Identifier
Created
Classification
Origin
06JAKARTA11482
2006-09-18 06:13:00
SECRET
Embassy Jakarta
Cable title:  

THE VISIT OF VP KALLA: ENGAGING ON THE ECONOMY

Tags:  PREL MASS MARR ID 
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S E C R E T SECTION 01 OF 03 JAKARTA 011482 

SIPDIS

SIPDIS

PLEASE PASS TO THE OFFICE OF THE VICE-PRESIDENT

E.O. 12958: DECL: 09/18/2016
TAGS: PREL MASS MARR ID
SUBJECT: THE VISIT OF VP KALLA: ENGAGING ON THE ECONOMY

Classified By: Ambassador B. Lynn Pascoe. Reasons: 1.4 (b) and (d).

S E C R E T SECTION 01 OF 03 JAKARTA 011482

SIPDIS

SIPDIS

PLEASE PASS TO THE OFFICE OF THE VICE-PRESIDENT

E.O. 12958: DECL: 09/18/2016
TAGS: PREL MASS MARR ID
SUBJECT: THE VISIT OF VP KALLA: ENGAGING ON THE ECONOMY

Classified By: Ambassador B. Lynn Pascoe. Reasons: 1.4 (b) and (d).


1. (C) Summary. Vice President Jusuf Kalla,s September
23-28 visit to the U.S. offers an excellent opportunity to
deliver a message on the need to accelerate economic reforms
to one of Indonesia,s most influential officials. Although
deeply involved in economic policy issues, Kalla is a
reluctant reformer who made his millions in the murky world
of Indonesian business. His instincts for boosting growth
run more toward ramping up state-directed lending programs
and expanding the role of state-owned enterprises than toward
improving Indonesia,s poor private investment climate. He
will be preaching a message that Indonesia is completely
ready for foreign investment and that, implicitly, the
timidity of U.S. investors is leaving the field open for the
Chinese. We should reply that the Yudhoyono
Administration,s program for improving the investment
climate and rebuilding Indonesia,s infrastructure have won
positive reviews from potential foreign investors, and that
the U.S. is committed to normalizing our commercial
relationship. However, Indonesia must implement on the
ground the many changes it has promised. In particular, it
needs to find ways to move reform legislation through the
parliament more quickly (Kalla is head of Golkar, the largest
parliamentary party),continue the fight against the
corruption that saps the economy, and redouble its efforts
against avian influenza, one of the greatest risks to
Indonesia,s economy.


2. (C) Kalla,s visit also serves as an opportunity to
engage him in other areas in which he has played a major
role. As the primary architect and implementer of the Aceh
peace agreement, Kalla illustrated his well-known reputation
for dealmaking. We should use that success as the basis for
suggesting enhanced GOI action in other areas of internal
conflict, such as Papua, the Malukkus and his home island of
Sulawesi. Late last year, Kalla took a strong public
position on the need for Muslim leaders to confront the
reality that there are terrorists operating in Indonesia who

hide behind claims of Islamic piety. He has been more silent
in recent times. We should query him on where that
engagement stands, as well as the GOI's stated commitment in
recent months to bring under control thuggish groups that
have threatened minorities. End Summary.

A Reluctant Reformer
--------------


3. (C) Vice-President Jusuf Kalla will be carrying a largely
business and economic message during his September 23-28
visit to the United States. The GOI is acutely aware that
its popular success is dependent upon its ability to boost
economic growth to the 7 percent range, a level that most
economists believe is necessary to employ Indonesia,s
millions of school leavers and unemployed workers. While
Indonesia has recovered from last year,s macroeconomic
instability and fuel price increases, the Yudhoyono
Administration,s campaign to improve the investment climate
and boost private investment in infrastructure projects has
advanced very slowly. Regulatory obstacles in the energy
sector have dampened oil and gas exploration spending despite
very high international oil prices, and Indonesia,s crude
oil production and LNG exports continue to decline.


4. (C) Kalla is both part of the problem and the solution.
He is one of Indonesia,s premier "pribumi" (ethnic Malay)
businessmen, and his companies profited for years from a cozy
relationship with the GOI and state-owned banks. His
economic policy instincts accordingly run strongly toward old
fashioned approaches like ramping up state-directed lending
programs and expanding the role of state-owned enterprises
(SOE). This approach resonates with many Indonesians, but
the country,s SOEs do not possess the capital or human
resources to develop the country or compete in an
increasingly dynamic Southeast Asia. Although he plays a
prominent economic policy role, Kalla has not used his
political influence to help drive legislation through
Parliament. He has proven very valuable in helping U.S.
investors break through bureaucratic red tape (he played a
key role in resolving ExxonMobil,s Cepu $2.1 billion
oilfield dispute),but has not devoted the same energy to
advancing the Yudhoyono Administration,s broad based

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economic reform program. This needs to change if Indonesia
is to enjoy a period of growth similar to its pre-crisis
boom.

