2023/78 “The Digital Transformation of Indonesia’s Banking Sector: Current Trends and Future Prospects” by Manggi Habir and Siwage Dharma Negara
EXECUTIVE SUMMARY
- The pandemic has especially accelerated digital adoption in the financial sector. Competition is intense in the bottom end of the market, with the entry of fintechs and conventional banks going digital by acquiring smaller banks and converting them to digital banks.
- The speed of this change has left digital financial players struggling with data integrity and access issues. This encouraged an initial reliance on servicing the business ecosystem of affiliates in a more controlled market environment in order to buy time for developing and fine-tuning their digital systems.
- By becoming major funders of fintechs, banks deepen their partnerships with those with a similar market focus. Well-funded fintechs also try to secure a more stable and predictable funding base by taking a stake in banks, thus blurring the distinction between the two.
- With rising digital financial transactions, risks associated with digital and online transactions increase, and regulators are tightening set-up and operating requirements as well as customer protection regulations. This is expected to streamline the sector since it provides an advantage to those with deep funding and a stronger market position.
- Even with a weak recovery and even if investors become more selective and stress profitability over growth and market position, the outlook for this sector remains positive. The ultimate beneficiary, though, will be the consumer as they gain more options and more affordable financial service offerings.
* Manggi Habir is Visiting Fellow at ISEAS – Yusof Ishak Institute and Independent Commissioner of PT ADIRA Finance. Siwage Dharma Negara is Senior Fellow at ISEAS – Yusof Ishak Institute.
ISEAS Perspective 2023/78, 2 October 2023
INTRODUCTION
The ongoing digital transformation of Indonesia’s financial sector since the early 2010s has further accelerated during the 2019-2022 pandemic. Social mobility restrictions (PPKM) during the pandemic forced most people to shift their daily activities online, including accessing financial services. Rising e-commerce transactions also led to increased use of e-payments, and fintech lenders were kept busy filling in the micro and small medium enterprises (MSMEs) loan demand gap.
This essay examines the digital transformation of Indonesia’s banking landscape.
INDONESIA’S BANKING LANDSCAPE
Much has been written about the provision of financial services to the vast unbanked segment at the bottom of the income pyramid in Indonesia. About 80% of Indonesia’s 275 million population are unbanked and underbanked.[1] Yet, smartphone penetration in Indonesia is relatively high at 80% of the population.[2] To make financial services affordable to low-income customers or small micro enterprises, transaction costs need to be brought down. This is where issues of data, technology and scale become critical. The battle for providing services to this vast bottom-end of the market is altering Indonesia’s banking landscape.
Indonesia’s Financial Services Authority (OJK) categorises the banking segment into conventional and Syariah banks. This essay excludes the latter, which account for just 7.6% of total banking assets.[3] Within conventional banks, there is a subset of a few more digitally-focused banks (henceforth digital banks). Both conventional and digital banks carry the same banking license. The difference between the two is getting blurred as conventional banks rapidly catch up and adopt a lot of the digital technology and online channels that digital banks have been using for some time. One difference between conventional and digital banks is that digital banks do not have physical branch networks and their services are operated entirely online. Conventional banks, on the other hand, continue to provide services through physical branches, albeit they have also begun launching online services as well.
In recent years, a new type of financial institution called fintech lenders has begun to provide loan services as well. Unlike banks, fintech lenders operate exclusively as an online platform that matches borrowers with funders directly, and collect a brokerage fee. The risk of non-repayment is absorbed by funders directly and not by the fintech lender. In contrast, a bank depositor is taking a bank risk, while the borrower risk is borne by the bank. Reflecting the higher risk, the return on funds for fintech funders is much higher than the return on bank deposits.
The operating costs of fintech lenders, given their use of technology and absence of branches, are much lower than those for commercial banks and this allows them strategically to service the unbanked sector at the bottom of the income pyramid. The beneficiaries are often lower-income individuals as well as small micro-enterprises involved in commercial activities, such as food stall operators and vegetable traders at traditional food markets.
Table 1: Financial Market Segments
Note: Note*: Large banks occasionally give overnight short-term loans to mid-to-small-sized banks (interbank borrowers market)
Source: Authors
Conventional banks have traditionally focused on large corporate and commercial (mid-sized corporate) segments (Table 1). Automation and the lowering of transaction costs have prompted these banks to offer consumer banking services to upper-middle income individuals and the SME sector.
Soon after the fintech lenders grew to provide services to the bottom unbanked sector (micro and SME segment), newer digital banks began to emerge. These digital banks are trying to replicate the success of the fintechs, but with a more stable funding base, as they could take on deposits. Like the fintechs, digital banks operate without a physical branch network and need fewer employees by using information technology and centralised operations.[4]
Table 1 shows an overlap of the conventional, digital and fintech markets. Conventional and digital banks compete at the mid-to-lower end of the commercial (mid-sized corporation) segment. Meanwhile, at the lower end of the financial market table, all three lending services are starting to compete, with conventional banks. The latter only recently entering the upper micro business segment. It is the newer digital banks and fintech lenders that are competing head-to-head in this relatively unbanked new segment.
The earliest players in the bottom-end micro-lending field have been conventional banks. Bank Danamon, followed by BTPN and later Mandiri, launched their respective micro-loan programme for this segment in 2004-2015.[5] However, these human-intensive programmes were not delivered digitally and operated through conventional branch networks. They were costly to operate since they relied on frequent customer visits by bank officers to market loans and to collect loan repayment from small traders. However, the high profit margins from these micro-loans were sufficient to ensure profits.
However, this trend ended when the government introduced the People’s Productive Loan (KUR) programme in November 2007,[6] which currently carries a subsidised interest rate of six to seven percent. Eventually, the commercial banks’ micro loan programmes became unsustainable and were discontinued. One exception is BTPN Syariah, a subsidiary of BTPN, which follows the Grameen Bank model by providing micro-loans to groups of women entrepreneurs in remote villages. The remoteness of this market segment enabled BTPN Syariah to continue making high-margin micro-loans operated manually through their branch networks.
THE RISE OF FINTECH LENDERS
As the conventional banks exited the micro-loan segment, the fintech companies began entering the bottom-end micro-lending segment around 2010. Unlike conventional banks, fintech lenders have no branches, use technology in their operations and channel their services entirely online. This allows them to provide financial services to the unbanked bottom segment of the income pyramid and scale up at low costs.
In 2011, only a handful of OJK-registered fintech lenders existed. However, by 2022 there were over a hundred of them registered, with an even larger number of unregistered or illegal fintechs providing online lending services. In the SME space, fintech lenders compete with commercial banks, but in the unbanked lower Micro segment they face relatively less competition (Table 1).
One key feature of Fintech loans is the relatively short loan tenure, averaging around 90 days. These loans are also limited by OJK to a maximum of Rp 2 billion (US$ 132,000) per borrower. As these do not require collateral, their interest rates are kept higher than those offered by banks.
In the early phase of its development, fintech lenders were primarily funded by individuals and non-bank institutions. However, during the pandemic, banks stepped in to become major funders of fintech lenders; this was to compensate for their inability to grow their loan portfolios. Today, while both banks and fintech lenders provide financing to SMEs, due to their higher operating costs, the former have largely avoided financing micro enterprises, a market in which lower cost digital banks and fintech lenders are active.
In the post-pandemic period, rising interest rates and the sluggish recovery have made it challenging for the fintech sector. For one thing, their high loan growth during the pandemic coupled with the rising interest rate environment are causing borrowers loan repayment problems. This has caused fintech lenders’ non-performing loans (NPLs) to rise (Figure 1).[7] In contrast, banks have managed to bring down their high NPLs, restructure their loan levels, and grow their loans portfolio again. They are also starting to compete with fintech lenders in the SME and upper micro enterprise market segment.
Figure 1: Non-Performing Loan Rate (%) for Commercial Banks and Fintechs
Source: Financial Services Authority (OJK)
Finally, fintech investors and venture capitalists have become increasingly more selective; they stress on and require positive cashflow or profitability from their fintech investees. Earlier, when interest rates were low, investor emphasis was more on scaling up and gaining market share.[8]
THE ENTRY OF TECHNOLOGY-DRIVEN DIGITAL BANKS
Aside from the advent of fintech lenders, the financial sector has also witnessed the entry of two types of digital banks.
One is the digital banks owned by conventional banks. These banks were created by conventional banks acquiring smaller banks and converting them into digital banks. Examples include Bank Raya (owned by BRI), hibank (formerly Bank Mayora, acquired by BNI), and BCA Digital (owned by BCA).
A second type of digital bank is a stand-alone digital bank owned by fintechs and/or tech companies. These include Bank Jago (where GoTo has a significant minority stake), Superbank (with Emtek, Grab and Singtel as shareholders), and Allobank (with the Chairul Tanjung group, Grab, Carro, IndoLife and Traveloka as shareholders). Investree, a well-funded fintech, has also taken a minority stake in Bank Amar. Another fintech, Akseleran, is planning to take a stake in a multi-finance company to broaden its customer base, diversify its services offered, and further strengthen its funding base.
For digital banks, the linking and servicing of their affiliated business ecosystems for MSMEs remain important strategies during the early growth phase.
With fintech lenders entering the lower-tier of the income pyramid, a few banks, including fintechs and tech companies, have taken stakes in existing small to medium-sized banks and converted them into digital banks (see Table 2). These banks have followed the fintech lenders’ model, but they have access to a more predictable and stable funding source and are able to mobilise deposits.
Table 2: Selected Major Digital Banks in Indonesia
Source: Authors compilation[9]
Post-pandemic, the initial excitement and expectation over fintech lenders and digital banks have tempered. With consumers reverting to their pre-pandemic offline behaviour, e-commerce growth has slowed down and, along with it, e-payment and fintech lending activity. The rise of interest rates globally has also raised the cost of business in this segment. The market valuation of listed tech-based companies worldwide has taken a hit, including in Indonesia (Figure 2).
Figure 2: Tech Companies Valuation Declines Post-Pandemic (IDX)
Source: Indonesia Stock Exchange
THE CHALLENGE OF BUSINESS ECOSYSTEM LINKAGES
A major challenge facing digital banks and fintech lenders is the strengthening of linkages in their digital business ecosystems. Key elements in these ecosystems include: (i) sharing and accessing data, (ii) verifying and making such data consistent and usable, and (iii) feeding data to algorithms for critical business decisions.
Data is arguably the sector’s most valuable raw material. The ability to acquire, store and manage appropriate data is as important as having sophisticated algorithms that are used to choose, filter and onboard both lending and funding customers. These algorithms are used to assess the loan repayment risk of each borrower and, for those passing the filtering phase, to help set the terms and conditions of their loan, which includes calibrating loan rates according to each borrower’s risk score, all in an automated way without human intervention.
Newly established digital banks in Indonesia such as Superbank plan to provide loans to the vast number of MSMEs suppliers and distributors within its stakeholders’ (Emtek, Grab and Singtel) respective ecosystems. By focusing on affiliated ecosystems, the bank is able to better control risks and more efficiently onboard and service its customers.[10]
An effective end-to-end seamless system involving digitally onboarding customers, processing transactions in an automated way and ultimately providing financial services online, will take time and resources to build and fine-tune. Inappropriate data processing could lead to unusable “garbage in garbage out” results. There is also the problem of connecting and having different systems among the group-related companies to talk with each other, and to ensure that their respective management cooperate in addressing these teething issues.
Algorithms inevitably contain biases that lead to skewed decisions. These systems take time to test, fine-tune and remedy, before they can be used in an open environment. This explains the tendency of digital banks and fintech lenders to initially operate in a more controlled network of affiliated group-related companies. This way, accessing and sharing data as well as testing algorithms becomes more manageable.
However, financial institutions relying on group-related ecosystems with a limited and narrow sectoral focus could face concentration risk issues whenever their markets suffer a downturn. Those that can link with a more diversified group of companies closely resembling an open market would have a better advantage.
