ahead of the planned long-term plan by the aquino administration. 

  • GabbyD

    i think a long-term (25 to 50 years) philippine development plan would be an interesting and good idea. 

  • J_ag

    Once again the bigger picture on Indonesia. Geographical, resource and historical determinism. 

    The Philippines based on its ongoing colonial experience with the U.S. were brainwashed into believing that the Philippines stood at the crossroads of Asia.  From an American perspective that would be correct. 

    However since the beginnings of modern times it has been Europe and Asia through the Suez canal and the Straits of Malacca that trade prospered. Then off course oil.. 

    The worlds largest economy is the E.U. free trade zone. The Europeans have been trading with the East for eons. The colonization process led by the Dutch East Indies and the British East Indies was one of trade and not conquest. The Arabs also did not conquer Indonesia but trade influenced their culture and the shift to Islam. 

    They also had established a well developed political order under  the Javanese in Madjapahit. The remnant of that order under Hindu culture remains in Bali.  

    Their archipelago is rich in resources and has very fertile soil due to being in the ring of fire of volcanoes. They are also fortunate not to be in the vicinity where typhoons form.

    They have their regular monsoons and are extremely rich in biodiversity.  The Dutch did not alter their culture or attempt to change it. 

    Also the Chinese trader was there already before the Europeans arrived. The Dutch like the British used the Chinese already there are their intermediaries in trade. 

    When they were forced to devalue their currency to the equivalent from 25 to one to 100 to one in just a few months externally imports dropped drastically.  However internally there was little effect of the devaluation in the basket of the locals since it was more local than imported.  

    What caused the downfall of Suharto was a banking crisis when their financial liberalization opened their banks and big corporations to foreign loans. The devaluation caused insolvency issues with their big business. 

    Credit creation was frozen and the economy collapsed. Being a resource exporter and with the government subsidizing the cost of energy under a nationalized energy sector and with serious real restructuring of their foreign loans they bounced back quickly. 

    It is a well known fact that almost 60-70% of bank deposits in Singapore belong to Chinese Indonesians. 

    India, Indonesia and Malaysia formed the backbone of the British Dutch  Commercial Empire with the pivot the country now known as Singapore. 

    These countries were able to learn from their not so complete colonizers and became what they are today. 

    Their prodigal son the Philippines who provided the link for silver (From Potosi) to be traded for Chinese tea got cut when the British with Jardines leading the charge switched from silver to opium to pay for tea and silk.  

    The rest as they say is history. 

    But hey we got Supsup with that killer bikini bod. 

    • Has anyone told you you should have your own blog, J_AG? Very good historical narrative and insights. I would just like to make two refinements on your comments.

      First, without a strong resistance and cohesive state, it would not have been possible to prevent extensive Portuguese and early Dutch/British colonization of Indonesia’s interior. It wasn’t that these colonizers were more interested in trade than religious or political missions so they settled for coastal trading outposts. Once they acquired the military means, the Dutch instituted a very repressive regime, but that came very late in the day.

      The Philippines provides the counter factual case to the Indonesian experience where divided tribal fiefdoms without defined territories or military lent itself to much easier conquest and occupation by Spain.

      Second, the strong state explains why Indonesians benefited from the exploitation of their natural and mineral resources and did not suffer the “Dutch disease”. Again here, the Philippines provides the counter factual case which is why until this day, we are still very wary of mining companies.

      So rather than simply crediting Indonesia’s rising to “geography, resources and historical determinism”, I think we should also give credit to the agency of the state and the actors within it.

      • J_ag

        Mr. Santos that was integral to the creation of an agent state.  Centuries of their own self determination.

        Please note that when the shift came to coal and oil to fuel the West’s modern rise 
        it became necessary to establish formal colonies against other European states. 

        The 20th century was proof of the extreme form of competition for resources and markets that led to wars amongst the European powers that dragged in the U.S. The U.S. was self sufficient in coal and oil then. it was simply oozing out of the ground in Pennsylvania. That is where Exxon was born.  For Japan they needed access to Manchuria’s oil together with the oil in Malaysia and Indonesia. 

        Royal Dutch Shell from the Indies. . 

        The West rose in an era of easy and cheap oil and coal. The history of the M.E and Persia is the same. Cheap oil…. 

        Thanks for suggestions about a blog.  I do this for mind exercises.  Except for a very few it’s nice to play with children on this blog. 

  • Anonymous

    Statistics:

    Although a high level of inequality still persists, Indonesia with a
    population of 230 million has a poverty headcount ratio about half that
    of the Philippines (13% compared to 26%). It has an average per capita
    income of $2,300 compared to $1,752 for the Philippines. It is ranked 44
    out of 139 in the Global Competitiveness Index compared to 85 for the Philippines.

