Nationalism takes centre stage in Indonesia's election campaign

By Rieka Rahadiana JAKARTA (Reuters) - Dressed in the style of Indonesia's first leader, even using replica 1950s microphones, presidential hopeful Prabowo Subianto roared to thousands of supporters at a recent rally in the capital: "Indonesia cannot be bought". It is a nationalistic tone that has been on the rise in campaigns by the major political parties ahead of elections to choose a parliament on April 9 and a new president on July 9. The question of whether Indonesia is souring on the foreign money that helped bankroll much of its growth was thrust into the spotlight this year with a new law that aims to boost the country's profits by banning the export of minerals unless they have been processed first. That threatens the fortunes of some of Indonesia's biggest investors, notably two major U.S. mining companies with large operations in the country - Freeport-McMoRan Copper & Gold and Newmont Mining Corp. To continue exporting, mining firms must now either pay 20-25 percent tax from this year, rising to up to 60 percent by the second half of 2016, or invest hundreds of millions of dollars on new smelters. The more prickly language, and its occasional echo of the jingoistic rhetoric of founding president Sukarno who famously told the United States in 1964 to "Go to hell with your aid!", comes as record foreign direct investment looks to be peaking. In part, that reflects investor concern over muddled government policy, barely functioning infrastructure and a sharp rise in labor costs in the world's fourth most populous country. Approved foreign investment outside the oil, gas and banking sectors last year was around $22 billion, roughly the same as 2012 in dollar terms. "In dealing with globalization, Indonesia should have a stronger position ... We should ensure that we are independent, not relying only on foreign investment," said Budiman Sudjatmiko, a member of parliament of the PDI-P party. Opinion polls suggest that PDI-P, currently in opposition, will win the most seats in parliament and easily grab the presidency with its hugely popular candidate, Jakarta governor Joko "Jokowi" Widodo. He has won national approval for his straight-forward leadership style but has yet to detail any economic policy. Behind PDI-P are Prabowo's Gerindra party and also Golkar, the parliamentary vehicle for autocrat Suharto's 32-year rule, which has managed to resurrect its fortunes in the 16 years since its patron was forced from office and Indonesia became a democracy. Several political analysts expect PDI-P to team up with the pro-business Golkar for its vice presidential candidate. All major parties favor keeping the law banning mineral ore exports despite criticism from the World Bank that it will damage the economy. "Indonesia has to be nationalistic ... But it doesn't mean that if national interest is at the forefront of our policy then foreign companies cannot come to our country," said Burhanuddin Abdullah, a former central bank governor who chairs the council of experts at Gerindra. CURRENT ACCOUNT DEFICIT However much the election speeches are tinged with xenophobia, all the top parties promise to address more fundamental economic challenges. That includes a large current-account deficit that threatens confidence in the currency and the budget-sapping cost of huge fuel subsidizes at a time when the outlook for economic growth has softened to barely 5 percent this year. "Raising fuel prices, but gradually, will be one of the options. We will let the people choose, cheap fuel prices but poor roads or paying a higher price and getting good roads," said Harry Azhar Azis, a senior member of Golkar's economic team. Investors who commit to broader economic development would win favor. Others may find Indonesia less welcoming, he said. "It will be a bit tougher ... Particularly investors who only play in the portfolio market, unless the investment has a strong correlation to industry development," Azis said. The director of PDI-P's Megawati Institute think tank, Arif Budimanta, said the country should develop infrastructure and lure investment into adding value to the country's natural resources, much of which are exported unprocessed. "There has to be synergy. With better competitiveness, the current-account deficit will improve gradually," he said. PDI-P wants to spend around 20-30 percent of the budget, from about 11 percent now, on infrastructure, whose weakness is a major factor in keeping economic growth below its potential. "We will prioritize the quality of growth, not just growth but also in terms of even distribution," he said. About 11 percent of Indonesia's 240 million people live below the poverty line. Another 30 percent are barely above it, many of them in the rural sector. Gerindra says the government needs to return to the 1970s emphasis on agriculture to lift the economy and has repeatedly warned that the ever yawning gap between the rich and the have-nots threatens social stability. "The focus of our program is agriculture and education ... If we want to develop our industry, it has to be agri-based industry," said Abdullah. His party wants to boost budget spending on agriculture to 5 percent in 5 years, from around 2 percent now. It will also press banks to lend more to the agriculture sector. The front-running PDI-P has also stressed education for an exceptionally young population - about half is under 30 - whose classrooms churn out workers barely able to compete with neighboring economies. Skill levels had to rise so locals could compete against outsiders coming into Indonesia's growing job market, said Budimanta. ($1 = 11,380 rupiah) (Additional reporting by Kanupriya Kapoor and Jonathan Thatcher; Editing by Dean Yates)