THE BANK-OWNED DIGITAL BANKS
In the meantime, the large conventional banks have not been idly standing still. Some have acquired smaller banks and converted them to digital banks to complement their regular ongoing services (Table 2). Others are nurturing strategic alliances with fintechs and becoming their major funders. They may even take an ownership stake in their fintech partner if the relationship works.
Large incumbent banks are also digitising their distribution channels to similarly acquire, select and onboard customers online. Fintech lenders and digital banks have a bit of a head-start in this area, but banks, given their resources, should be able to catch up easily. Those that can acquire, select and manage their database as well as timely fine-tune their algorithms can create a reliable digital banking system. One approach is to grow organically in its current form. Alternatively, it can inorganically be acquired by large incumbent banks that do not want to start from scratch.
Recent strategic alliances and acquisitions, as well as conventional banks’ digitalisation are starting to blur the boundaries between these segments.
NEWLY EMERGING DIGITAL-RELATED RISKS
The banking industry faces several familiar digital-technology-related risks that have become more prevalent in recent years.
First, the growing use of digital platforms exposes banking and financial institutions to cyber threats such as hacking and data breaches.[11] A cyber ransomware attack recently caused disruption of Bank Syariah Indonesia (BSI) services. The incident highlights the weakness of the bank’s digital security systems.[12] As cyber-attacks become increasingly complex and sophisticated, there is an increased risk of customer data breaches, financial theft, and service disruption.
Second, improvements in digital technologies also increase incidents of identity theft, phishing scams and online frauds.[13] The fraudsters could exploit vulnerabilities in online banking systems, use malware to capture confidential information, or impersonate legitimate institutions to deceive customers.
Third, banks and financial institutions deal with vast amounts of personal and financial data. While data privacy regulations impose strict requirements on how customer data are collected, stored, and processed, in practice, there is weak enforcement.[14]
Fourth, the banking industry relies on a complex technology infrastructure, including core banking systems, payment gateways and online banking platforms.[15] The industry is struggling to keep up with the latest technology. Outdated or poorly maintained systems may increase the risk of system failures, software glitches or infrastructure vulnerabilities, which can lead to service disruptions, transaction errors and financial losses.
THE REGULATORY FRAMEWORK
Rapid digital technological advancements often outpace the development of regulatory frameworks. Financial institutions face challenges in keeping up with advancements related to digital technologies, such as cryptocurrency, blockchain and digital wallets. However, regulatory bodies lag behind in understanding the emerging new risks and coming up with effective and enforceable rules. The difficulty for regulatory bodies is finding a delicate balance between a regulatory framework that is tight enough to protect consumers but at the same time, loose enough to allow innovation to flourish.
The Indonesian government has been quite supportive in providing a relatively loose regulatory environment during the initial phase of the fintech sector development. However, with the rise of digital risks, it has begun to tighten up the regulatory framework. Regulations such as the E-Money and Digital Financial Innovation roadmap as well as subsequent regulations[16] are designed to facilitate innovation while ensuring consumer protection and financial stability. The government is also encouraging closer collaboration between traditional financial institutions and fintech players.
Collaboration and partnerships between traditional banks, fintech companies and other stakeholders will be critical to capitalise on the opportunities presented by digital technology. Traditional banks can leverage the innovation and agility of fintech startups, while fintech companies can benefit from the funding resources and broader customer base of established financial institutions.[17]
THE NEAR-TERM OUTLOOK AND FUTURE TRENDS
The near-term outlook for Indonesia’s banking sector remains generally favourable. The country has seen significant advancements in digital technology adoption in recent years, and this trend should continue.
Digital technology has played a crucial role in promoting financial inclusion in Indonesia. It has enabled banks and financial institutions to reach previously underserved segments of the population,[18] particularly in remote areas. Digital platforms, mobile banking and e-wallets have made financial services more accessible and convenient, allowing a larger portion of the population to participate in the formal financial system.[19] The challenge from now on is to educate and incentivise the unbanked market segment to become more financially and technology literate as well as to utilise various digital services more safely and effectively.
Indonesia has a thriving fintech ecosystem, with numerous startups and technology companies entering the financial services space and providing innovative digital financial products and services, such as peer-to-peer lending, digital payments, crowdfunding, and robo-advisory services.
Unfortunately, as digital technology becomes more prevalent, cybersecurity and risk management become critical concerns for the financial sector. Indonesian banks and financial institutions will continue to spend and invest more in cybersecurity measures, risk assessment frameworks, and incident response capabilities.
Digital technology is transforming the Indonesian banking and financial sector landscape. The distinction among banks, finance companies and fintechs is blurred by the fact that these different market segments now cooperate with each other. In some cases, where there is a strategic fit, different entities merge into a larger financial services group.
Given Indonesia’s large unbanked population, rising internet penetration and increasing smartphone usage, the financial industry still has considerable room to grow. Intense competition among the three categories of financial services and the offering of new digital services, especially at the lower-end of the market, should ultimately benefit end consumers.
ENDNOTES
For endnotes, please refer to the original pdf document.
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2023/77 “New Thai PM Faces a Crisis of Confidence” by Termsak Chalermpalanupap
EXECUTIVE SUMMARY
- As a political novice, Thailand’s new Prime Minister, Srettha Thavisin is facing an uphill struggle to prove that he is the right man for the job.
- He has no formal leadership post inside Pheu Thai, the major party in the 11-party coalition government. He also did not take part in the selection of Pheu Thai’s election candidates. Neither did he have much say on who would join his cabinet line-up.
- He is in great need of support from his coalition partners. Without that, he will not be able to deliver concrete results. Worse still, he can be unseated in a no-confidence motion in the House of Representatives.
- The volatile political heavyweights from the other parties in his coalition government do not owe him anything – neither allegiance nor gratitude. They would resent his supervision if it limits their manoeuvrability to advance their own political interests.
- The most formidable challenge Srettha is facing is a crisis of confidence: More and more unhappy Thais feel that he lacks what it takes to deliver good concrete results.
*Termsak Chalermpalanupap is a Visiting Fellow and is Acting Coordinator for the Thailand Studies Programme, ISEAS – Yusof Ishak Institute.
ISEAS Perspective 2023/77, 27 September 2023
INTRODUCTION
Many challenges await the new Thai Prime Minister Srettha Thavisin. First of all, as a political novice without any power base in Pheu Thai (PT), the largest party in the 11-party government coalition, he faces a crisis of confidence. More and more Thais doubt that he can stop corruption and improve lives and livelihoods – let alone lead Thailand back to genuine democracy.[1]
During the election campaign, as a premiership candidate of the PT, Srettha was less popular than Paetongtarn Shinawatra, another of the party’s premiership candidate, who is also the youngest daughter of former PM Thaksin Shinawatra, and Pita Limjaroenrat, leader of Move Forward Party (MFP).
The 60-year-old real estate tycoon used to head Sansiri, the largest real estate public company on the Stock Exchange of Thailand, with an estimated market capitalisation of about 30.147 billion baht (US$ 840 million). He has been accused of engaging in “unethical” business practices (including tax evasion and price manipulation through mysterious nominees) in some of Sansiri’s land purchases.[2]
Both Sansiri and Srettha have denied any wrongdoing. Srettha, who resigned from the CEO post at Sansiri on 3 April, has sued Chuwit Kamolvisit, a former Bangkok MP, for slander and demanded 500 million baht as compensation.[3] Chuwit has responded with a threat to petition the National Anti-Corruption Commission to investigate Srettha.
The PT was in disarray after it failed to score a “landslide” victory in the May general election. At first, it had to play second fiddle to the MFP, the election winner, in haphazardly attempting to win the premiership for MFP’s Pita. After Pita’s failure due to lack of support from senators, the PT seized the opportunity to “divorce” the MFP and decided instead to work with parties in the previous Prayut Administration, which many PT supporters disdain as vestiges of authoritarianism.
Srettha’s premiership will practically be held hostage by its four major coalition partners, all of which are former opponents of the PT: Bhumjaithai (BJT, 71 MPs), Palang Pracharath (PPRP, 40 MPs) and United Thai Nation (UTN, 36 MPs), and Chartthai Pattana (10 MPs). The PT alone has only 141 MPs in the 11-party coalition of 314 MPs.[4]
Without the support of these four parties, which were part of the Prayut Administration, the current PT-led coalition would lose control of the majority in the 500-member House of Representatives; Srettha would then risk being toppled in a no-confidence motion.
In addition to the above predicament, Srettha also has to deal with another “political hot potato” – Thaksin, who has been undergoing some unspecified emergency treatment in the Police Hospital after surrendering himself on 22 August to face an 8-year jail term upon his return from 17 years of overseas exile. About one week after his return, Thaksin quietly submitted a personal request for royal clemency. On 1 September, the Royal Gazette published a decision of the King to reduce the jail term of Thaksin from eight years to one.
How will Thaksin serve this remaining one-year jail term, and under what extraordinary arrangements during the Srettha Administration will be a closely watched issue. The Corrections Department on 21 September approved Thaksin’s request to extend his stay in hospital by 30 more days.
It will be a remarkable achievement if the Srettha premiership lasts till its mid-term in May 2025, when his administration is expected to deliver a new and democratic “people’s constitution”.[5]
POLITICAL NOVICE’S DISADVANTAGES
So far, it remains a mystery who invited Srettha to join the PT prior to the May general election. One speculation has it that it was Yingluck, former prime minister and younger sister of Thaksin, who recommended him. Srettha was a known critic of the Prayut Administration.
At first, Srettha was given merely an informal role as chief advisor to the head of the “Pheu Thai Family,” Paetongtarn. He subsequently emerged as one of the PT’s three premiership candidates. The two other candidates are Paetongtarn, and Chaikasem Nitisiri, a former justice minister in the Yingluck Administration.
Srettha’s most memorable feat during the election campaign was to unveil on 5 April the PT’s ambitious pledge to give every Thai who is 16 years old and above a “digital wallet” containing (the right to use) 10,000 baht for spending within their neighbourhoods.[6]
Not having any formal post in the PT leadership, Srettha played no role in the selection of election candidates. Neither did he have much say on who would join his cabinet. The cabinet list was submitted to the King on 1 September, ten days after Srettha had won the premiership on 22 August. The Royal Gazette published the King’s approval on 2 September.[7]
Key ministerial posts went to senior politicians who are influential leaders of factions within the PT, and to Thaksin’s lieutenants. One of them, Dr Prommin Lertsuridej, will be the chief-of-staff to Prime Minister Srettha. In all probability, few of them will be willing to obey Srettha, to whom they owe neither gratitude nor allegiance.
Interestingly, Srettha is concurrently the finance minister.[8] This will enable him to push the implementation of the “digital wallet” plan. More importantly, he can control the purse strings and keep an eye on spending and decide on new budget requests from all ministers. He will be assisted by a deputy finance minister from the UTN, Krisada Chinavicharana, who on 31 August resigned as permanent secretary of the Ministry of Finance.
Not being an MP has both advantages and disadvantages. Srettha will have more time to travel overseas, which he wants to do every month in order to negotiate free trade agreements with Thailand’s key trading partners.[9] Srettha reportedly secured a deputy foreign minister of his choice, Jakkapong Sangmanee, the PT’s registrar, to assist him in this endeavour.
However, one huge disadvantage in not being a legislator is a tendency to lose touch with MPs and senators, whose support he needs in order to push through in a timely manner key legislations – especially constitutional amendments.
PERILS OF COALITION GOVERNMENT
Perils of the Srettha coalition government could already be seen in the tedious “horse-trading” for cabinet posts. The commotion began as soon as the PT announced its decision in early August to part ways with the MFP. Pol Gen Sereepisuth Temeeyaves, leader of Thai Liberal, one of the coalition partners with only one MP, compared the infighting to “dogs fighting over a rice bowl”.[10]
Many MPs in the PT were surprised and upset to see the interior minister post go to BJT leader Anutin Charnvirakul,[11] and the agriculture minister post to PPRP secretary-general Thammanat Prompao. The former post controls all provincial governors and local government administrations; the latter is in a position to help farmers nationwide. Both are crucial in winning the hearts and minds of the provincial poor.
