18 August 2010; revised 28 August 2010.

WHY INDONESIA OUTPERFORMS THE PHILIPPINES

Eduardo Climaco Tadem

Kyoto, Japan

Not too long ago, Indonesia was Southeast Asia’s basket case. Within the region, it was the
hardest hit by the 1997-98 financial crises and subsequently plunged into a cycle of political
and social unrest and economic decline. Today, however, under its current political and
economic setup, Indonesia has attained levels of stability and prosperity few would have
imagined possible just a decade ago. This was the conclusion reached by scholars of
Indonesian studies during the First Indonesia Forum held at the Kyoto University Center for
Southeast Asian Studies on July 23, 2010.

Political Recovery

Historian Takashi Shiraishi, Japan’s most distinguished Indonesianist, attributes the

country’s remarkable recovery to three factors: (1) a successful decentralization program, (2)
the containment of religious and ethnic conflicts at the local level, and (3) a strong nationalist
imprint traceable throughout the country’s history.

Economist Kosuke Mizuno, on the other hand, notes the ability of the Indonesian economy to
weather the worst effects of the 2008-2009 global economic meltdown by keeping a
balanced financial and current account while increasing employment.

The devolution of political power saw the channeling of 60 percent of public works funds to
local governments. This has resulted in the proliferation of local governments through the
creation of new districts and an increase in the number of local political parties. Professor
Shiraishi sees these developments as positive for two reasons: (1) local governments have
become more important and, (2) more local people now have a greater stake in the running of
local governments. Local parties are also able to extend their influence to national politics by
joining major coalitions.

Decentralization has led to the containment of ethnic and religious conflict at local levels.
Thus the “politics of identity” has now been relegated to the backstage leading to the rise of
the “politics of economic growth.” Shiraishi says Indonesians now look at politics as a way
of achieving economic growth rather than as a vehicle for asserting one’s ethnic or religious
identity. As for the Islamist groups, while not discounting sporadic outbreaks of violence and
loud voices, Shiraishi says they are now forced to add once peripheral issues such as
pornography as part of their national agenda.

Dr. Herman Hidayat of the Indonesian Institute of Sciences (LIPI) and a Kyoto University
Visiting Fellow adds that decentralization has caused local economies to thrive. In areas

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where separatist movements have been strong, e.g., Aceh and Papua, 70 percent of income
from local resources accrues to the local governments.

The third factor has to do with what Shiraishi calls Indonesia’s “robust sense of nationalism”
which has been nurtured over the past decades. The Indonesian military, for one, is not
ethnic-based and culls its leaders from among the country’s various ethnic and religious
groups. The “rakjat” (people) factor has always been present throughout history and a
heterogeneous elite class is far more aware of the masses than in other Southeast Asian
societies. Even the much-maligned Suharto regime had to combine political repression with
economic delivery albeit with a little help from Indonesia’s vast oil resources. At present,
democracy and decentralization may have led to a fragmented local political scene but it has
not jeopardized the sense of national identity or “Indonesianess.”

Economic Resilience

For his part, Professor Mizuno sees the Indonesian economic resiliency as offering an
“alternative model of development” that contrasts with the East Asian experience of export-
based authoritarianism. Instead, investments focused on expanding a domestic market to take
advantage of high levels of consumption among the public. Rather than relying mainly on
financial instruments tied in with the global system, the country leaned on what Mizuno calls
“vernacular financial networks.” Ironically, these self-finance initiatives were the outcome of
“weak bank lending and a weak bond market” which have characterized Indonesia’s
economy since 2000.

Unemployment was held in check as “own account and family workers increased.”
Furthermore, family businesses and an informal sector “absorbed the employment shock
generated by the global financial crisis.”

Dr. Hidayat adds that, under President Susilo, state-owned enterprises have been retained and
all have turned in profits including Garuda, Pertamina, and Indosat. This is in contrast with
the previous Megawati regime where many state companies were privatized and sold to
foreign entities.

Mizuno reports that recent financial data show a balanced growth for Indonesia particularly
with its financial and current accounts. He concludes that Indonesia’s strength lies in its
“balanced and open economy that relies heavily on a large domestic market, strong private
consumption, vital family businesses, and vernacular financial networks.”

