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Indonesia Steps Forward

Commentary by Cameron Hume

Two unicorn companies in Indonesia with a combined valuation of $19 billion have announced their merger in preparation for a public listing in Jakarta and New York. How did this come about?

Indonesia has changed.

At independence in 1949 Indonesia was one of the poorest countries in the world. Dutch colonial policy was not to prepare the population, spread over hundreds of islands in three time zones, to be one nation. The new leaders selected one dialect to be the new national language, and they opted for a secular state although most Indonesians are Muslims. Under Presidents Sukarno and Suharto Indonesia maintained a facade of periodic elections while the state remained autocratic and the economy state-controlled.

That model collapsed during the 1998 Asian financial crisis. After 35 years in power President Suharto resigned, replaced during the next six years by four successors all chosen by constitutional means. These Presidents recognized the independence of Timor Leste, ended the conflict in Aceh, removed the military from its role in domestic politics, and returned the economy to a pathway of stable growth, averaging 5% per year.

What difference has the consolidation of the nation state and a shift from autocracy to democracy made? In 1998 Indonesia had the 32nd largest economy in the world, with per capita income of $465 (in 2010 constant dollars, World Bank figures). Lower income, despite considerable progress since independence.

Today, just one generation later, Indonesia has become the world’s 16th largest economy. It is a middle-income country, with per capita income of $4,135 (purchasing power parity at $11,000 due to low cost of living). Alongside the state-owned companies and entrenched conglomerates that still dominate the economy, new privately held entrants are forging their way forward.

Who are the two unicorns about to merge? Why are they successful?

One is Tokopedia, an on-line shopping service that links many small family-owned stores to a flourishing internet market. The second is Gojek, a payment platform and mobility company that created an on-line market for motorcycle rides through urban traffic. Mirroring our own tech giants, both are innovators, using internet access to link customers to the market in new ways, disrupting the profits of less efficient incumbents.

Indonesians are now both middle class and tech savvy. 200 million Indonesians access the internet regularly; they constitute the 4th largest market globally for cell phones, of which 63% are smartphones. The educational system is improving, albeit gradually, with the Asian Development Bank estimating that expected years of schooling per student has reached 13.6 years.

What comes next?

Indonesia should sustain its commitment to building one nation by constitutional and democratic means. Marketplaces must be open for innovation, with restrictions on rent-seeking by public companies and incumbent monopolies. Fundamental restructuring of the country’s legal system should accompany recent positive, front-end changes to the investment regime. Public investments in eduction and social services can help citizens still shifting from village to city life. More women should be welcomed into the workforce. And openness to trade, now at 37% of the national economy, should be sustained. Tokopedia and Gojek, (the merged company will be called Go To) have taught a lesson about success in the new Indonesia.

Tokopedia and Gojek, (the merged company will be called Go To) have taught a lesson about success in the new Indonesia.

Who will learn it?

(The writer, a former ambassador to Indonesia, is chairman of the American Indonesian Chamber of Commerce. He is writing in his personal capacity.)