The PT also sacrificed the energy minister post and let it go to UTN leader Pirapan Salirathavibhaga in exchange for the defence minister post which the UTN had earlier wanted. The energy minister will have a crucial role to play in bringing down prices of electricity, diesel, gasoline, and cooking gas to curb the rising cost of living. This is crucial in winning urban votes.
The defence minister post went to Sutin Klungsang, one of the PT’s deputy party leaders. He has recruited General Nipat Thonglek, a former permanent secretary of defence with a reputation for being a “Democracy General”, to be his chief assistant. Sutin has become the first civilian in modern times to head the Ministry of Defence without concurrently holding the premiership.[12] But Sutin’s appointment came too late to change the annual military reshuffle.
Under the careful watch of outgoing PM General Prayut Chan-o-cha, who was concurrently the defence minister, appointments of the new Supreme Commander of the Armed Forces, Army Commander, Air Force Commander, and Navy Commander were swiftly done. Announced on 30 August, the appointments take effect on 1 October 2023, at the start of the new fiscal year.[13]
The PT had to yield – some PT negotiators said they had to “swallow blood!” – in order to secure support from these former “enemy parties” to help Srettha win the premiership. And they are cognizant of the fact that crucial support for Srettha will continue to come only at a price. The PT as well as Srettha must allow ministers from coalition partners some leeway to advance their respective parties’ agendas without unnecessary intervention from the head of government.
One serious risk that Srettha cannot avoid is to be held responsible for whatever corruption and other wrongdoings in the government under his watch. He can learn from the example of former Prime Minister Yingluck Shinawatra, who had to flee the country to avoid a 5-year jail term for failing to stop massive corruption in the infamous paddy pledging scheme of her administration.[14]
Srettha’s dilemma lies in his need for support from these coalition partners to stay in power long enough to deliver concrete results. At the same time, his dependency on them can be mistaken by ministers as a licence to abuse power with impunity. In such a situation, corruption in the Srettha Administration may thrive and spread faster than the Thai economy can recover.
HOW TO PLACATE UNHAPPY THAIS?
When asked what kind of prime minister he wants to be, Srettha has responded: “People’s prime minister”; he has pleaded repeatedly through the mass media to give his “people’s government” a chance to prove its worthiness.
Following his formal acceptance of the royal command to serve as prime minister on 23 August, Srettha announced his conviction that the next four yours of his premiership would be “four years of changes”. He also reaffirmed the pledge of the PT-led coalition government to work “tirelessly” to make Thailand a land of hope for the younger generation and a land of happiness for all, and to “once again win honour and dignity for Thailand in the international arena”.[15]
Therefore, in his first cabinet meeting on 13 September, Srettha secured quick decisions on lowering prices of electricity and diesel; suspending repayment of debts of farmers and SMEs for three years; and introducing new visa-free entry for more foreign tourists.[16] Also high on his to-do-list are cutting prices of gasoline and cooking gas, and providing new financial support for distressed SMEs.
Another high priority for Srettha is to put in place by 1 February the digital wallet to stimulate nationwide spending during the Songkran water festival in mid-April. It is still unclear how he is to raise the 560 billion baht needed to give 56 million adults 10,000 baht each. This huge special stimulus injection was not included in the new fiscal budget of 2024, which starts on 1 October 2023.
The Srettha Administration will also push for legal recognition of same-sex marriages, development of a new volunteer military, and drafting a new constitution.
However, what the actual policy of the Srettha Administration towards marijuana and hemp will be, remains unclear. The PT promised during the election campaign to return marijuana and hemp back to the list of banned narcotics. But the BJT, now the second largest party in the coalition government, vowed to defend “free” cultivation and the sale and use of marijuana and hemp for medicinal purposes.
Ex-PT leader Dr Cholnan Sri-kaew, in his capacity as the new public health minister, will now have the unenviable task of finding a new compromise. Dr Cholnan on 31 August stepped down as PT leader to take responsibility for his failed pledge not to let the PT embrace the two parties of the two ageing generals—the PPRP of General Prawit Wongsuwan,[17] and the UTN of General Prayut.[18]
One sensitive omission that all in the PT-led coalition government can readily agree upon is to leave untouched the controversial Section 112 of the Criminal Code, the so-called lese-majeste law. This was in fact one of the crucial preconditions of many senators who voted for Srettha on 22 August.
Another play-safe move for Srettha is to avoid offending the Thai military and their conservative allies in the Senate by not advocating “reforms” of the armed forces. Instead, Srettha’s softer approach is to go for “joint development”[19] in full consultation with all relevant stakeholders in the military and in the general public.
Yet, another sensitive and pressing issue confronting Srettha is how to deal with Thaksin, who now has a one-year jail term to serve following the King’s commutation of his sentences from altogether eight years down to one. Any new preferential treatment for Thaksin will only confirm the widespread public suspicion that Thaksin is wielding actual power behind the PT and is secretly manipulating the Srettha premiership.
NEW CONSTITUTION NOT THE PANACEA
One of the old and continuing challenges confronting Srettha is the polarisation between conservatives who want to preserve the status quo, and the young who want more rapid changes. A large majority of the latter voted for the MFP because of its clear agenda for change – including reform of the military and the monarchy.
Nevertheless, most political parties inside the coalition government as well as the MFP (149 MPs) and the Democrat Party (25 MPs) tend to see eye to eye on the need to give Thailand a new and genuinely democratic constitution. A civil society movement on 30 August submitted to the Election Commission a list of 212,139 signatures calling for a new constitution.[20] Such a petition normally needs only 50,000 signatures.
However, every proposal to amend the 2017 Constitution requires support of at least one-third of senators (83 senators). At the premiership voting on 22 August, 152 of 249 senators voted for Srettha.
It is unclear how many senators will support the drafting of a new constitution. Several senators have voiced their opposition to such a move, which they consider to be of low national priority.
The current batch of senators will leave in May 2024, at the end of their five-year transitional period during which they had had the authority to join MPs in selecting a new prime minister. After their departure, the Senate will be filled by a new batch of 200 senators selected from professional groups through own-peer voting who however will no longer have the authority to join in the premiership selection.
A majority of MPs in the lower House will then be in a position to approve the drafting of a new constitution. One key decision to be made is whether to choose drafters in a national election; or to handpick them through a search committee. PT’s Deputy Prime Minister and Minister of Commerce Phumtham Wechayachai has been appointed to be in charge of setting up a committee to study ways and means of holding a national referendum and drafting a new constitution.
If the drafters come from a national election, what will happen if a majority of them are supporters of the MFP, and what if they produce a far-reaching reform-oriented new constitution? The Srettha Administration will face a deadly dilemma: either block such a progressive new constitution, or fall apart with the resignation of Srettha from the premiership and his calling of an early general election.
Such a dreadful scenario is plausible, considering the fact that the MFP has gained a great deal of public sympathy in the wake of Pita’s failure to win the premiership, and the subsequent rejection of the resubmission of his name for another round of premiership selection. Pita on 16 September resigned as leader of the MFP. Secretary-general Chaitawat Tulathon is expected to succeed Pita.
One recent survey found that the MFP’s popularity rose from 30.20% in the May general election to 49.04% in late August; whereas the PT’s popularity dropped from 28.20% to only10.65%.[21]
In addition, MFP’s candidate Pongsathorn Sornpetnarin easily captured a House seat in the by-election in Rayong’s Constituency 3 on 10 September, with 39,296 votes. In the second place was Democrat Party’s Dr Banyat Jatnachan, who received only 26,466 votes.
It is therefore pragmatic for Srettha to concentrate first on tackling economic woes besetting the Thai people. He needs to deliver quick good results, so that he has more bargaining power in dealing with his coalition partners as well as in keeping the MFP at bay. The latter objective is important if he is to secure continued endorsement of the influential conservative establishment for Srettha’s premiership.
CONCLUSION
The new Thai prime minister is facing an uphill struggle. His lack of a political power base inside the lead government party is a serious handicap.
He can count on support from his coalition partners only as long as they are happy to work with him in this rather shaky coalition government.
A growing number of unhappy Thais are rather sceptical that he has what it takes to succeed.
ENDNOTES
For endnotes, please refer to the original pdf document.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
“Human Capital, Amenities and Trade: The Case of Malaysia” by Cassey Lee
2023/76 “Maintaining ASEAN’s Leverage in a Volatile Trade Policy Landscape” by Kristina Fong Siew Leng
EXECUTIVE SUMMARY
- Geopolitical tensions between the US and China have been rising, with international trade facing more frequent challenges in what has become a tit-for-tat retaliatory landscape. Moreover, economic security initiatives have become more strategic and sophisticated, and more players now find themselves caught in the crosswinds of the strategic battleground.
- The US-China trade spat has seen ASEAN emerging as a viable alternative to China as a manufacturing hub, especially for technology-related goods. ASEAN economies collectively account for around 30% of US Electrical and Electronics (E&E) imports, notably on par with China, in 2022.
- Major economies have stepped up their engagement with ASEAN economies this year through the G2G channel and at a business level through the relocation of operations out of China into Thailand and Vietnam as part of a China+1 diversification strategy. China’s strict zero-COVID policies may have also catalysed the search for viable alternative production bases.
- ASEAN economies should proactively maintain their favourable position amid the global supply chain recalibration. Possible strategies could include: 1) Active engagement with key trade partners, 2) Domestic policies that provide a stable and predictable business environment, 3) Productive capacity upgrading policies, 4) Leveraging on multilateralism and 5) Strengthening the public-private-academic nexus.
* Kristina Fong Siew Leng is Lead Researcher (Economic Affairs) of the ASEAN Studies Centre. The author wishes to thank Jayant Menon, Senior Fellow of the Regional Economic Studies Programme, Sharon Seah, Senior Fellow and Coordinator of the ASEAN Studies Centre and Climate Change in Southeast Asia Programme, and Joanne Lin, Lead Researcher and Co-coordinator of the ASEAN Studies Centre for their valuable comments and suggestions.
ISEAS Perspective 2023/76, 26 September 2023
A MORE SOPHISTICATED GEOPOLITICAL BATTLEFIELD
As geopolitical tensions between the US and China continue to rise, middle powers and small countries alike remain inadvertently caught in the crosswinds and become part of the strategic battleground. Whilst the Trump presidency (2017-21) was dominated by a barrage of retaliatory tariff increases between the two economic majors, the approach to international trade policy has since become more sophisticated, taking on elements of investment policy. One such approach has countries building up capacity onshore and attracting new investments in key strategic areas in the technology supply chain, exemplified by the US CHIPS Act of 2022[1] and the European Chips Act[2] enacted in September 2023. Some non-tariff barrier approaches are more direct and are laced with a security angle, such as China’s export restrictions on key rare metals (gallium and germanium, and related compounds)[3] (effective 1 August 2023), the US’ export caps on Chinese technology giant, Huawei[4] and more recently, the Netherlands’ additional restrictions on the export of ASML Holding’s chipmaking machinery to China.[5] This back and forth is set to continue with new measures and announcements of counter-policy measures making the headlines more frequently as it becomes increasingly a race for technological dominance as much as to address economic security concerns. That said, official dialogue between the US and China on trade and investment matters, including the establishment of a working group, convey some positive signals that having a ceiling to, if not a de-escalation in, trade tensions would be the preference of both sides.[6]
ASEAN RESILIENCY AMID GEOPOLITICAL UNCERTAINTIES
Although small in its constituent parts, the ASEAN region has grown in importance as an integral node in global value chains, as both a manufacturing hub and a significant player in the technology supply chain network. The region has effectively emerged as a viable alternative to well-established supply chains, diverting some of the global manufacturing concentration away from China. To assess the extent of the trade pattern shifts catalysed by the onset of the Trump, tariff-driven trade war, and ASEAN’s standing in the global ecosystem, we take into consideration trade data from the 2016-2022 period, covering the period before the Trump trade war, through the pandemic and into the present day.