Unquestioned legitimacy

Other than the above observations, it is also important to note that Indonesia’s national
leadership has enjoyed a level of legitimacy not found anywhere else in Southeast Asia.
Indeed, until the May 2010 election of Philippine President Benigno Aquino III, Susilo
Bambang Yudhoyuno stood alone in the region as a head of state whose legitimacy was

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unquestioned. Not bad for a country that, upon the advent of democracy in the post-Suharto
period, looked to the Philippines on how to conduct free and fair elections.

It may also be added that the Indonesian military, once the bulwark and chief enforcer of
Suharto’s “orden baru,” has, for all intents and purposes, returned to the barracks. Its
“dwifungsi” (dual function) role has been severely curtailed, its once all-pervasive business
interests dissipated, and its guaranteed block of Parliament seats abolished by law.

In his keynote speech at the Kyoto University Forum, Professor Shiraishi made pointed
references to the Philippine experience and contrasted this with the Indonesian case. What
makes for the disparity between the two Southeast Asian neighbors?

The Philippine Case

The Philippines never had an enduring nationalist tradition, only sporadic outbursts at certain
periods or when a perceived slight to an imagined national pride occasionally takes place.
Filipinos are probably the most thoroughly colonized of all Southeast Asian peoples and this
has been a major impediment to successfully creating a viable nation-state. The country did
bask briefly in the glory of its 1986 EDSA uprising that toppled the Marcos dictatorship and
inspired similar “people power” revolutions in other parts of the world. In the long run,
however, Philippine governments failed to effectively cash in on the hard-won democratic
opening. A decentralization program succeeded only in exacerbating the worst features of
patronage politics as local government units became even more dependent on the central
government for their internal revenue allotments.

Garbage-level patronage was especially evident during the nine years of Gloria Macapagal-
Arroyo’s turbulent tenure as President. With her 2004 election marred by serious charges of
a manipulated electoral count, Arroyo had to fend off continuous challenges from both the
political opposition and reformist young military officers. Obsessed with clinging to power,
Arroyo opportunistically utilized the “politics of transaction and expediency” by courting the
loyalties of the military hierarchy and unprincipled allies in Congress and in local
governments. In return she tolerated rampant cases of military abuses and showered political
allies with largesse from government funds.

Allegations of high profile corruption scandals involving Mrs. Arroyo, her family and
cronies further eroded her popularity which plunged to the lowest ever for a sitting Philippine
President. Furthermore, human rights violations reached a scale that reportedly rivaled the
Marcos martial law years. The last months of Arroyo’s term was appropriately punctuated by
the horrific Maguindanao massacre allegedly perpetrated by her close and loyal political
allies. Not surprisingly, her party’s Presidential candidate suffered a humiliating electoral
debacle in the May 2010 elections.

The Philippine economy continued to hew closely to the now discredited neo-liberal agenda
of trade and investment liberalization, government deregulation, and privatization. Since the
Ramos years, all administrations have made the sale of government-owned assets a major

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strategy for raising revenues and offsetting huge budget deficits. While growth rates were
registered, it was what economists called a “jobless growth.” Traditional rent-seeking
business concerns and landed elites have retained their pre-eminence while skewing
manufacturing and agricultural investments in favor of “quickie” ventures such as property
development and shopping malls. The result was a collapse of industries and the stagnation
of agriculture, particularly food production.

Comparative Figures

The 2009 statistical data graphically tell the story of how Indonesia now outperforms the
Philippines (see Table 1). Indonesia’s per capita GDP, at US$2,362.10, was 35 percent
higher than the Philippines’ per capita GDP of US$1,749.60. Its GDP growth rate of 4.5
percent was four times higher than the Philippines’ measly 1.1 percent performance. Inflation
was kept at a low 2.8 percent while the Philippines struggled with a 4.4 percent rate.

From 2005 to 2008, Indonesia had a higher unemployment rate (8.4 percent against 7.4
percent) but by mid-2010, Indonesia had improved with a 7.14 percent rate while the
Philippines fell behind with 8.0 percent. As a percentage of GDP, Indonesia’s budget deficit
of 2.3 percent was more manageable than the Philippines’ 3.9 percent. The strength of
Indonesia’s local economy was shown by a gross domestic investment inflow that was 31
percent of GDP while the Philippines turned in an anemic 14 percent. Despite Indonesia’s
inward-looking policy, foreign investments poured into its economy with a US$14 billion
inflow for 2008-2009 while the Philippine had to make do with only US$3.5 billion foreign
investments for the same period.

