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Indonesia: the fraught road from Jakarta to Nusantara
Nusantara and its Presidential Palace were inaugurated on 17 August, when Indonesia celebrates Independence Day. This makes Nusantara, built in the forested region of West Kalimantan on the island of Borneo, Indonesia’s new capital. This mammoth project, backed by former President Joko Widodo since 2019, comes with an estimated price tag of $32 billion. Construction began in 2022 and is set to be completed by 2045.
The problems afflicting Jakarta include overpopulation, pollution, subsidence and flooding. With 12 million people living there – 30 million if you include the entire metropolitan area – Jakarta is overpopulated. It’s one of the world’s most densely populated cities, with more than 16,000 people per square kilometre. Its residents suffer the effects of chronic traffic congestion and the air pollution that goes with it.
Above all, the city is increasingly reliant on groundwater abstraction to meet the drinking water needs of its rapidly growing population. In the absence of an adequate water supply system, most of its residents mainly depend on water pumped from underground. This intensive extraction has resulted in an alarming amount of subsidence, with some parts of the city sinking by between 10 and as much as 30 centimetres a year. North Jakarta has sunk 2.5 metres over the past ten years. The consequences are dramatic: more than 40% of the city now lies below sea level. Sea walls have been built to prevent the Java Sea from flooding the city, offering residents a temporary respite. However, there is a very real threat that these walls could collapse. For example, a section of the wall gave way in 2007 following torrential rain and storms.
There is also an eminently political dimension to the project. Outgoing President Joko Widodo sees it as an opportunity to leave his mark on the country’s history. Known throughout his two terms of office as the “infrastructure president”, he sees the project as the culmination of his political vision – which is why he was so keen to inaugurate the new capital before leaving office in October. To make sure the project is completed, Joko Widodo has even had a law passed requiring future heads of state to continue with construction.
Moving the capital off the island of Java is also a way of strengthening national unity by integrating Indonesia as a whole and rebalancing economic activity across the country. Nusantara lies at the centre of the Indonesian archipelago and its 17,000 islands, whereas Jakarta is on the island of Java, which alone accounted for 58% of Indonesia’s GDP and 50% of its population in 2023.
Despite having only begun in 2022, construction work has already run into considerable delays, mainly because of a lack of funds. The government has committed to finance 20% of the projected cost, leaving the private sector to cover the remaining 80%. But while a handful of Indonesian groups have had no choice but to provide funding, foreign investors have failed to answer the call. The government hopes to reap 100,000 billion rupiah in private investment by the end of 2024. By the end of June, just 51,300 billion rupiah had been collected, all of it from domestic funding providers. Meanwhile, the government has already shelled out 42,000 billion rupiah (€2.44 billion) for the current fiscal year. While the inauguration may have sent a positive signal out to potential investors, they are looking for more tangible progress – notably on infrastructure – before committing. The accumulated delays and lack of amenities mean people are reluctant to relocate. To encourage or even force people to settle in Nusantara, the government is offering bonuses to civil servants, many of whom have voiced their displeasure.
Lastly, although Nusantara is designed to become a “green city”, running entirely on renewable energy and aiming to be carbon neutral by 2045, construction itself represents a threat to biodiversity. The city is being built in one of the world’s largest rainforests, home to rare and endangered species such as the orangutan and the proboscis monkey. The project has already resulted in the loss of 14,000 hectares of forest in an area already hit by deforestation due to mining and intensive palm oil production. The project also threatens the indigenous peoples of the forested region of West Kalimantan. The Balik people, for example, are gradually being driven out in return for financial compensation.
Nusantara is an extremely ambitious project driven by a mix of pragmatic and political considerations. History also shows us that the creation of “new cities”, and particularly capital cities (such as Brasilia, New Cairo and Abuja), is a fraught endeavour and rarely successful. Moreover, the project will not solve Jakarta’s overpopulation problem: Nusantara is designed to be able to accommodate just 2 million people by 2045. While Jakarta’s wealthiest residents might be able to move to higher ground, its poorest inhabitants are likely to find it very difficult to relocate. Indonesia must continue to invest to solve the problems facing Jakarta.