Figure 1. Import pattern shifts for the US and China (2016-2022)
Source: UNCTAD and author’s analysis
From the initial analysis of both the US’ and China’s import patterns for this period, we observe a notable shift in imports away from one another and subsequent positive spillovers to the ASEAN region, as shown in Figure 1. For the US, the share of overall imports from China fell to 17% in 2022 from 21% in 2016, while the share of China’s imports from the US fell more marginally to 7% in 2022 from 9% in 2016. ASEAN’s share of imports correspondingly grew to 11% for the US (2016: 7%) and 15% for China (2016: 12%). Notably, there are significant dynamics exhibited by the changing patterns in the Electrical and Electronics components (E&E) imports. For the US, the significant shift away from China as a key backward linkage in this sector has resulted in import shares falling to 30% in 2022 (2016: 42%), while the shift to ASEAN in tandem has resulted in import shares totaling 29% in 2022 (2016: 20%). For context, ASEAN-sourced imports for E&E products make up almost a third of US imports of these components compared to a fifth before the Trump trade tensions started. This puts ASEAN on par with China in terms of import shares for the US in this respect. That said, some of this change could have also resulted from Chinese MNCs adding capacity to ASEAN locations for their own de-risking strategies on account of rising tariff rates imposed by the US.
Comparatively, China’s import share trends over this period are more stable, with shifts in imports from ASEAN for the main categories observed more muted in comparison. Import shares for overall products stood at 15% (2016: 12.4%) and 19% for E&E components as at 2022 (2016: 18%), reinforcing the central importance of ASEAN in the trade landscape. Amid the ongoing US-China trade rivalry, ASEAN’s relationship with China has remained intact, while its relationship with the US has strengthened. However, it should be noted that despite the growing ties with the US, ASEAN’s overall trade with China stood at USD 730.1 billion in 2022, 1.7 times that with the US which had a corresponding value of USD 422.5 billion. Moreover, China constitutes 19.1% of ASEAN’s total trade, whilst the US makes up only 11.0%.
A BROAD ROLE FOR ASEAN IN INTERNATIONAL TRADE
ASEAN’s changing trade patterns with major economies reflects its growing importance, as seen in Table 1. Although European economies did not see substantial changes to imports from ASEAN over the period, Japan experienced an increase in ASEAN import share, especially for that of E&E products to 16.9% in 2022 from 13.7% in 2016. This too can be a shift away from reliance on China; Japan’s import shares from there fell from a significant 52.3% in 2016 to 42.2% in 2022 in E&E components. Not only has ASEAN grown in importance as an upstream producer for major economies, it has also markedly grown as an export destination for economies such as China and Japan (Table 1). All in all, the ASEAN region is greatly intertwined in the global supply chain, with its importance growing as both a viable backward and forward linkage. That said, it illustrates the importance and provides growing impetus for all stakeholders in the global value chain to prioritise the relationships between developed economies and China with ASEAN, and vice versa.
Table 1. Major economies and their trade dynamics with ASEAN
Source: UNCTAD and author’s analysis
ASEAN’S COMPETITIVENESS IN KEY AREAS OF MERCHANDISE TRADE
As Table 2 on Revealed Comparative Advantage (RCAs)[7] shows, ASEAN is an evident choice for supply chain recalibration to ‘de-risk and diversify’. Illustrated by the RCA values of more than 1, Malaysia, the Philippines, Singapore, and Thailand have maintained their productive competitiveness in semiconductors and related electronics over this period, while Vietnam has established its standing in this regard driven by the additional capacity built up in this sector since the onset of the trade spat. Given the high level of sophistication and specialisation along the technology value chain, most of the trade diversification trends at the start of the US-China trade tensions could have initially been centred around labour-intensive and lower-tech activities.[8] However, the tide could be shifting as even very niche producers such as TSMC, a global leader in semiconductor foundries, is seeing the need to diversify from its home base of Taiwan. This may provide more high-tech opportunities for those ASEAN countries that have capabilities to move up the value chain, such as Singapore.[9] Apart from these products, resource-endowed ASEAN countries such as Indonesia and Malaysia also find themselves competitive in the supply of integral energy-related exports such as natural gas.
Table 2. Revealed Comparative Advantage (RCAs) of ASEAN countries in selected products
Source: UNCTAD (SITC Product code classifications); Note: SITC Product code of 776: Cathode valves and tubes include that of semiconductors and integrated circuits.
THE ASEAN REGION IN FOCUS FOR MAJOR TRADE PARTNERS
The region holds strategic importance with respect to backward and forward linkages and has become increasingly significant in the technology value chain, especially as a China+1 diversification strategy. As a positive spillover, the added focus on the ASEAN region as a major global trade player has spurred greater industrial capacity building in select sectors; this has led to sectoral specialisation and enhanced economic development through human capital and technological upgrading. Thus, from the perspective of ASEAN and its trade partners, it is of mutual benefit to continue active engagement and remain open to trade growth. This stance has already taken root as perceptions of ASEAN as a leader in championing global free trade amongst respondents surveyed in the ISEAS State of Southeast Asia 2023 has risen from 15.5% in 2022 to 23.5% in 2023.
To ensure economic security, major powers that are wary of China have stepped up their engagement with ASEAN, for example through a slew of face-to-face high-profile roadshows this year. One notable example is US Secretary of the Treasury Janet Yellen’s trip to Vietnam in July, after earlier trips to China and India. Objectives of the trip included enhancing cooperation between the countries in manufacturing, and promoting the G7’s Just Energy Transition Partnership (JETP) funding for renewable energy adoption, of which USD 15.5 billion were allocated to Vietnam. In the same trip, Treasury Secretary Yellen also promoted the USD 500 million available funding for international semiconductor factories under the CHIPS Act, to build up capabilities along the global technology supply chain. All these activities laid the groundwork for the official upgrade of US-Vietnam relations to a Comprehensive Strategic Partnership in September,[10] along with a spate of business deals and partnerships quickly revealed thereafter involving the participation of technology heavyweights such as Nvidia and Microsoft.[11]
MULTINATIONALS HAVE ALSO TAKEN INTEREST IN ASEAN
There have also been moves by multinational businesses, especially those in the E&E sector, to do more in ASEAN countries as part of their own strategies for self-preservation. Several major computer hardware manufacturers have announced concrete plans to diversify away from their reliance on China. In January, Dell announced its intention to completely shift away from “Made in China” chips by the end of 2024 and target at least 20% of its laptop production in Vietnam this year.[12] Subsequently, HP announced in July that they are working with suppliers to shift more production of consumer and commercial laptops to Thailand and Mexico this year, with preliminary intentions to move some of this capacity to Vietnam next year as well.[13] Apple has also diversified some of its MacBook production to Vietnam this year, marking the first time its laptops have been produced outside China.[14] Malaysia has also gained some sizeable wins with Infineon Technologies announcing that it will build the world’s largest 200-millimeter Silicon Carbide (SiC) power fab there,[15] as well as Tesla making known its intentions to set up a headquarters there later this year.
ASEAN HAS WELL-ESTABLISHED TRADE AND INVESTMENT AGREEMENTS
One of ASEAN’s strengths is that it already has some robust formal relationships with major economies individually and at bloc level. These established platforms for active engagement in trade and investment activities are beneficial to facilitate greater collaboration, and perhaps, more importantly, brings ASEAN to the fore with respect to the latest global developments. Some notable Free Trade Agreements include the Regional Comprehensive Economic Partnership (an ASEAN+6 trade deal, that includes China), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (which includes four ASEAN countries – Brunei, Malaysia, Singapore and Thailand + 8 including Australia and Japan), ASEAN+1 FTAs with China, South Korea and India. Of note, the ASEAN-China FTA is currently undergoing an upgrade and the ASEAN-India Trade in Goods Agreement (AITIGA) is being reviewed. Other major bilateral FTAs include Singapore’s bilateral FTAs with the European Union (EU), United Kingdom (UK), and the United States, Vietnam’s bilateral FTAs with the EU and UK, and Thailand’s bilateral FTAs with China, Australia and Japan, with some notable ongoing negotiations between the EU and US and a number of ASEAN economies. Most recently, the EU announced the start of a scoping exercise to relaunch negotiations for the EU-Philippines FTA when the European Commission’s President Ursula von der Leyen visited the country in late July.[16]
STRENGTHENING ECONOMIC LEVERAGE WHILE REMAINING NEUTRAL
In tandem with the more focused interest that major economies’ have taken in ASEAN economies, ASEAN economies should take proactive steps to maintain their favourable position amid the global supply chain recalibration. Some possible policy strategies are:
- Pursuing active engagement with key trade partners – In line with how major economies and companies have been stepping up efforts to engage with ASEAN, it is important for ASEAN economies to show the same level of commitment and, likewise, pursue opportunities and build up relationships with key trade and investment partners. Although, ASEAN is undoubtedly in a favourable position in terms of manufacturing capabilities and competitive aspects such as production costs, ASEAN economies are not the only ones on the radar of major economies. India has frequently emerged as a key market for E&E components relocation. Complementing high-level G2G engagements this year, companies such as Tesla and Apple are seeking to build up a viable technology hub in India. Thus, there is a risk that potential complacency may lead to a loss in some of the strategic leverage ASEAN currently holds. Active engagement will also help ASEAN economies de-risk their own supply chains as well.
- Promoting domestic policies that provide a stable and predictable business environment Amid global risks and uncertainties, companies prefer operating in a business environment characterised by economic policy certainty and political stability. Thus, placing emphasis on this objective will help regional economies rank higher in terms of a relocation preference. In the latest IMD World Competitiveness Ranking 2023, five ASEAN economies feature in its assessment of 64 economies. Singapore ranks highest in terms of government and business efficiency, while the Philippines ranks the lowest. To note, Malaysia’s rankings in both these measures appear to be lower than what would be expected of an upper-middle income economy.
Table 3. IMD World Competitiveness Rankings 2023
Source: IMD World Competitiveness Center
- Prioritising productive capacity upgrading policies – Being at the forefront of technological development lends itself well to how the prospects of an economy are perceived. Targeting capital investments in new technologies and having a workforce sufficiently skilled to reap the benefits of these technologies, should be high on the priority list of ASEAN governments. Regional economies must tread carefully so as not to unleash beggar-thy-neighbour policy implications akin to the impacts some developed economies are now facing by virtue of the competitive subsidy regimes they have adopted.[17] Relocation attraction should not be based on costs alone and hence, having a robust foundation of capital and skills can help limit adverse spillover effects, as there is more to the value proposition than attractive subsidies.
- Leveraging on multilateralism – Strengthening respective domestic productive capacities and building up industrial specialisation may be worthwhile objectives for economies to pursue independently, but there are certain benefits to acting together as a bloc, especially in terms of collective interests and for smaller ASEAN member states to benefit in terms of visibility and credibility. Moreover, collaborating as a bloc on aspects such as digital upgrading and harmonisation of standards would also strengthen the region as an attractive business ecosystem. In terms of active participation in high-profile and multilateral FTAs, it would serve to maintain the region’s relevance in the global supply chain and avoid the risk of ‘being left out’ of key global economic developments. Moreover, deep FTAs, such as the ones initiated by the EU and the US, can also set the stage for economic reforms in investment protection and labour rights, which could also make these economies more attractive from an investor perspective, if implemented in a non-distortive way for the host country. In preparation for accession to high-profile FTAs such as RCEP and CPTPP, ASEAN countries involved are required to amend relevant domestic laws in order to comply with the terms of the deal. These FTAs also provide an opportunity for CLMV countries to transition to open regionalism through the multilateralisation of preferential terms of the trade accords they are party to.[18] As a start, the RCEP requires these countries to extend preferential tariffs to all RCEP members, above and beyond ASEAN. In this context, the Margin of Preference (MOP)[19] would ideally be reduced to zero and hence, again, help to increase the attractiveness of ASEAN as a trading bloc ecosystem. As of 2018, the import-weighted MOP for Cambodia, Laos and Vietnam stood at 10%[20] which is more than double that for other ASEAN economies.