While the UNDP human development index for 2009 shows the Philippines with a higher
ranking of 105th to Indonesia’s 111th, the more important indicators show the latter to be
ahead. Poverty rates in Indonesia are lower – 53.8 percent of Indonesians living under US$2
a day compared with the Philippines’ ratio of 57.4 percent. Indonesia also has a lower birth
rate of 18.7 per 1,000 persons compared to the Philippines’ 25.8 percent. In terms of income
and wealth distribution, the Philippines registers a higher measure of inequality with a Gini
index of 44.5 while Indonesia has only a 34.3 index.

The human development indicators where the Philippines performs better are in life
expectancy (71.7 years against 70.7 years), infant mortality (23.1 deaths per 1,000 births as
against 26.6), and the education index (0.89 vs. 0.83). These advantages, however, are slight
and unless the Philippines stages a remarkable comeback within the next few years, they
could disappear quickly.

Given the much improved political and economic situation, Indonesian tourist arrivals in
2009 of 6.4 million was more than three times higher than the Philippines’ 2.7 million. The
biggest surprise was Transparency International’s latest assessment of Indonesia as being
less corrupt than the Philippines. For whatever it is worth, the Happy Planet Index also ranks
the Indonesian people as happier than Filipinos.

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The Future

In only twelve years, and despite bumps along the way, Indonesia has managed well the
transition from centralized authoritarianism to a vibrant and stable democracy, a feat none of
its Southeast Asian neighbors have been able to achieve. President Susilo, however, has his
share of local detractors who perceive him to be weak, indecisive and obsessed with image
building. Its economy still lags behind the top regional performers – Singapore, Malaysia,
and Thailand. But for the moment, Indonesia appears to have its political and economic
fundamentals adeptly figured out. How long will this rosy picture last? Professor Shiraishi
expects Indonesia’s current upsurge to continue for the next ten years.

As for the Philippines, 24 years after the historic EDSA revolt, its political life remains
spineless and its economy brittle. It remains to be seen whether newly-installed President
Benigno Aquino III, riding on the wave of a landslide electoral victory, can rectify the
overindulgences of the Arroyo years, invigorate the economy, restore confidence in
government, and steer the country and its people forward.

TABLE 1: COMPARATIVE INDICATORS, INDONESIA AND PHILIPPINES

Indicators Indonesia Philippines
1. Economic indicators
GDP at current prices (2009, in US$M) 546,427.0 182.701.7
Per capita GDP (2009, in US$) 2,362.1 1,749.6
Growth rate of GDP (2009) 4.5 1.1
Inflation rate (2009) 2.8 4.4
Unemployment rate (2005-2008) 8.4 7.4
Unemployment (2010, World Factbook) 7.14 8.0
Budget deficit as % of GDP 2.3 3.9
Gross domestic investment as % of GDP 31.0 14.0
Foreign investments inflow (2008-2009, US$M) 14,194.9 3,492.0
2. Human Development Indicators
Poverty Index (% living under $2/day) 53.8 57.4
Birth rate (2005-2010, per 1,000 persons, UN) 18.7 25.8
Income Inequality (2009, UN; Gini, 0 = perfect equality) 34.3 44.5
Life Expectancy (2005-2010, UN) 70.7 71.7
Infant Mortality (2005-2010, UN) deaths/1,000 births 26.6 23.1
Education Index (1 = perfect education attainment) 0.834 0.887
Literacy Rate 92.0 93.4
3. Other Indicators
Corruption Index (Rank - higher rank, less corruption) 111th 139th
Tourist arrivals (2009, in thousand arrivals) 6,452.6 2,705.0
th
Happy Planet Index (Rank - higher rank, more happy) 14 16th
Sources: ASEAN Statistics and Wikipedia Online Encyclopedia. Accessed 13 August 2010.

Eduardo Climaco Tadem, Ph.D., is Professor of Asian Studies at the University of the

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Philippines Diliman. He is currently a Visiting Researcher at the Kyoto University Center for
Southeast Asian Studies. For their invaluable comments and suggestions he wishes to thank
Takashi Shiraishi, Caroline Hau, Dewi Fortuna Anwar, Herman Hidayat, Nic Tiongson, Jojo
Abinales, and Tesa Encarnacion Tadem.