The great legitimacy crisis
We must not deceive ourselves about the nature of the political crisis in Western democracies: anti-establishment parties are first and foremost symptoms rather than causes. Populism surfaces – and resurfaces – to fill the political vacuum that’s left when traditional parties and political institutions lose their legitimacy. It fills the void created by distrust.
Hannah Arendt analysed the mechanics of this void in the 1930s1. She pointed out that, in a democracy where political institutions are seen as legitimate, we vote, consciously or not, for parties that more or less reflect our social class – those that best “represent” us. They frame and stabilise the political playing field, heading off breakdowns and negotiating compromises. However, when a society is in the grip of a crisis of political legitimacy and traditional parties have ceased to be representative, organised political expression vanishes. The electorate becomes a shapeless, volatile mass susceptible to being captured by various forms of populism. This can give rise to what Hannah Arendt called “negative solidarity” between the traditional populist electorate – the hard ideological core – and a mass of people who have little in common, sociologically and economically speaking, apart from their desire to do away with the prevailing order.
Attempts by anti-establishment parties to gain power are not based, then, on a stated ideology but rather on this mechanism of negative solidarity, which they try to whip up in connection with various issues such as immigration, tax and/or the rejection of the established elite. The aim is to create a focal point for political grievances and form majorities based around the rejection of the status quo. Societal values are obviously a godsend for such parties, especially in divided societies where political adversaries have come to be seen as existential enemies that must be destroyed. In the United States, issues like abortion rights, gender and race, where compromise is not possible, pave the way for negative solidarity.
It’s easy enough to understand why increasingly impoverished middle classes and the most disadvantaged populations2 might vote to do away with the prevailing system. But what about elites that benefit from that very system? To answer this question, we need to go back to the nature of democracy and try to understand its weaknesses. D. Acemoglu and J.A. Robinson3 show that our attachment to democracy is not predicated solely on our values: democracy is, rather, a compromise between the underlying – and often unconscious – interests of the elites, the middle classes and de facto political power, which is to say the power of the street. If this compromise were to be called into question, particularly by street protests, the elite might feel threatened and some of its members might opt to break with the political status quo. This isn’t about values: it’s about maintaining one’s position.
Moreover, excessive government debt4 also encourages people to vote for disruptive parties because it shatters the institutional compromise as each social class blames the others for “not paying their due” or “benefiting excessively” from the largesse of a spendthrift government. One hears this argument in the German state of Thuringia, where the far-right AFD recently made historic gains. One also hears it in France. Generally speaking, fiscal trade-offs always call into question the social contract between government and the people. They are one of the most powerful links between economics and politics. The same goes for credit, which is often a response to the unequal distribution of income, masking – for a time – inequality5. This phenomenon was observed in the United States in 1929: the crisis was preceded by growing inequality in income and wealth and by an increase in the debt ratios of middle-income households6. During the subprime crisis, household debt and real estate bubbles were also part and parcel of the major imbalances highlighted by M. Obstfeld and K. Rogoff7 ; those imbalances prepared the way for the financial risk of that time to culminate in the political crisis of today.
Lastly, the impact of taxation on the political behaviour of elites is also tied to the development of public administration in its present form. Driven by the needs of a society that places more and more demands on public services, current forms of administration have contributed to a heavier tax burden. According to Hannah Arendt, this is one of the drivers – identified by her as long ago as the 1970s – of the loss of political legitimacy: bloated government creates a “tyranny of the invisible”8 where citizens start to feel powerless and might feel compelled to take “seditious action”.
Democracy is thus a much less stable and more hybrid system than many democrats tend to think. And signals of a democratic crisis in the West are nothing new: in 2007, the United Nations published a report on the decline in political confidence in Western democracies since 19609. This phenomenon would come to be known as “democratic malaise”. This crisis of confidence resulted first in a lack of interest in political parties and trade unions and subsequently in anti-establishment voting. Above all, it has resulted in an accelerating vicious cycle in which distrust of institutions fuels distrust of individuals and vice versa10. These two phenomena are, unfortunately, linked: social fragmentation, polarisation and societal violence will persist as long as the crisis of political legitimacy continues to deepen, and vice versa.