- Strengthening the public-private-academic nexus – In any major industrial development, it is vital that a clear and constant line of communication between the business sector and the government exists. The benefits of this are particularly important for new areas of business and innovation. Businesses would gain a better pulse on new technological developments in their industry and perhaps even be market leaders in the area. This would be useful for policy prescriptions, especially to capacity build for the future. Moreover, businesses would also be able to provide relevant and valuable feedback on the right kind of policy mix for their industry to sustainably grow. The further integration of academic output and knowledge-sharing to this nexus, would enhance the innovation capabilities and competitiveness of economies in the region.
ENDNOTES
For endnotes, please refer to the original pdf document.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
2023/75 “What Can We Expect of Indonesia’s PDP Law?” by Yanuar Nugroho and Sofie Syarief
EXECUTIVE SUMMARY
- The Personal Data Protection (PDP) Law was ratified by the Indonesian House of Representatives at the end of 2022. Although seen as a move in reaction to some data leakage incidents, this marks an important step in the country’s journey towards digital transformation.
- However, the enactment of this law near the end of Jokowi’s terms makes it look like mere lip service since it can be implemented only after all derivative regulations are in place. Till today, none of them is ready, which means that implementation of the law will be delayed.
- There are some serious challenges in the law. First, the accountability of the government in handling and managing citizens’ personal data is not clearly defined. Second, the mandate to establish the Personal Data Protection Authority is difficult to operationalise because the chain of command involving various government entities is unclear. Third, there is a risk of journalistic work being stifled by indiscriminate use of the law by those in power.
- Policymakers must carefully identify, anticipate and mitigate potential unintended consequences of the law.
* Yanuar Nugroho is Visiting Senior Fellow at the Indonesia Studies Programme (ISP) and Regional Economic Studies (RES) at ISEAS-Yusof Ishak Institute Singapore and Senior Lecturer at Driyarkara School of Philosophy Jakarta. Sofie Syarief is former Visiting Fellow at the Media, Technology and Society at ISEAS-Yusof Ishak Institute Singapore and a PhD student at Goldsmiths, University of London, UK.
ISEAS Perspective 2023/75, 22 September 2023
INTRODUCTION
On 20 September 2022, Indonesia’s House of Representatives (DPR) ratified the PDP Law (Personal Data Protection, or UU Perlindungan Data Pribadi),[1] which was first initiated in 2016. The ratification happened during the ‘Bjorka havoc’ when a hacker penetrated and stole data from national online applications such as the Covid-19 tracing app, PeduliLindungi, operated by the Ministry of Health (MOH) and the MyPertamina app belonging to the state-run oil and gas company Pertamina.[2] Not long after the incident, 1.3 billion SIM card registration data were stolen, exposing personal ID details.[3] In the latest case, in early July 2023, 34 million passport numbers and immigration IDs were leaked.[4] All these data leaks involving governmental bodies were usually met with denial or excuses, the most popular being that the leaked data are obsolete[5] although ID numbers are valid for life.[6]
The PDP Law’s ratification is seen as a reactive move to the cases of data leakage. It marked an important point in the country’s journey towards digital transformation.[7] The government has been slow in developing its digital capacity, especially in protecting citizens’ personal data. Indonesia has passed the Law on Information and Electronic Transactions (UU ITE, or ITE Law). This law is seen as an ‘elastic’ regulation which, instead of providing convenience and ease of service to the public, suppresses democratic and civic space in Indonesia by introducing an extended range of vague and imprecise offences, and with draconian penalties that can be abused.[8]
The calls for more serious policies concerning data governance resurfaced when Bjorka publicly leaked several supposedly confidential datasets.[9]
Politically, the enactment of the PDP Law coming near the end of Jokowi’s term makes it look like mere lip service because it cannot be implemented until the derivative regulations are ready. These regulations are impossible to complete within less than a year. The issue of personal data and data protection is understood differently by the government – even among government bodies— and by the citizens. The logical implication is the occurrence of bias and multiple interpretations when the policy is implemented. This essay highlights some key issues related to data governance and the PDP Law. It will also discuss implementation challenges.
GOVERNMENT’S ACCOUNTABILITY, OR THE LACK THEREOF
At the heart of the PDP Law is the crucial ‘accountability principle’ requiring all organisations operating in Indonesia to be responsible for managing data.[10] Yet, there is still very little assurance of accountability when government bodies mishandle data.[11]
Government accountability on data mishandling was shown to be even more crucial a mere two months after the PDP Law was passed when another data leak occurred, in November 2022.[12] The breach was met with a firm denial from the Minister of Health[13] after the ministry (as the data controller) failed to inform the public (as the data owner) that data protection failure had occurred, as required in the PDP Law. The minister’s denial stopped further investigations within the ministry.
The response to the data leak incident illustrates the government’s ineptitude and reluctance in taking data breaches seriously. Arguably, it shows how the government has yet to understand that personal data protection is part of citizens’ rights to privacy as stipulated in the Constitution. During the abovementioned massive data breach, the president and several ministers were targeted for doxxing—an act to intentionally reveal a person’s private information online without their consent, often with malicious intent. Rather than seeing it as cause for alarm, Coordinating Minister for Political, Legal, and Security Affairs Mahfud MD — who himself was doxxed[14] — responded with a statement that showed a lack of sensibility in personal data protection. He tweeted, “I’m not bothered, and I don’t want to know. Because my personal data is not confidential. It can be taken from and seen on Wikipedia (Google), on the back covers of my books, at the LHKPN KPK (State Officials’ Asset Report of Corruption Eradication Commission). My personal data is open, no need to leak it.”[15]
In a show of privilege, the former Minister of Communications and Informatics (Menkominfo) Johnny G Plate, opted to use an American phone number after his private data was doxxed.[16] Rather than acknowledging how harmful private data breaches can be or showing care in securing the public’s data which his own ministry had harvested, he asked journalists not to make a fuss about his decision.[17]
Unfortunately, the responses from both ministers largely represent the government’s lax stance in regard to data protection.[18] The inadequate responses are compounded by half-heartedness in acknowledging the root cause, which is poor data protection governance. In handling the Bjorka hacking incident, rather than take measures to improve the nation’s cyber security system, the government opted to block sites or accounts used to hack the system. At the same time, several relevant agencies, including Kemenkominfo and the National Cyber and Crypto Agency (BSSN), shifted the blame onto the other.[19] These responses ignited public scepticism: How can the government protect citizens’ data if the authorities keep buck-passing and no one takes responsibility?
CHALLENGES TO PERSONAL DATA PROTECTION
The PDP Law stipulates two types of personal data: specific and general.[20] In public services, data are further classified into personal or individual data, aggregate or group data, and demographic data. Based on the Civil Registry (Administrasi Kependudukan/Adminduk) Law No. 24/2013 revising Law No. 23/2006, personal data are stored, managed, and protected confidentially, whereas aggregate data refer to a group of data on characteristics or events, or groupings of individual populations such as demographic events, age groups and occupations. Demographic data are used by citizens to access public services, while the government uses them as a basis to carry out development planning, budget allocation, and law enforcement.[21] These data are sourced by and are under the responsibility of government agencies.
Such a complex classification of data, especially if protection is not well managed, is prone to leakages and breaches. Poor data security or user negligence can lead to data leakage. Data breach occurs when the system is broken into.[22] Between 2019 to 2021, there were many cases of data breaches in Indonesia. Based on BSSN (2021), there were 290.3 million cyberattacks in 2019. This would increase by 41%, reaching 495.3 million cases in 2020. Understandably, as data flows exponentially increase, so does the risk of cyberattacks. From 2019 to 2020, ransomware attacks alone increased 105%.[23]
Official responses to data security problems may have shown a lack of goodwill and evasion, judging from excuses given by some individuals. One example is the statement that a particular hack involved old, outdated data[24] – implying the hacked data were not important. Another example is the claim that the system was still safe despite a hack.[25] Nevertheless, these cases have multi-dimensional impacts, not only for the individual data owners but also for data management institutions, especially when the data are managed by government agencies. For individuals, hacking of their personal data may cause material and non-material losses, for instance, when the hacked data are used for doxing, fraud, or breaking into digital assets in the form of currency and other digital products. For data management institutions, such cases reduce public confidence in their performance and may decrease service quality or cause a decline in their reputation, and potentially lead to lawsuits.
The government is hence obliged to secure data as a strategic resource. There is an urgent need for better personal data governance, both for Indonesia’s public and private sectors. The government must take full responsibility for protection of existing personal data. Indeed, it is for this reason that the PDP Law was proposed and passed.
PDP LAW AND ITS (PROBLEMATIC) SUBSTANCE
Consisting of 16 chapters and 76 articles, this law substantially covers at least four aspects, that is, data categorisation, the rights of data subjects,[26] the obligations of data controllers,[27] and the establishment of Personal Data Protection Authority (PDPA).[28]
The table below describes a juridical review of the substance of the PDP Law and the technocratic implications in its implementation, both concerning derivative regulations and the duties and responsibility of relevant institutions.
Source: Compiled by authors
Several articles in the PDP Law have legal implications and loopholes that need to be investigated. For instance, there are around 15 authorities that have not been listed — PDPA included — in resolving disputes through non-litigation adjudication mechanisms and issuing mediation decisions regarding compensation. There is a legitimate concern that the law can threaten the work of Indonesia’s press,[29] including criminalisation of it.[30] The law also regulates criminal sanctions without providing definite limits on the meaning of each element,[31] and is therefore somewhat more inclined towards imposing sanctions than raising awareness.
In particular, the establishment of the PDPA under the President begs the question of its independence since its role is to oversee the implementation of the law by all stakeholders. Another loophole are the provisions that require companies or providers to comply with requests for deletion without delay within 3 x 24 hours from the date the request was submitted.[32] These are technically problematic because in practice, companies would need a longer time to delete data, perhaps even weeks. Further, the obligation for data controllers to have a Data Protection Officer (DPO) and parameters related to the terms of the fulfilment of the rights of Personal Data Owners[33] is difficult for medium to smaller businesses to fulfil.
IMPLEMENTATION CHALLENGES
There are two fundamental challenges to overcome for the PDP Law to be fully implemented: (i) Preparing derivative regulations and (ii) Establishing the PDPA Board.
The formulation of derivative regulations requires a fairly long time and is a complicated process. The PDP Law mandates that nine Government Regulations (Peraturan Pemerintah, or PP) and one Presidential Regulation (Peraturan Presiden, or Perpres), and subsequent Ministerial Regulations, be produced. So far, the passage of various PP and Perpres has taken significant amounts of time, mostly around six months or even a year from draft to law. If these regulations are the priority of the President – like the Omnibus Law on Job Creation (UU Ciptaker, Law No. 11 of 2020) and State Capital Law (UU IKN, Law No. 3 of 2022), they could be formulated quickly. Arguably, the completion of derivative regulations of PDP Law has so far not been the government’s priority.[34]
The government organised a public consultation in February 2023 involving some 200 participants from the banking, health, education, IT, e-commerce, hospitality, transport, and public sectors.[35] So far, there is still no clear time horizon as to when the implementing regulations will be completed. Again, this signals that the issue of PDP is not seen as a priority.
