Indonesia's New Deal

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For Yudhoyono to deliver economic reform, though, he must overcome resistance from a legislature dominated by his adversaries: members of Megawati's Indonesian Democratic Party of Struggle, who have formed an opposition alliance with members of Suharto's former party, Golongan Karya (known as Golkar). However ineffectual Megawati's administration was perceived to be, it was far from idle on the economy—her team is praised for slashing the national debt, stabilizing the currency, lowering interest rates and selling off state-controlled assets. But the toughest reforms—those that might threaten the interests of powerful bureaucrats and business leaders—have been left to Yudhoyono. "The low-hanging fruit has already been plucked," says Tom Lembong, a manager with a U.S. hedge fund with investments in Indonesia.

Moreover, the unofficial President-elect appears to be on a collision course with his mainstay constituents, Indonesia's working class. To attract investment and new factories, the country needs to overhaul labor laws that businessmen say make it too costly to compete with countries such as China. They especially complain about rules that mandate high severance payouts to laid-off workers, which they contend impedes their ability to adapt to changing economic conditions. According to a study by the World Bank, the cost of firing a worker in Indonesia averages 157 weeks of pay, higher than in any other East Asian country except communist Laos. Union leaders, of course, don't see the labor rules as overly protectionist. Dita Indah Sari, a longtime labor activist and chairperson of the Front Nasional Perjuangan Buruh Indonesia union, says current law doesn't go far enough to protect workers. Business and government leaders "shouldn't scapegoat the workers to hide their economic failures," says Sari, who blames the country's lackluster performance on corruption and bureaucracy.

Labor-reform efforts, Sari says, will probably be met by strikes and protests—the kind of civil unrest Yudhoyono would like to avoid. The potential wrath of the unions was on display Sept. 21 outside the High Court in central Jakarta. Hundreds of workers laid off last year from aircraft maker PT Dirgantara Indonesia raged in protest when the court rejected their claim that layoffs were conducted illegally. Nandang Rusmana, a mechanic who worked at Dirgantara for 20 years, is still unemployed more than a year after he lost his job and is borrowing money from his family to keep his children in school. "There's no justice in Indonesia!" he yells.

On that score, management and workers are often in agreement. Indonesian courts have handed down a series of bizarre verdicts in commercial cases in recent years that have eroded the confidence of investors. In April, for example, the Commercial Court declared the very profitable Indonesian operation of Prudential Life Assurance bankrupt after an Indonesian consultant claimed the company owed him money from a terminated contract. The court immediately replaced Prudential managers with a receiver, who fired key staff. By the time Prudential got the Supreme Court to reverse the verdict in June, sales of new policies had fallen 50%. Since then, Prudential has fought off two other attempts to declare the unit bankrupt, including one last week (Sept. 23). Charlie Oropeza, president-director of Prudential's Indonesia operations, calls his situation "wacky." The legal system "is the biggest and most urgent problem for us," he says.

Yudhoyono will also have to set straight the country's stance on the development of key industries such as mining and oil-and-gas production. Although Indonesia is rich in natural resources, investors in recent years have shied away from development projects because of confusion over industry regulations as Jakarta grants more power to local governments. In one case, three years of haggling between Exxon-Mobil and Indonesian oil company Pertamina, now in the process of being privatized, has stalled the development of the massive Cepu oil field on the island of Java. The negotiations were dealt a serious blow in August, when Exxon-Mobil says it was informed by Pertamina that its contract to operate the field, set to end in 2010, would not be continued. Exxon-Mobil says it will hold off on a $2.6 billion investment to develop the field until its contract is extended. With oil prices remaining near $50 a barrel, Indonesia is losing nearly $3 billion a year in oil production due to this one unresolved dispute alone.

That's money left on the table by a nation that is hard pressed to pay for basic infrastructure. Little wonder the pressure will be on Yudhoyono to make swift progress on the economic front. Yudhoyono "gives the impression of someone who has an understanding of the problems and has a clear idea of what needs to be done and how he's going to do it," says Agost Benard, a credit analyst at Standard & Poor's in Singapore. But political honeymoons tend to be short, and the feel-good factor could easily fade if first impressions quickly prove unfounded. After that, the new President will have to answer to voters like Riza, the laid-off backpack maker, who says he'll vote with his wallet in the next election, too, if Yudhoyono doesn't surpass his predecessors in creating jobs. "We will try to find a new person who is better than him," Riza says—demonstrating once again that democracy, like second marriages, represents the triumph of hope over experience.