Southeast Asia's Biggest Challenges

Michael Richardson (Visiting Senior Research Fellow, Institute of South East Asian Studies in Singapore)

Indonesia and the Philippines are the most populous countries in Southeast Asia. Their progress would set a positive tone for the region. Yet they are struggling with fractious political elites, restive military establishments and heavy debts. They are weighed down by rising birth rates, unemployment and poverty. Indonesia, with a population estimated at 223 million, is the world's fourth-largest nation. By 2025, it is projected to have more than 270 million people. The Philippines, with a population of more than 81 million, is expected to have nearly 110 million people by then.

However, both countries have leaders who appear to be committed to recovery strategies. Indonesia's newly inaugurated president, Susilo Bambang Yudhoyono, said in an interview in the latest issue of Time magazine that he wants to improve the investment climate, starting with political stability, improved security, good taxation and economic policies, and legal certainty, including sanctity of contracts and fair systems for settling disputes.

But the problems that Philippine President Gloria Macapagal-Arroyo is encountering with her reform programme in Congress suggest that Dr Susilo, who is struggling to win firm majority support in the legislature, may also face an uphill battle. While Indonesia has made an impressive and rapid transition from authoritarian rule to democracy in the last six years, the financial and economic crisis of 1997-98 that brought former strongman Suharto down and put Indonesia back on a democratic path hit the country hard. According to the National Development Planning Board, Bappenas, nearly 25 per cent of the population is unemployed or only able to find part-time work at very low rates of pay.

Annual economic growth of about 4 per cent sounds impressive but provides less than half the 2.5 million young Indonesians entering the employment market each year with jobs. Poverty has increased in the past few years and corruption is widespread. State spending on basic development needs like health, education, housing and family planning has fallen, because government revenue has declined and about one-third of it is used to pay or rollover debt accumulated in the past. The UN Children's Fund, Unicef, says Indonesia has the highest rate of elementary school dropouts in Southeast Asia. Both government and Muslim religious schools need more funding and better teacher training.

Mrs Arroyo warned in August that the Philippines was in "fiscal crisis" because it had been spending far more than it earned since 1998. But lawmakers are reluctant to back the higher taxes she wants. They fear such measures could hurt political supporters and contributors.

An annual budget deficit, equivalent to as much as 5 per cent of economic output, led to a rapid build-up in debt. It amounts to nearly 80 per cent of gross domestic product for the government, and more than 120 per cent for the entire public sector. This is one of the highest levels in Asia.

A report this year by a group of economics professors at the University of the Philippines warned of a looming Argentina-like default on loan repayments if there was a surge in global interest rates or a withdrawal by foreign lenders.

If the governments of Indonesia and the Philippines can implement necessary changes, they will increase the level of foreign investment, trade and other economic support. Self-help must be the starting point. If they fail to quell lawlessness, they will become poorer, and criminality of all kinds, including terrorism, will increase. There will be little then that anyone outside those countries can effectively do to help arrest the downward slide.

(Originally appeared in the November 5, 2004 issue of South China Morning Post in Hong Kong, reproduced here with permission.)