Chapter 9 of the PDP Law mandates the need for a Perpres to establish a ministerial level non-structural body (PDPA) that reports to the President[36] and a PP on the authority of this institution as a data protector.[37] However, the institutional form of the PDPA is also unclear, even though the law explicitly stated it as being fully and directly responsible to the President (Article 58 para 4). There is a question of its independence. Although the law applies to both corporations and the government, the regulation delegates the establishment of the PDPA to the President, virtually rendering it no different from other executive institutions. Conflicts of interest may arise when there is no clear division of responsibility or authority regarding supervision and enforcement. Unclear regulations regarding the position and institutional structure of the PDPA will also leave its formation—including how vast its authoritative reach will be—heavily dependent on the President’s “good will”.[38]
The ways in which the PDPA will be established entails at least two significant problems. First, inequality of sanctions may occur in response to a failure in data protection. Any violations of data protection may be subjected to varying sanctions, from mere administrative sanctions to fines.[39] However, criminal penalties[40] are also looming, with specific penalties towards corporations.[41] Not only are governmental bodies not regarded as economic institutions that amass annual income and cannot therefore be subjected to sanctions more profound than the administrative ones, the nature of the PDPA—not being independent from the executive bodies they are supposed to regulate— opens the possibility for unfair judgments and ineffective supervision.
Second, the PDPA being an institution on par with the governmental bodies it is meant to regulate poses a serious challenge. For example, it might do very little to determine which ministry or agency is responsible for any breach of a civil registry, especially for ID numbers, and put in place measures to secure the data created and harvested under government policies. The supervision of the PDPA should hence rest with an independent commission rather than with a government ministry.
The process for establishing the PDPA will likely take a long time, and there is no guarantee that it will start work immediately after it is formed. One is reminded of the National Research and Innovation Agency (BRIN), whose full organisational structure and governance remain unfinalised more than two years after its formation.[42] These lessons indicate that the institutional aspect is more urgent than the implementation of the PDP Law or the establishment of PDPA, and should be prioritised accordingly.
With such challenges, what may the implications of the enactment of the PDP Law be?
LACK OF AWARENESS OF DATA PROTECTION
The long list of sanctions against private data protection violations might force public entities and private corporations to channel their resources towards obeying the PDP Law. However, as much as sanctions are necessary, punitive actions towards citizens might be problematic if imposed before any meaningful measures to raise public awareness on protecting private data are taken.
According to a 2021 survey conducted by the Ministry of Communication and Information Technology, Indonesia’s overall digital safety index—including the safety to not share any private data via social media—is quite low, i.e., 3.1 on a scale of 1-5.[43] This reflects general ignorance towards personal data protection or that of other people; this opens possibilities for unintentional breaches, which stem not from malicious intent but from the lack of adequate awareness of private data and the importance of protecting them—evidenced by how Minister Mahfud reacted to the personal data breach against him.
With this background in mind, the law might lead to misuse and overcriminalisation,[44] like the ITE Law. In essence, it threatens criminal action against anyone unlawfully disclosing other people’s personal data. However, there is neither sufficient definition nor legal limitation on what constitutes ‘unlawful’ (Article 65 para 2) hence opening possibility for abuse. Equally, without adequate knowledge and conceptual awareness of data protection, the public is prone to unintended offence. For instance, teachers sharing students’ daily activities could potentially be a violation[45] especially because the Law categorises children’s data as ‘specific’ data,[46] implying different and more stringent legal repercussions.[47] It is therefore crucial to ensure overall awareness of personal data protection if the fundamental aim is to protect the public.
CURBING PRESS FREEDOM
In a continuation of the trend in curbing press freedom,[48] the PDP Law also has its own articles which may stifle journalism. Among the varieties of specific data that should not be disseminated, “criminal record” is included (Article 4 para 2). Within the bill, “criminal record” is elaborated as a written account of past unlawful acts and present judicial proceedings, police records and immigration records for travel ban issuance. The fact that all kinds of criminal records—including ongoing judicial proceedings—are regarded as specific data, implying offence for anyone publishing them, will potentially threaten journalistic work in reporting.[49]
Exclusions for the disclosure of specific data are also found in the Law (Article 15 para 1). However, these are limited to governmental undertaking and academic research. Journalistic works and the public’s legitimate interests are disregarded. As mentioned, the term ‘unlawful’ can also be problematic for journalistic works. There is no legal definition and limitation regarding unlawful dissemination of personal data — or even specific data — rendering the term obscure yet broad.
As such, some articles of the PDP Law can be used in an unchecked manner by certain groups, especially those in power, to restrict and criminalise journalistic works. The possible outcome is journalist reports such as exposing public officials’ history of corruption or other crimes—which are of legitimate public interest, and paramount since Indonesia is anticipating a national executive and parliamentary election in 2024— can be subjected to punishment. Not only do these articles contradict Indonesia’s Press Law (Law No. 40 of 1999)[50] which mandates the press to professionally fulfil the public’s rights to know without coercion and interference, they further question the country’s commitment to democracy.
CONCLUSION
There are several aspects within the PDP Law that must be revisited and attended to when it comes implementation. These aspects, including unclear institutional set-up and articles that have ambiguous or conflicting ideas, foreshadow unintended consequences affecting the actual protection of Indonesians’ data. Such consequences must be identified, anticipated and mitigated when they happen. Reflecting on the consequences and putting them in the bigger picture takes us to another reflection: Beyond the PDP Law lies a more fundamental need for a digital strategy at the country level. Without a strategy to provide firm ground for digital transformation, Jokowi’s vision of Pemerintahan Dilan, a digital government that serves the people, will never be realised.
ENDNOTES
For endnotes, please refer to the original pdf document.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
Temasek Working Paper No. 6: 2023 – “The So-Called ‘Kāla Head’ Armband of Temasek: A Preliminary Report” by Natalie S.Y. Ong
ASEANFocus Issue 2/2023
Highlights
- Changing Political Landscapes in SEA
- Towards a Regional QR Code
- Rise of Unicorns in SEA
- A New Chapter in ASEAN-Japan Relations
- Live Music Industry in SEA
Southeast Asia Climate Outlook: 2023 Survey Report
The Southeast Asia Climate Outlook Survey 2023, the fourth iteration of ISEAS’ annual regional climate survey, was conducted between 11 July and 6 August 2023 drawing a total of 2,225 responses from citizens of all ten ASEAN states, exceeding last year’s 1,386 responses. Besides English, the survey was offered in six different Southeast Asian languages (Bahasa Indonesia, Burmese, Lao, Khmer, Thai and Vietnamese), both online and in-person.
2023/74 “Are the National Unity Government’s Responsible Investment Policies Fit for Purpose?” by Sam Baron and Ye Khaung Oo
EXECUTIVE SUMMARY
- After the February 2021 coup, Myanmar’s National Unity Government (NUG) issued new responsible investment policies that call for companies to end tax payments to the military and divest from all military-backed companies.
- The NUG’s policies require that if companies are unable to end tax payments to the military, then they should consider initiating a ‘responsible exit’ in consultation with the parallel government and leave the Myanmar economy until democracy is restored.
- While the NUG claims that its policies on responsible investment are aligned with international standards such as the United Nations Guiding Principles on Business and Human Rights (UNGPs), the UNGPs and other standards do not specifically prescribe against paying taxes to authorities, nor do they state that doing so constitutes a human rights violation under international law.
- By advising that all companies making tax payments to the junta exit the economy, rather than just targeting those that actively support or collude with the military, the NUG’s responsible investment policies may generate a counterproductive effect of foreign investors exiting the Myanmar economy, and thereby decrease the number of economic opportunities available to many ‘ordinary citizens’ in Myanmar.
* Sam Baron is the inaugural Policy Research Fellow at the Yokosuka Council on Asia-Pacific Studies. He previously served as a Myanmar analyst with the United Nations Office of the High Commissioner for Human Rights, based in Bangkok. Ye Khaung Oo was a Research Officer at the ISEAS – Yusof Ishak Institute and is pursuing Master of International Development at Duke University Sanford School of Public Policy.
ISEAS Perspective 2023/74, 19 September 2023
INTRODUCTION
More than two years after the Myanmar military orchestrated a coup d’état that usurped state power from the National League for Democracy (NLD) government that had just won its second landslide election, the country’s economy remains in dire straits. According to a 2021 World Bank report, Myanmar’s GDP shrunk by more than 18% in the immediate aftermath of the coup.[1] This past fiscal year (2021-22), the country’s GDP rose only by a modest 3%, meaning that, cumulatively, the country’s economy will remain substantially smaller than before the coup took place, for the foreseeable future.[2]
Due in large part to the February 2021 coup, poverty across Myanmar has grown at an alarming rate, with the United Nations Office for the Coordination of Humanitarian Affairs (OCHA) recently estimating that 14 out of country’s 15 states and regions had recently entered the critical threshold for malnutrition.[3] Even relatively prosperous urban areas such as Yangon have not been spared, with new statistics from the United Nations Development Programme (UNDP) showing that roughly a quarter (24.1 percent) of those living in eight of the city’s poorest townships have gone without any income from February 2022 to 2023, a period of more than 12 months.[4] Rising poverty levels, and other devastating economic impacts of the February 2021 coup on ordinary people across Myanmar have raised a number of critical questions among foreign companies still operating in the country.
Principally, many companies have faced the dilemma of whether to remain in Myanmar or to initiate an exit from the economy. The National Unity Government of Myanmar (NUG), a parallel government established by NLD lawmakers deposed by the junta following the February 2021 coup, prescribes that if a company cannot avoid paying taxes or making other types of payments to the junta, it should strongly consider initiating a ‘responsible exit’ from the Myanmar economy.[5] Specifically, the NUG’s policies state that all foreign companies operating in the economy should withhold payment “of all taxes and other fiscal obligations to military-controlled authorities…until the lawful and legitimate government is restored.”[6]
Pragmatically, however, several long-standing investors who operated in the Myanmar economy prior to the military takeover have been forced to pay taxes to the junta since the coup. Due to a variety of reasons such as the growing risk of retaliation against its workers and employees, many companies have made tax payments even if they are not otherwise supportive of the military government. In fact, the number of firms being forced to make tax payments to the junta recently reached a post-coup high after the junta imposed more stringent tax enforcement measures that make it substantially more difficult for firms to avoid and/or delay making payments.[7]
Thus, by advocating for all companies that cannot reasonably suspend their tax payments to the junta to exit the Myanmar economy, the NUG’s current approach to responsible investment is counterproductive, as the withdrawal of otherwise responsible companies from the Myanmar economy is likely to exacerbate poverty and negatively impact normal people.
CORPORATE EXODUS
Since the February 2021 coup, as many as 30 multinational companies have either chosen to exit Myanmar or temporarily suspend their operations in the country — dealing a blow to normal Myanmar people whose livelihoods depend on the employment opportunities provided by the private sector.[8] While the exact reasons why companies are leaving Myanmar are varied and largely sector-specific, their decision-making is being underpinned by the opinions of investors and civil society groups – some of which are advising companies either to temporarily cease their operations or initiate a ‘responsible exit’ from the Myanmar economy to avoid financially supporting the military junta or becoming complicit in human rights abuses committed against the country’s civilian population.[9] This is the position adopted by the NUG, whose official guidance on responsible investment instructs companies to consider initiating a ‘responsible exit’ in consultation with the parallel government if a company finds that it cannot reasonably suspend financial support, including the payment of taxes, to the military after conducting a self-assessment of its business activities.[10]
The NUG’s Three-Pillar Framework Guiding Responsible Investment and Continued Operations, the parallel government’s primary policy framework first articulated in July 2021, states that its policies on responsible investment are aligned with the United Nations Guiding Principles on Business & Human Rights (UNGPs) and the OECD’s Guidelines on Multinational Enterprises (OECD Guidelines), two of the most authoritative international standards governing responsible business conduct.[11] Yet, beyond stating that companies should aim to identify, prevent, mitigate and account for the adverse human rights impacts throughout their operations, neither the UNGPs or OECD Guidelines explicitly provide companies with guidance on responsible disengagement, nor do they suggest that the payment of taxes constitutes an adverse human rights impact under international law.[12]
Officially, the NUG’s policies on responsible investment state that their primary aim is to “cripple the military council by limiting its access to all financial flows, including tax revenues, contractual payments, debt, and any type of financial aid, so as to degrade and destroy their machinery of oppression and control.”[13] By calling on foreign companies that pay taxes to the military to cease their operations and exit the economy, the NUG’s policies seem to be more aimed at waging an economic war against the junta – one that squeezes the Myanmar military of revenues and legitimacy.