    As a child, I’ve been trained to walk around with this “Pilipinas? We are practically your equal!!!”  when among Markanos and Yuropeyanos and Haponskis and to have supremacy-airs when with Latinos and Asyanos.  Thank goodness for education so I can rattle off statistics (to myself and to other Filipinos)  that Latin America’s banana republics have out-republick’ed Pilipinas (oh, they have really out-classed us) and that Asia’a “No hay Kristiyanos, que barbaridad!!!””  have out-revvved their economic engines and any still behind us now would have overtaken Pilipinas when NoyyiNoy leaves Malakanyang.  

    And to CBCP and other goody-goody-two-shoes who ask  “what good is wealth and economic wellbeing that you can’t take with you when you die???”   who schooled these damn idiots that they can not understand the widdom of leaving a leagacy and a better place to grandchildren and nephews and nieces.

  • “What we find is that after falling off a cliff following the 1997 crisis, Indonesian investments were already on an upward trajectory even prior to 2004 having gone from 11% in 1999 to 26% in 2003.”–Doy
    “Investments in the Philippines on the other hand tracked a continuous descent from 1997 onwards. Even during the high growth years of the Arroyo administration, it continued to plumb the depths…”–Doy again

    That, my dear Doy, is exactly the reason for their divergent path. Yodhoyono inherited from his predecessor an economy on its upward trajectory. All he had to do was introduced clean governance after winning the election in 2004 to maintain if not improve the existing inertia that the Indonesian economy was headed at the time.

    What did Pres. Noynoy inherited from his predecessor? Well, its your words so what can I do but believe you.

    Reviving a corpse is going to be a tough job for Noynoy but in time, with the continued backing of the good people of the Philippines, he can do better than what the Indonesian guy has done. Let’s just wait and see.

    Of course there are the oppositionists and the detractors who will not contribute to the efforts being undertaken by the government but they will become irrelevant when these things we the people are aiming and hoping this government can achieve come to be realized.

    • You left out the part where I said that the restoration to pre-1997 rates of investment was similar to the heights achieved under Suharto’s corrupt regime. It wasn’t “good governance” (which may or may not be taking root at the moment in Indonesia) that brought it about, but a restoration of political stability. It seems “free markets” and elite capture can sit comfortably side by side.

  • Manuelbuencamino

    “What we find is that after falling off a cliff following the 1997 crisis, Indonesian investments were already on an upward trajectory even prior to 2004 having gone from 11% in 1999 to 26% in 2003. In 2009, investments were simply restored to their previous levels in the 1990s during the height of Suharto’s crony capitalism.”
    There was massive capital flight following the race riots. Many Indonesians, specially those associated with Suharto, sent their money to safe havens like Singapore and Hongkong. 

    Money returned after calm was restored. 

    Do those returning funds qualify as foreign investment?

    Just curious…

  • Joe America

    Great article. The trend analyses are superb. If you’d care to drift by my blog site in the next day or two I shall opine on how the social circumstance in the Philippines assures success is undermined everywhichway. I have no idea if Indonesia has such a negative foundation, too. When jealousy supplants aspiration as the fundamental motive of many, you don’t exactly burn up the marketplace.

    • Anonymous

      You have a bias…   but don’t you agree with Ja_G when Ja_g opined on the wisdom of Nooy administration allowing increased migration into Pilipinas?  For Pilipinas opening up the gates so that more of the mercantile and professional-minded (with investor-dollars, to boot!!!)  from Israel, South Africa, Ethiopia, India, South Korea, Lebanon, Syrian, Iraq, Indonesia and Malaysia become Pilipinas citizens?

      • Joe America

        UPnnGrd, I believe citizenship is a commitment to live by a state’s rules whether you were born there or not. I find it odd that Philippine economic growth is fueled by so many of its citizens working, living and gaining citizenship abroad, where they are generally welcomed and participate as if born there. Yet the Philippines bars people from coming here to bring their wealth and ideas because of some notion of racial purity, I guess. Or some notion that an outsider may undermine the state. When indeed, the outsider, coming in, is likely to be highly respectful of his new nation. Likely to bring money and competitive skills in. 

        What exactly is the downside, except insecurity that a Filipino can’t keep up with an outsider?

        • No notion of racial purity as that of the white or yellow skinned I’m sure of it.

          You will be surprised Joe the Arabs, for all of their vaunted wealth, won’t allow non-nationals to own business and property including mere residential. They’re more insecure than the Filipinos I guess. 

        • Anonymous

          I am unclear about Pilipinas immigration rules and citizenship rules.  I know the juris this versus juris-that and for Pilipinas, “being born in Pilipinas” is not good enough to be acknowledged as natural-born Pilipino — extra is needed.

          Now for foreign-born like you (JoeAm) I do not know the basis with which Pilipinas qualifies who to accept as citizens and who to hold-off at arms length. For all I know, that dude James Donelan, SJ is still a non-Pinoy citizen.