But how can political legitimacy be rebuilt? To address this question, we must explore the concept of legitimacy itself. Drawing on historical comparisons, Max Weber wrote a foundational text between 1917 and 1919 that set out a typology of various forms of legitimacy: “The three pure types of legitimate domination”11. These three categories are what he called “ideal types”. In reality, they don’t exist as distinct forms: political systems tend to adopt a mix of different types of legitimacy. This typology can help us interpret how our political systems are changing. It can help us name the crisis by identifying the deep undercurrents that drive the crashing waves of events. Indeed, this is something Weber himself encouraged us to do: keep an eye on structures, dominant trends and what’s happening behind them.
The first category of legitimacy derives from what Weber called rational-legal domination, rooted in “belief in the legality of enacted rules and the right of those elevated to authority under such rules to issue commands”12. In other words, citizens believe in the supremacy of the law. This is the type of legitimacy on which our modern forms of democracy are built. The civil service derives from this principle, being underpinned not by individuals but by technical and procedural norms and hierarchical principles. But the civil service is not unique in this respect: the modern large corporation is also based on this type of legitimacy. In fact, according to Weber, bureaucratic forms of domination are on the rise everywhere, and this has contributed to the current political crisis, which he called the “cage of steel” – a disenchantment with the world rooted in a loss of both freedom and meaning: in this type of system, belief in law and normative standards prevails over belief in people. While this type of legitimacy is obviously essential to all democracies, it is especially so in the United States, whose unity rests not on a nation-state tradition but on a written document: the Constitution, seen by Americans as the nation’s sacred founding text. This makes the historical decline in trust in America’s legal institutions particularly alarming: behind the sound and fury of the electoral battle lies a regime crisis. That is the reality of the crisis in America today.
The second category of legitimate domination defined by Weber is what he called traditional domination. Here, citizens accept a political system based on “daily belief in the sanctity of time-honoured traditions and the legitimacy of those who are called to exercise authority by these means”13. This is the type of legitimacy on which the systems of traditional and patriarchal societies (where authority rests with fathers, clan chiefs, etc.) are based. Modi’s message of an ethnic nation and Hindu regeneration clearly reflects this idea.
The third and final category of domination identified by Weber is charismatic domination. This more emotionally driven type of domination is based on submission to an individual seen as heroic, whether he or she be, in the words of Weber, a prophet, a war hero or a great demagogue (not ethically comparable categories!). This charismatic legitimacy can lead to not only the most authoritarian but also the most unstable types of domination: the leader’s legitimacy is precarious, deriving solely from his or her person, and must be proved anew each day. Donald Trump’s second attempt to gain power falls into this category. The battle for power becomes a kind of narrative warfare, backed up by the image of Trump with a bloodied ear and a raised fist. The trap for the opposition would be to merely offer an alternative narrative rather than giving the electorate what it really wants: a tangible response to the societal crisis.
The survival of democracy is not just a matter of winning elections. It is always tied to the legitimacy of political institutions, the reconstruction of democracy, where possible, or, failing that, a more or less visible and abrupt transition from one type of regime to another – which would lead the world towards more authoritarian types of systems. This shift is likely to be exacerbated by citizens’ legitimate expectations: disappointed by the unfulfilled promises of globalisation, people are sensitive to the siren song of traditional and charismatic forms of legitimacy. Finally, the Western world’s reputation – and its ability to offer something more than double standards, which in turn undermine democratic legitimacy – also depends on how our political systems evolve. Everything is related: domestic political transitions and external geopolitical transitions will not cease until the legitimacy of politics in the broadest sense has been restored, whatever its nature.
Italy – 2024-2025 Scenario
Despite inflationary pressures and high interest rates, Italian growth proved "resilient" in 2023. Growth picked up slightly at the start of 2024, with a 0.3% increase in GDP, leaving an overhang of 0.6% for the year. Lower inflation combined with a stable labour market should support a modest recovery in consumption in the coming quarters, though consumer caution and a high savings rate may prevent a stronger recovery.
