Clinton in Indonesia: A Good Place to Start

(Note: This commentary originally appeared in The Honolulu Advertiser on Feb. 19, 2009.)

HONOLULU (Feb. 19) -- Imagine an economic slide like the one the U.S. faces today, only ten times worse. That was Indonesia a decade ago—all major banks nationalized and many closed, GDP down by 15 percent, and the country descending into poverty and near civil war. After 21 years in control, the Suharto government collapsed. And not much later—disastrous terrorist attacks and the 2004 tsunami.

But the Indonesia that U.S. Secretary of State Hillary Clinton visited this week is a different place: a lively democracy with $50 billion in foreign reserves and an economy that could grow by 4 to 5 percent this year, despite the global crisis.

All this makes Jakarta a good place for Secretary Clinton to scope out a new, pragmatic thrust for U.S. economic diplomacy. We can learn from Indonesia how it clawed its way back from economic crisis. We can engage Southeast Asia more fully and build ties with a region that approaches China and Japan in economic importance. And we can work closely with a huge Muslim country that is becoming a poster child for economic reform. (Yes, it just happens to be President Obama's childhood home as well.)

What can the world learn from Indonesia?
Indonesia is poor, diverse and incredibly complicated, and the details of its experience will be relevant only to a few countries. But here are general lessons from its approach to crisis management:

Keep your wits about you. In the midst of the turmoil, Indonesian technocrats focused on basics: getting lending moving, even if with government help; controlling budgets and borrowing (they didn't have the luxury of providing a fiscal stimulus); and eliminating barriers to flexibility. Rather than strengthening "buy Indonesian" policies, they chipped away at protectionism—for example, in autos, which had become a fiefdom of the former presidential family.

Follow a long-term strategy. While moving to stabilize the economy, policy makers understood that corruption and bureaucracy were the ultimate obstacles to growth. Already during the crisis, they embarked on a tough, long-term campaign of "Reformasi" and persisted under successive governments. For example, they fired half of the officials in key customs offices and replaced them with fewer, well-trained and highly-paid professionals—and lots of computers that are not so easy to bribe.

Make politics inclusive. Indonesia built democracy not just through the ballot box, but also by decentralizing economic decisions to local governments. This created new administrative headaches and made reform even more difficult. But it also made government more legitimate and its decisions more accountable. It encouraged local entrepreneurship and, as in China, stimulated provinces to compete with each other in pursuing good policy.

When APEC economies met to review Indonesia's accomplishments last week in Singapore, they expressed wide admiration for what the country had accomplished.

Not that Indonesia's work is done—its policy makers spoke frankly about the continuing frustrations of stamping out corruption and implementing reform in their vast, unruly economy. But the Indonesian story is good news at a time when good news is in desperately short supply.

What should the world do for Indonesia?
Indonesia faces immediate threats and long term challenges that could be addressed with international support.

In the short run, it needs foreign exchange to bolster confidence in its currency. This is an election year in Indonesia, and the government cannot ask the IMF for money. The logical source is the Chiang Mai Initiative—an Asian pool of funds established in 1998 for this kind of crisis. Inexplicably, key decisions have been long delayed on making these funds available in practice. At a meeting next week, Asian finance ministers will, hopefully, finally act on this initiative.

In the long run, an Indonesian-U.S. partnership should be a Clinton priority. The U.S. has large economic and political stakes in Asia, and they are not limited to Northeast Asia alone.

An Economic Partnership Agreement, like that which Indonesia recently concluded with Japan, would be a start. It could enhance mutual openness in trade and investment and provide support for capacity building in Indonesia's difficult reforms. And it could include a major technical, educational and cultural initiative. What better way to repay America's debt for President Obama's Indonesian education?

This is a tough time for America to look beyond its borders and, when we do, many partners clamor for our attention. But Secretary Clinton needs early, tangible results to show for her new foreign policy. We need to project "soft" as well as military power firmly and productively—and for now, at bargain prices—especially in Asia.

For many reasons, Indonesia is the right place to demonstrate how American values and resources can again play a large positive role in the world.

Peter A. Petri is a Senior Fellow at the East-West Center in Honolulu and the Carl J. Shapiro Professor of International Finance and former Dean of the International Business School at Brandeis University. He can be reached at ppetri@brandeis.edu

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