TAXES AND RESPONSIBLE INVESTMENT
In April 2023, the activist group Justice for Myanmar (JFM) criticized ThaiBev, Carlsberg, and Heineken, three of the largest beer conglomerates operating in Myanmar, for paying tens of millions of dollars in tax revenues to the junta, known formally as the State Administration Council (SAC).[14] JFM and other civil society groups echoed the arguments of the NUG by stating that these companies continue to provide the SAC with a financial lifeline that aids and abets the human rights violations they commit against civilians across Myanmar. The decision of JFM to target the three beer companies over their tax payments reignited vigorous debate among policymakers and academics about whether the payment of taxes or other revenues to the junta actually constitutes a human rights violation under international law. It also raised questions about what extent companies should ultimately be responsible for reducing their tax payments to the junta.[15]
Most literature on the subject is focused on the fact that many forms of tax avoidance—and not tax payments—are a violation of international human rights law. Magdalena Sepúlveda Carmona, the former UN Special Rapporteur on extreme poverty and human rights, for example, argued in a 2014 report that businesses which purposefully avoided paying taxes to authorities may be in violation of their responsibility to respect human rights under Principle 13 of the UNGPs.[16] Although it must be noted that the situation in Myanmar is significantly complicated by the fact that the military’s takeover is likely illegal under the country’s 2008 Constitution, and the SAC is therefore an illegitimate government, there is simply no legal precedent by which tax payments to a de facto legal authority have constituted a human rights violation in the past.[17]
John Ruggie, the Harvard professor who was appointed by former UN Secretary General Kofi Annan to formulate the UNGPs, also did not believe that a company’s presence in a country paying taxes made them complicit or legally liable for the human rights violations committed by the government who received the revenues.[18] In a 2008 report to the UN Human Rights Council, Ruggie noted that a company’s “mere presence in a country, paying taxes, or silence in the face of abuse is unlikely to amount to the practical assistance required for legal liability.”
Legality aside, however, the payment of at least some taxes to the military junta is currently the only viable means by which a company can safely operate within the Myanmar economy. Particularly, the threat of retaliation against a company and its workers for the non-payment of taxes to the junta remains a principal concern. In March 2021, after the Committee Representing the Pyidaungsu Hluttaw (CRPH) initiated a campaign to suspend the payment of all taxes across the country following the coup, the senior-most junta tax official said that Myanmar’s tax office would “go after businesses and employers who don’t levy taxes correctly on their customers or staff,” clearly demonstrating the risk to foreign companies.[19] Even the NUG’s own Three Pillar Framework on responsible investment states that companies must take the safety of its own employees into account when making investment decisions – recognizing the increasingly fraught tightrope companies must walk to both appease civil society and continue to safely operate.[20]
BALANCING MORALITY AND PRACTICALITY
The primary purpose of the divestment campaigns waged against foreign companies by the NUG and others within civil society has been to express disapproval of organizations with financial ties to the military and to apply social pressure on those that openly support the military regime. This approach, however, should not be replicated and broadly applied to companies and other commercial entities that merely pay taxes to the junta in accordance with local laws, and otherwise positively contribute to Myanmar society. If it can better emphasize the distinction between so-called ‘good faith’ actors attempting to operate responsibly with those that are complicit in or supportive of the military’s activities, civil society can more effectively target and stigmatize organizations that maintain ties with the military, and actively work with those that make positive contributions to Myanmar society and its economy.
Making this distinction is becoming increasingly important, because when a socially responsible investor withdraws, there is a possibility that another investor, unconcerned with ethical considerations, will seize the opportunity. When Telenor, a leading responsible business in Myanmar left the country in 2022, for example, a joint venture between M1, a Lebanese investment company with ties to military generals, and a Myanmar company acquired the company’s assets. Another telecommunications firm, Ooredoo Myanmar, may have also been acquired by a subsidiary that maintains ties to former military generals with links to junta leaders.[21] Thus, as the above examples demonstrate, as long as economic incentives remain in place, companies that are not bound by social responsibility will be eager to capitalize on the departure of those that are.[22]
Creating a scarcity of foreign investment via social pressure will ultimately result in a weakened private sector, which in turn, will give way to the military’s increasing share of control over the distribution of goods and services across Myanmar communities. Ordinary citizens, who rely on essential products and services, may eventually have no choice but to consume products produced directly by the military or its business affiliates due to the lack of viable alternatives circulating in the economy. Meanwhile, the lack of a robust private sector will also likely lead to the erosion of the middle class and a responsible civil society, both of which are critical for Myanmar’s future development.
TOWARDS A NEW APPROACH TO RESPONSIBLE INVESTMENT
While it is by no means ideal for companies to be making tax payments to the military junta, the NUG’s current approach of tagging all such payments as an ‘irresponsible’ business activity lacks nuance, and ultimately, is counterproductive. While one could argue that tax payments continue to finance the junta’s reign of terror, it is clear that such payments pale in comparison to the level of harm that would be inflicted on ordinary people were companies be forced to exit the economy instead. Moreover, the SAC’s increasingly aggressive crackdowns on companies that attempt to delay or otherwise refuse to make tax payments make it increasingly untenable for any company to abide by the NUG’s policies in the future. Such considerations should compel the NUG to modify its current approach.
Going forward, the NUG may need to view tax payments made by companies to the military junta as a necessary evil, while at the same time actively work with these companies to set guardrails and reduce their effective tax burden. Rather than advocate for companies to completely withdraw, for example, the NUG could request companies to inform them of whether certain tax payments made to the military were done ‘under protest’, and to provide evidence that demonstrates other ways in which the company may be actively working to reduce their financial flows to the SAC. This approach would be consistent with international standards such as the UNGPs, which state that in cases where laws may require companies to take actions contrary to their responsibility to respect human rights, they should aim to “respect the principles of the greatest extent possible in the circumstances … and be able to demonstrate their efforts (Principle 23).”[23]
By removing tax payments as an ‘irresponsible’ business activity and providing a pathway by which companies can actively engage with the NUG without fear of reputational or operational damage to their business, the NUG can more effectively promote responsible investment, bring their policies in line with international standards, and help to ensure that companies still invested in Myanmar’s economy continue to remain there.
CONCLUSION
While the NUG’s policies on responsible investment may have made sense immediately following the coup as it sought to quickly cripple the ability of the junta to raise revenues, a new approach is now needed as the NUG’s “defensive war” against the military enters its third year and Myanmar’s economy continues to suffer. Standing strong after shattering the expectations of Western analysts who doomed the revolution to fail, the NUG has much to be proud of.[24] Yet, its leaders must also recognize that in order to sustain its revolution, the NUG must make a conscious effort to retain the companies already invested in Myanmar’s economy.
Currently, the NUG’s Three Pillar Framework on responsible investment rightfully highlights that its Ministry of Planning, Finance, and Investment will not recognize new investments made by companies with the SAC following the February 2021 coup.[25] It does, however, acknowledge the legitimacy of pre-existing investments inked between companies and the previous civilian government. The very fact that the NUG’s policies aim to restrict new inbound investment should prompt it to retain and actively engage with the companies still operating there, rather than attempt to force them out. Thus, as businesses inch toward a resumption of their operations, and ramp up their post-coup economic activity in Myanmar, the NUG might be wise to recognize that their presence in the economy is a net positive – even if they are occasionally forced to make tax payments to the military junta.
ENDNOTES
For endnotes, please refer to the original pdf document.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
2023/73 “Vote-buying and Islamic Politics in Thailand’s Deep South” by Daungyewa (Hong) Utarasint
EXECUTIVE SUMMARY
- Vote-buying began to gain prominence in the region around 1992 when the New Aspiration Party took the lead in Thailand’s Deep South.
- Voters may distort or rationalize their views on vote-buying by framing it as conforming to Islamic principles, despite contradictory opinions on the matter. When accepting gifts and money in exchange for votes, villagers justify it as adherence to Islam.
- The more the political parties compete for seats, the higher is the magnitude of money spent in exchange for votes. In the past, voters typically received money from three to five sources. However, for the 2023 general election, with seven political parties competing, resources for vote-buying have expanded.
- While vote-buying might have reached unprecedented levels, there is a silver lining: the Move Forward Party, which rejects vote-buying practices, emerged second in the party-list votes. Most Move Forward Party supporters are younger Malay Muslims who feel that old-school politics—vote-buying, patron-clientelism, and identity politics—must be eradicated.
* Daungyewa (Hong) Utarasint is Visiting Fellow at ISEAS – Yusof Ishak Institute. She is Visiting Assistant Professor, Arts and Humanities at NYU Abu Dhabi (NYUAD). Her current research investigates women and voting behaviour amid conflict in the southernmost provinces of Thailand, examining obstacles to women’s political participation, and how religion and cultural norms affect women’s political mobility.
ISEAS Perspective 2023/73, 18 September 2023
INTRODUCTION
In 2010, I facilitated a focus group discussion on peace and conflict in Pattani.[1] During the discussion, a participant inquired about my religious belief, and asked, “Are you a Muslim? And if so, why don’t you wear a hijab?” In response, I shared with her my reasons and mentioned that many Arab women I had encountered did not wear the hijab. The woman replied, “Well, they aren’t as strict as we are. We are the true Muslims. We are at the Corridor of Mecca.” That was the first time I ever heard someone claim they were more Muslim than others.[2] The phrase Patani is the Corridor of Mecca is commonly heard in the area. Many Malay Muslims in the region believe that Patani Darussalam is the hub of Islam in Southeast Asia, and they take great pride in this.
Ironically, while bribery and money politics are against Islamic teaching, vote-buying during election campaigns is rampant in South Thailand, and was remarkably so in the 2011 election. While conducting my research on voting behaviour in 2012, I discovered that the so-called Corridor of Mecca region was rife with this practice. Once, while interviewing a household in Pattani, a man approached and asked the homeowner how many residents were over the age of eighteen. He drew out a stack of money, counted it, and handed it to the household owner. He even gestured towards me asking, “Does she count?” The owner glanced at me then shook her head at the “vote buyer”. On another occasion, during a visit to a subdistrict chief in Pattani, I personally witnessed a local politician running for a provincial administrative office hand over a stack of money to the subdistrict chief. The local politician also gave another stack to a religious leader seated beside him. The whole incident happened right in front of the chief’s house.[3] Much like local politicians and government officials, many religious leaders and preachers, including Imams and Khatibs, act as vote-canvassers or brokers.
Over the past two decades, vote-buying in Thailand’s Deep South has been on a steady rise. The trend has become more pronounced in the last ten years. In 2017, a retired village headman shared information that during his 27-year tenure (1984-2011), the amount offered for a vote escalated from 100 baht per person in 1984 to 500 baht in 2011. Alarmingly, the money offered per individual crept up to 1,000 to 3,000 baht in the 2019 and 2023 general election. For the 2023 general election,[4] in the final stretch before election day, substantial amounts of money were believed to have been spent in various provinces. In Pattani alone, estimates suggest that close to a billion baht (30 million USD) was spent,[5] while Yala saw expenditures of approximately 600 million baht (23 million USD). Narathiwat reportedly had spending similar to Pattani’s. Based on the interviews conducted, of all the intense election battles in Thailand’s Deep South, Narathiwat was the fiercest battleground, and was significantly infiltrated by dark money and mafias. The practice of vote-buying was so entrenched it seemed normal. This discrepancy led me to wonder: If the area is perceived to be profoundly religious, why has vote-buying become normalized?”
This article explores voters grappling with Islamic principles and their perception on vote-buying. Additionally, it seeks to understand the extent to which vote-buying is accepted among the Muslim populace in Thailand’s Deep South. I propose two hypotheses: to mitigate their guilt when accepting money or gifts for votes, voters may distort or rationalize their views on vote-buying and seek justification in Islamic principles; and the higher the number of political parties vying for the seats in Thailand’s Deep South, the more money they spend on vote-buying.