Business investment remains hindered by high financing costs but could benefit from the Transition 5.0 plan. The construction sector is expected to hold up in 2024 despite the end of the "Superbonus", as it will be supported by the National Recovery and Resilience Plan (NRRP), and in particular the funds allocated to public works and infrastructure projects.
Growth is expected to continue to stabilise in 2025 as household consumption firms on controlled inflation and a gradual decline in interest rates. Though business investment will benefit from the positive effects of monetary easing and stronger domestic demand, the end of the "Superbonus" will continue to weigh on the construction sector. Exports are expected to grow in step with a modest improvement in global demand, particularly from emerging markets. Italy is expected to generate moderate economic growth of close to 1% in 2025.
Egypt – Retrospective of a currency crisis: how to build confidence?
The Egyptian economy, though weakened, is recovering from a two-year external liquidity crisis. The crisis is a reminder of the extent to which countries with debt and dependent on external financing are vulnerable to investor confidence. Thanks to substantial funding from the United Arab Emirates and the IMF, the country's external liquidity risk has dipped sharply. But this is not a long-term blank check of confidence. Exploring these issues will further our understanding of the gamble that external creditors are making on this country.
France – 2024-2025 Scenario
Economic activity continued to grow in France in Q1 2024, up 0.2% after 0.3% in Q4 2023. The growth overhang at the end of the first quarter thus stands at 0.6% for 2024.
As we finalised our scenario before the dissolution of the National Assembly, it can be described as “politically neutral” or “with policy unchanged”. But the political picture that appears to be emerging, with none of the coalitions achieving a majority, could have little impact on the growth scenario through end-2025 and instead could have an impact above all on public finances and sovereign spreads.
We expect growth to be stable in 2024 relative to 2023, at 1.1%. The main growth driver will be household consumption, as disinflation continues. But growth will also be fuelled by foreign trade, owing to the points already observed. However, investment will in all likelihood continue to be negatively impacted by the past tightening of financial conditions, while the destocking trend of late 2023 and early 2024 is likely to detract from annual growth. Growth is expected to increase to 1.3% in 2025, bolstered by persistent strong consumption momentum and the rebound in investment as monetary policy returns to normal. Annual average inflation is expected to fall sharply, to 2.3% in 2024 (in CPI terms) and 1.5% in 2025.
United Kingdom – 2024-2025 Scenario
UK economic growth was sluggish in 2023, with a slight recession in the second half of the year as tight monetary policy weighed on demand. Economic activity grew strongly in first-quarter 2024, although household consumption remained low.
Domestic demand, and household consumption in particular, is expected to be the main driver of the coming recovery, driven by solid real income growth and future rate cuts. In the short term, households could continue to be overly cautious given past price shocks, high interest rates and an ongoing easing in the labour market. The investment outlook is accompanied by an upward bias thanks to the advent of a period of political stability and Labour’s pro-business policy.
Inflation returned to the 2% target in May 2024 (and was stable in June) amid widespread disinflationary pressures. It is expected to return to slightly above the target in the second half of the year on less negative inflation in energy prices.
Given the continued easing in the labour market and the prospect of inflation below the medium-term target, the BoE is expected to start a very gradual cycle of monetary easing on 1 August, though a further postponement is not to be ruled out.
Spain –2024-2025 Scenario
The Spanish economy managed to maintain a robust growth rate at the beginning of the year despite numerous unfavourable factors, including the weakness of the Eurozone economies, persistently high inflation, and the impact of the rise in interest rates, which were expected to peak in first-quarter 2024. The strong performance resulted from several key factors, with positive labour-market momentum, persistently dynamic immigration flows, and sound international tourism data, which once again exceeded expectations and explain the strong contribution of external demand to growth. On a less positive note, growth in domestic demand remained more modest.
First-quarter data, together with a slightly more favourable situation overall, have led us to revise our GDP growth forecasts upwards to 2.4% for 2024 and 1.7% for 2025. We expect domestic demand to take over as the key growth driver. A lower contribution from public consumption would be more than offset by a gradual recovery in both private consumption and investment.