Survey of recent developments

The Indonesian public is becoming increasingly concerned about the gap between policy rhetoric and action. A strong contributor to this has been a long-running corruption saga involving a tax official, Gayus Tambunan, whose activities have helped confirm the public's worst fears about the ineffectiveness of the anti-corruption campaign. Claims of progress in this and other fields, including the economy, are often overstated, and opinion polls suggest that people are increasingly unwilling to take them at face value.

Nevertheless, the most recent data reveal a surprising surge of GDP growth, driven mainly by investment spending. Inflation has been quite steady for the last six months, albeit a little above the target range; this is disappointing, but not a major problem. In response to surging food prices the government has temporarily removed tariffs on rice, wheat and soybeans, and ordered increased rice imports. Energy subsidies continue to weigh heavily on the budget; the plan to remove the subsidy from petrol used in private cars but not from that used in motor cycles makes good political – if not economic – sense, since motor cycle owners greatly outnumber car owners. The 2011 budget is unlikely to have a stimulatory impact.

The composition of exports has altered quite dramatically over the last two decades, albeit in unexpected directions. The pattern of export destinations has also undergone significant change, reflecting the growing relative importance of Asia to the global economy.

The president's proposal for a new capital as the solution to the congestion problem in Jakarta is questionable. If policy makers fail to understand why existing cities perform their diverse functions poorly, the creation of a new capital is more likely to replicate than to solve problems. Cities are crucial to the modernisation of the economy, and are important vehicles for poverty reduction. City governments could greatly improve their performance by adopting a strategy of financial self-reliance.

The decision to establish a single authority to supervise the entire financial sector has now been delayed for almost 11 years. The draft law currently under discussion suggests that the central bank has no intention of giving up its role as supervisor of the banks. This means there would be wasteful and confusing duplication of that function in the new authority. In any case, it remains unclear exactly what purpose the authority's establishment is intended to achieve.

There have been several reminders recently of Indonesia's vulnerability to natural disasters, including multiple eruptions of Mount Merapi in central Java, which caused almost 400 fatalities and considerable damage to the local economy and infrastructure. Evacuation of residents of the area worst affected seems to have been handled well. An important policy decision needs to be made about whether those who lost their houses, crops and livestock should be permitted to return permanently to their villages.