THE VISIT OF VP KALLA: ENGAGING ON THE ECONOMY

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 JAKARTA 00011482 002 OF 003 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 JAKARTA 00011482 003 OF 003 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