The collapse of the Thai baht in July 1997 was followed by an unprecedented financial crisis in East Asia, from which its economies have only relatively recently (slowly) recovered.  At the time, the International Monetary Fund (IMF) initiated a $40 billion program to stabilize the currencies of South Korea, Thailand and Indonesia, and the U.S. bought around $2 billion yen to help stabilize what was already a troubled economy ailing from bad debt and an even worse banking system.  But no measure was enough to save Indonesia’s President Suharto, the nation’s military leader and second President (holding office from 1967-1998), as sharp domestic price increases, caused by a drastic devaluation of the rupiah, lead to widespread rioting.  And in retrospect, it is generally accepted that Indonesia was hit the hardest by the crisis, and had a tougher time than others in winning back investor confidence and attracting new foreign capital.

With roughly 230 million people, Indonesia is the most populous of the ten-membered Association of South-East Asian Nations (ASEAN).  The archipelago is comprised of 17,000 islands and a dizzying array of cultural and religious traditions.  Along with Malaysia, the Philippines, Singapore and Thailand, it is considered by economists to be one of South-East Asia’s main economies.  However, thus far it has been plagued by similar problems as its neighbors, a “mediocrity trap” as some pundits put it, that has left it lagging behind China, India and even South Korea and Taiwan in terms of global consumer brands.  “Why does it still have no global consumer brands of the stature of South Korea’s Samsung and LG?  Where are its rising technology leaders, like Taiwan’s AU Optronics and Taiwan Semiconductor?  Where are its equivalents of India’s world-conquering Tata Steel, Ranbaxy and Wipro?  Or China’s market-devouring Huawei and Lenovo?” wrote The Economist back in February.  The periodical concluded, per the findings of journalist Joe Studwell:

“the region’s business scene remains dominated by old-fashioned, mediocre, sprawling conglomerates, run at the whims of age=ing patriarchal owners.  These firms’ core competence, such as it is, is exploiting their cosy connections with governing elites. Their profits come from rent-seeking: being handed generous state contracts and concessions, or using their sway with officialdom to keep potential competitors out. If they need technology, they buy it from abroad. As a result, the region has no indigenous, large-scale companies producing world-class products and services.

Be that as it may, the short term at least has never looked better.  Last week The Economist noted that “as commodity prices soar, and secure supplies become ever more alluring, the queue of companies seeking to invest in Indonesian natural resources reads like a ‘Who’s Who’ of global industrialists.”  This on the heels of the UBS announcement projecting that the world’s supplies of thermal coal (the sort mined in Indonesia), will fall 14m tons short this year), predictably causing China’s top coal producer (China Shenhua Energy) and Tata Power to latch on to highly coveted market share.  Moreover, deals within the oil and gas industry (including the development of liquefied natural gas plants and refineries), and mining and palm plantations will also result in a 73% FDI increase from last year to $10.3 billion.

Yet multinationals and investors alike still have reason for concern.  Corruption, bureaucracy and legal uncertainty (and archaic mining, tax and labor laws) are still rampant.  In 2004 the BBC reported that Indonesia had lost $2.35b in the past two years due to corruption, according to the attorney general’s office.  The words of Mark Baird, the World Bank’s chief representative in Indonesia until 2002, still resonate, especially with foreign investors.  ”The pattern of outcomes from the courts is very hard to understand except in terms of corruption, and probably incompetence, in the court system,” Mr. Baird said before stepping down from his post. ”Sometimes I think domestic businesses are quite comfortable with this legal system.”  Indeed, as Economist points out, “Mars, a confectionery firm, and Intel, a technology giant, have been at the wrong end of curious court verdicts over the past few months.”

Other pundits think the problems facing foreign investors may go beyond the judiciary.  “Under Suharto, bureaucracy was slower.  However, once you got the required licenses, you would not have any problems in the future.  Now the problem is that even if you have a permit from the central government, the district and provincial authorities might stop you because you violated their laws.  The big problem in the new Indonesia is not democracy, but decentralization,” wrote one observer.

Adding to concern is today’s report from The Financial Times that Indonesia is losing $16b a year in natural resources due to illegal logging, fishing, and mining, and will be able to do little about it until military and civil servant salaries are significantly increased, according to Juwono Sudarsono, the country’s defense minister.  “Economists estimate that the annual theft of natural resources equates to 3.7 per cent of the country’s gross domestic product and cuts a full percentage point off the country’s growth rate,” the article states.  And rising food prices are once again rearing their ugly head.  The inflation rate has accelerated to 8.2%, the highest rate in two years, based primarily on the costs of basic foodstuffs.  The central bank is thus expected to raise interest rates within the next two months, and although the government is not expected to raise the price of subsidized fuels, higher global oil prices will result in even less government spending in order to contain a budget deficit that is around 2% of a slowing GDP.