The first section of this article delves into the evolution of vote-buying in Thailand’s Deep South over the years. The subsequent section explores how voters justify accepting money or gifts in exchange for votes. The third section presents various debates surrounding the practice of vote-buying in Muslim communities. Finally, the article summarizes the main ideas and arguments and offers suggestions to address vote-buying.
THE ONSET OF VOTE-BUYING IN MALAY MUSLIM REGIONS
Both Wiroj Pipitpakdee and Den Tohmeena, former MPs from Pattani, attribute the escalation of vote-buying to the intense competition between General Kriangsak Chamanan, a former prime minister, and Bunlert Lertpreecha in Roi-et province (in Northeastern Thailand) in 1981. This contest, infamously known as the “Roi-et disease,” supposedly ushered in the era of extravagant spending to gain votes. This phenomenon eventually spread to provinces across Thailand, including the Deep South. Wiroj recalled that when he first contested in the national elections in the late 1980s, vote-buying was not as rampant.
In 1986, a group of lawyers and teachers established a political group, and they were supported by Islamic religious and spiritual leaders in the southernmost provinces of Thailand. This group eventually evolved into the well-known Wadah political faction. Distinctly rooted in ethno-religious political identity, Wadah maintained its presence in Thai politics for almost three decades. Over the years, there were numerous transitions and transformations within the faction. In 2018, some of its members reorganized themselves to establish the Prachachart party. Back in 2012, I learned through my interviews with several Wadah members that the concept of vote-buying was not widespread at the beginning of their political career.
However, vote-buying began to gain prominence in the region around 1992 when the New Aspiration Party took the lead. At that time, the Wadah faction, under the leadership of Wan Muhammad Noor Matha and Den Tohmeena, was an integral part of the New Aspiration Party. Its leader, General Chavalit Yongchaiyudh, who served as the Prime Minister from 1996 to 1997, had a stronghold in the Northeastern part of Thailand. Arguably, the practice of vote-buying in Northeast Thailand spilled over into Thailand’s Deep South via the New Aspiration Party. This article contends that this era marked the beginning of vote-buying in Thailand’s Deep South.
THE ISLAMIC CONTEXT AND VOTER PERCEPTIONS ON VOTE-BUYING
While pouring funds into vote-buying does influence elections in the Deep South, it is not the sole determinant for victory. The efficiency of the vote-buying approach matters just as much, if not more. How vote-canvassers and their patrons efficiently utilize their funds and strategize their gift-giving play a crucial role. Effective time management and strategic scheduling are also vital in capturing more votes.[6]
How do Islamic institutions in Thailand’s Deep South steer vote-buying? In such scenarios, religion could and should act as a potent deterrent. However, some individuals navigate its teachings and find loopholes in how the religion interprets materialistic pursuits. This is not unique to Thailand and Islam. In Nigeria, a poll concluded that vote-buying and guidance from religious leaders were pivotal factors in Nigerian voters’ decisions.[7] In the Philippines, Imam Dr. Jamel Cayamodin, said in his Eid’l Fitr sermon stated that “Muslim communities have the highest instances of vote-buying.”[8] As for Thailand’s Deep South, I interviewed a former member of Wadah, who expressed scepticism about the ability of the Islamic Council Committee of each province to monitor vote-buying. He stated that corruption was pervasive even within these committees. Furthermore, money was often used to influence votes for the position of the head of the Islamic Council in various provinces.
Besides, there is a debate whether the term al-risywah, an Arabic word which means bribe, can really capture the whole meaning of vote-buying in Thailand’s Deep South. Imron, Yasmin, and Abdulawwal (2002) had mentioned in their article that even among religious leaders in Thailand’s Deep South, there was no unanimous agreement whether the term risywah encompasses the practice of vote-buying.[9] Younger Malay Muslims, however, are critical in these views, and believe that receiving or giving money in exchange for votes is al-risywah. The debate surfaced across social media platforms such as Facebook, TikTok, and Instagram, predominantly among the younger generation of Malay Muslims. Besides the discussion of al-risywah, a verse from Quran 2:188 says, “Do not consume one another’s wealth unjustly, nor deliberately bribe authorities in order to devour a portion of others’ property, knowing that it is a sin.” (Surah al-Baqarah, 2:188)[10] The verse has been interpreted differently by various Islamic scholars.[11] There remains a debate on whether the verse encompasses the act of vote-buying.
In many cases, it is difficult to discern whether a gift is given in hopes of securing votes or simply done out of genuine generosity. In 2023, the election campaign coincided with the month of Ramadan. An incumbent politician from Narathiwat provided free petrol to residents, allowing them to fill up at any gas station in Sungai Kolok during Eid’l Fitr, which was celebrated on 21 April, 2023. This gesture was ostensibly to facilitate people visiting their relatives across different villages. However, with election day then looming on 14 May, less than a month after the festival, one cannot help but be sceptical of the politician’s true motives. It is puzzling that the Election Committee of Thailand (ECT) did not view this as suspicious. While we were not dealing with direct cash handouts, it was undeniably a form of gift-giving.
Perceptions of what contradicts Islamic principles can differ. Several instances that may seem irrational to a literate person or urbanite are ways in which villagers justify their adherence to Islamic righteousness when accepting gifts and money in exchange for votes. They tend to adapt their voting behaviour so as not to be in violation of Islamic principles. In 2012, during an interview in Narathiwat, a woman in her 70s recounted that several vote-buyers from various political parties approached her, offering different sums for her vote: some proposed 200 baht, others 300 baht, and a few 500 baht.
One might assume that she would have accepted the highest offer of 500 baht, but she denied it, saying it would be against Islam. She explained that the individual who offered her 200 baht approached her first and she accepted that offer. According to her, accepting a later, higher offer after already committing to the first would be breaking a promise, which is against Islamic principles. She then burst into tears, pleading with us not to inform the police. We were taken aback, unsure of the situation. It was not until she confessed that the true dilemma became clear. At the polling booth, she had inadvertently voted for a candidate other than the one she had promised to support. She insisted it was an honest mistake; she had simply forgotten the number of the candidate she had intended to vote for.
During the 2023 general election, another interesting case emerged: an individual returned 500 baht (about 15 USD) to a vote-canvasser of one party after he had received 1,000 baht (roughly 30 USD) from another party. He believed it would be sinful to accept money from both sides. These cases clearly illustrate how Malay Muslim voters in the region develop ways to rationalize actions they recognize as transgressions against Islam.
VOTE-BUYING IN ISLAMIC COMMUNITIES
In Thailand’s Deep South, while many are cognizant of and discuss the vote-buying practice, the exact sum of money used remains elusive to most. The 2023 election saw the highest number of competing political parties in Thailand’s Deep South, with seven major parties vying for dominance. As mentioned earlier, the more political parties there are competing for seats, the more the magnitude of money spent to buy votes. In the past, voters typically received money from 3-5 sources. However, for the 2023 general election, with seven political parties competing in the region, resources for vote-buying funds have now expanded for voters.
Various social media platforms highlighted the issue of vote-buying in Thailand’s Deep South during the 2019 general election. For many urban voters, this was the first glimpse into the magnitude of vote-buying taking place. Projek Sama-Sama, an impromptu election monitoring collective established by local journalists and volunteers, disclosed that in the 2019 elections, individual voters received amounts ranging from 200 to 3,000 baht (US$6.2–US$94) — marking the highest recorded figures in the region’s history.[12] There are also non-government organizations such as the Asian Network for Free Elections (ANFREL) that actively monitor vote-buying and other suspicious activities during elections, and ‘We Watch’ (wewatchthailand.org), an organization that recruits volunteers to oversee polling stations across the country. Furthermore, new political entities like the Future Forward Party have set fresh standards for campaign strategies in Thailand’s Deep South. The party’s approach, which contrasts sharply with traditional election campaigns in the region, firmly rejects the use of money politics to secure votes. This has laid a new groundwork for the constituencies. Although the Future Forward Party was dissolved by the Constitutional Court in 2020, its successor, the progressive Move Forward Party, continues to refuse employing vote-buying. Like the Future Forward Party in 2019, Move Forward Party failed to secure any seats. But Move Forward Party were the runners-up for party-list votes in every constituency in Thailand’s Deep South. This marks a notable progression from four years prior.
Unlike Thailand’s Deep South, where Islamic institutions and the Islamic provincial council remain silent on vote-buying, mosques and Islamic preachers in the upper southern Thai provinces of Satun, Krabi, and Songkhla unequivocally condemn the practice. For instance, a mosque in Satun made national headlines when a large vinyl sign was displayed prominently at its entrance. The sign at Ban Kuan-Sanai mosque declared: “The Imams, Khatibs, Bilals, and the mosque committee have unanimously agreed that vote-buying/selling is strictly prohibited in our village. This is because it is not only haram (sinful) but also against the law. Action will be taken against: 1) Those bringing money into the village for vote-buying purposes, and 2) Those distributing money to voters within the village. The Imams, Khatibs, Bilals, and the Mosque Committee will abstain from any Islamic activity involving those partaking in these condemnable practices, as well as their relatives.”[13] In essence, the situation in Satun province indicates that the residents of Ban Kuan-Sanai believe vote-buying affects the reputation and daily lives of Muslims.
Another controversial incident unfolded just before election day. A letter from the Islamic Committee Council, intended for every mosque in the lower Southern Thailand region, found its way to social media. This letter, specifically addressed to all Imams in the Krabi province by the Islamic Committee of Krabi, firmly encouraged eligible voters to participate, and highlighted that vote-buying was prohibited. However, the letter’s conclusion was provocative; it explicitly directed everyone to vote for the Prachachart Party, number 11, urging support for the Islamic party, Prachachart. The letter spread like wildfire. Many, particularly the well-educated Muslims, condemned it. The Head of the Islamic Committee Council defended his position, stating that the letter had not been authorized by him but was instead issued by a secretary without his knowledge.[14]
As of March 2018, out of 3,943 mosques around Thailand, there were 707 mosques in Pattani; 666 mosques in Narathiwat; and 509 mosques in Yala.[15] I was also told that the Prachachart Party approached Imams and the Islamic councils in Yala, Pattani and Narathiwat using the same strategy they employed with the Islamic Council Committee in Krabi. The correspondence requested that Imams and ulama in each mosque encourage preachers and their congregations to support the Prachachart Party at the polls. While this may seem innocuous, the close ties between the Prachachart Party and the Islamic Council in each province effectively hinder other parties from campaigning in mosques. Restricting other political parties from seeking electoral support is considered undemocratic.
CONCLUSION
In the modern world, commercial transactions follow a legal norm wherein the exchange of goods and services between buyers and sellers is typically assured through regular market operations. Contrastingly, the relationship between vote-buyers and voters lacks this certainty. There is no guarantee that those who receive money will reciprocate as intended by the donors.[16] Vote-buying has not only become the norm among those offering bribes, but voters have also started expecting monetary payments from candidates. Distributing money or gifts helps candidates remain competitive, but there is no guarantee that those who spend the most will fare better. Religion can be utilized to counteract vote-buying, but some individuals might navigate its teachings, finding loopholes in their religious principles to further their materialistic pursuits.
Nonetheless, the 2023 general election signalled a shift in the region, with contrasting developments emerging. While vote-buying might have reached unprecedented levels, there is a silver lining: the Move Forward Party, which rejects vote-buying practices, emerged as a second in the party-list votes. Most Move Forward Party supporters are younger Malay Muslims who envision that old-school politics — vote-buying, patron-clientelism, and identity politics—need to be eradicated. To effectively mitigate vote-buying, a promising solution involves enlisting a greater number of local volunteers and NGOs. Their roles should not be limited to just election monitoring; they should also disperse throughout the region to educate villagers about the significance of free and fair elections for community development and growth. Engaging these volunteers with community and religious leaders could heighten awareness and potentially deter the practice of vote-buying.
ENDNOTES
For endnotes, please refer to the original pdf document.
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