Bilateral Commercial Relationship: Playing Catch-up
-------------- --------------


5. (C) The Yudhoyono Administration has increased its
counter-terrorisQefforts, welcomed the restoration of
military ties, made clear its desire to expose as many
Indonesians as possible to U.S. education and training, and
committed itself proving to its people that democracy is a
system that will benefit them. Indonesia should feel that is
has no better friend than the United States. We see
Indonesia as a fellow democracy with shared values of
tolerance and pluralism, as a nation of crucial importance to
the region and the world, and one we want to succeed.
Unfortunately, recent polls suggest that our standing
continues to decline.


6. (C) In the context of a blossoming bilateral
relationship, our economic and commercial ties have lagged
noticeably. Although 2005-06 witnessed the largest ever
acquisition of an Indonesian company by a U.S. firm (Philip
Morris,s $5.2 billion buyout of Sampoerna),the largest U.S.
commercial sale ever in Indonesia (Boeing,s $4.4 billion
sales of 737-900s to Lion Air),and the largest U.S. energy
investment here in a generation (ExxonMobil,s Cepu project),
U.S. firms have been slow to return to Indonesia.
Nonetheless, Kalla is likely to deliver the somewhat
unrealistic message that his country is completely ready for
outside investment and to call on the USG and American
business to bring forward funds. In this regard, he might
complain about our travel advisory that calls on Americans to
defer non-essential travel to Indonesia. While supporting
the desire for investment and reaffirming our longstanding
commitment to assist to the maximum extent possible, we
should use Kalla,s visit to deliver a realistic message that
the GOI needs to continue to work to make Indonesia
competitive in the international marketplace in order to
genuinely reemerge as a favored destination for investors.
The most important reforms facing the GOI include:

--Taking clear steps to improve the investment climate by
passing a new investment law, making the labor market more
flexible, and passing key tax amendments and improving tax
administration.

--Redoubling efforts to reduce corruption and reform
Indonesia,s judiciary to ensure that courts respect the
sanctity of contracts.

--Reducing bureaucratic red tape including unnecessary
requirements for permits, licenses, and other approvals at
both the central and local government levels. Improved
coordination between all levels of government in Indonesia's
newly decentralized system is also important.

--Reducing clearance times at Indonesia,s major ports, more
consistently applying customs and other import regulations,
and reducing corruption among customs officials.

--Removing the main obstacles to infrastructure development,
including the development of a system for Government risk
sharing in infrastructure projects and rationalizing land
acquisition regulations for toll roads.


7. (C) Although Kalla has not been deeply involved in the
GOI,s efforts to fight avian influenza (AI),we should also
take the opportunity to emphasize that the disease poses a
grave threat to Indonesia,s economy and needs resolute GOI
attention. The GOI,s new three-prong strategy Q focusing
on raising awareness, improving epidemiological surveillance,
and controlling AI in the poultry population is on target,
but needs forceful leadership and adequate budget support to
match donor contributions.

Kalla's Larger Role
--------------


8. (C) Kalla,s relationship with President Yudhoyono is
marked by both cooperation and tension. Many in the

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political classes view Kalla as a potential rival for the
Presidency in 2009. Nonetheless, he has worked cooperatively
with Yudhoyono in a number of areas, and both would suffer if
the economy does not produce enough jobs in the coming years.
Reflecting his reputation as a wily dealmaker, Kalla lead
the negotiation process that brought 30 years of violence to
and end in Aceh. He has also weighed in to help remove
obstacles blocking the USG-funded reconstruction of the road
from Banda Aceh and Meulaboh. It would be worthwhile to
probe Kalla on future GOI steps to better integrate other
troubled regions, such as Papua, the Malukus and his home
island of Sulawesi. As leader of Golkar, the largest party
in Parliament, Kalla should be probed on how he sees breaking
the almost total logjam in seeing new legislation passed,
notably in the areas of trafficking in persons, investment
and labor reform, formally bringing the police and military
under civilian ministerial control, and legal reforms to more
effectively prosecute transnational crime.


9. (C) Following the Bali bombings of October 2005 and theQlimination of terrorist leader Azahari in November, Kalla
emerged as a leading government critic of Indonesian Muslim
leaders who refused to recognize the existence of terrorists
who were draping themselves in the cloth of Islamic piety
while attacking their fellow man. For a period there was
much discussion of a joint effort by known Muslim leaders and
the Vice-President to work to dissuade young Muslims from
adopting the violent ideology espoused by groups such as the
Jemah Islamiyah. More recently, President Yudhoyono spoke of
the need for the country to return more towards its founding
nationalist ideology, the Pancasilla, soon followed by a
Cabinet announcement of a crackdown of thuggish groups that
have threatened minority religious groups with violence.
Recently, Kalla has been less visible on these subjects. He
should be reminded of the importance of maintaining the
ideological fight within the country, and his assessment
should be sought on the GOI's future plans in this domain.
HEFFERN