Commentary: Despite some bumps, Indonesia has passed severe COVID-19 tests

JAKARTA: It takes a serious crisis to reveal a country’s fundamental strengths and vulnerabilities.

As in all countries, the COVID-19 pandemic of 2020 and 2021 has severely tested all aspects of Indonesia: Its governance, institutions, polity, economic resilience, health system, societal cohesion, its vulnerable communities and international relationships.

Most important, the country has held together, the administrative and political apparatus has continued to function despite deep economic and social stresses.

This is in notable contrast to the country’s last major crisis, 1997–98, which paralysed the government, resulted in nasty ethnic conflicts, and triggered the collapse of the Suharto regime.

This time, President Jokowi has if anything consolidated his political authority. As in much of developing Asia, there are concerns about ‘democratic regression’, including the weakening of the anti-corruption commission, the administration’s authoritarian tendencies, and unresolved Papua issues.

But Indonesia remains a functioning democracy with a lively civil society, arguably more so than any other ASEAN state.

ECONOMIC RECOVERY

In 2020 Indonesia experienced its first recession of the 21st century, itself a testimony to competent economic management in the democratic era, and in stark contrast to the 13 per cent collapse in GDP collapse in 1998.

Indonesia’s economic recession was a comparatively modest 2.1 per cent, a good deal smaller than several of its neighbours. Economic recovery is gradually underway in 2022, with growth estimated at 3-3.5 per cent.

At the outset of the crisis, the authorities responded quickly, with Bank Indonesia adopting unconventional but effective monetary policy, in part to support a cautiously expansionary fiscal policy.

Buoyant commodity prices have further stimulated the economy. As recovery proceeds, the challenge will be to revert to the pre-crisis fiscal and monetary policy settings lest they become embedded in the political system, especially leading up to the 2024 general elections.

The government also used the crisis as an opportunity to enact a more ambitious microeconomic reform agenda, notably through its so-called Omnibus Law, which the parliament approved in late 2020.

Although the consultation and socialisation processes in the preparation of the Law were deficient, foreign investment did in fact increase in 2021. The challenge in the country’s Constitutional Court is unlikely to derail its implementation.

Nevertheless, Indonesia has continued to drift slowly towards a more inward-looking development strategy.

DEVELOPMENT STRATEGY

The strategy of promoting greater domestic value added, known domestically as hilirisasi, has gathered strength, especially in the natural resource sector, and with attendant dangers of proliferating cronyism.

At the same time, official policy emphasises the goal of enhanced participation in global production networks. These two objectives are fundamentally incompatible, and the result is that Indonesia continues to miss out on major manufacturing export opportunities.

The parliament has also yet to ratify the RCEP agreement of which Indonesian strategists were the architects .

Not surprisingly, the health system was initially overwhelmed by the pandemic. Indonesia’s official COVID-19 mortality rate, 53.3/100,000, is not high by global standards. But its ‘excess mortality rate’ is much higher, estimated to be several multiples of this figure.

There are no quick health fixes for a system that has historically been a low priority for public investment. A significant minority of the population has little or no health insurance.

The initially slow vaccination rate also reflected the global inequities of vaccine supply, with China being by far the most important and forthcoming supplier.

The health response in the first half of 2020 was also complicated by the confusing directives issued by the health minister, who was subsequently replaced.

Protecting living standards, especially those of the poor, has been a major challenge. Since the Asian financial crisis, Indonesia has made significant progress in constructing a workable if rudimentary social safety net.

But the programs are modestly funded and not designed for a large-scale shutdown in economic activity as occurred periodically in 2020.

LIVING STANDARDS

There has been a surprisingly small deterioration in living standards, presumably because the economic contraction in 2020 was limited and the social programs have had some protective effect, according to research by Asep Suryahadi and others.

Initially these programs covered only the poor, not the near-poor. But the government has subsequently made an effort to extend their coverage.

With an estimated one-third of secondary school children in households without functioning internet or enrolled in schools that are not able to offer digital education, there has almost certainly been rising educational disadvantage that may never be remedied without specific catch-up programs.

Notwithstanding the serious loss of life, Indonesia has not been deeply scarred by the pandemic. ‘Stability’ in its various economic and political manifestations continues to be the cornerstone of political life.

The recovery agenda is still substantial, in the context of a slowing pre-pandemic economy. With such a weak tax base, falling to below 10 per cent of GDP during the pandemic, the government’s fiscal space is highly constrained. Public debt has risen, albeit moderately.

There is growing education and labour market disadvantage to be overcome. The public health and medical research systems require huge investments. Social safety nets need to be strengthened.

The physical infrastructure investment requirements remain daunting, even as President Jokowi still appears intent on pressing ahead with his grandiose new capital city project in remote Kalimantan.

Indonesia will also chair the 2022 G20 summit, which provides an opportunity for the Jokowi administration to inject a voice from developing economies into the global agenda as the world recovers from COVID-19.

It’s also an opportunity for some quiet China–US diplomacy on the sidelines, especially given that the ASEAN countries are a crucial ‘swing’ actor in this dispute.

Haryo Aswicahyono is a Senior Fellow in the Department of Economics at the Centre for Strategic and International Studies (CSIS), Jakarta, Indonesia and Hal Hill is the HW Arndt Professor Emeritus of Southeast Asian Economies at The Australian National University (ANU). This commentary is part of an East Asia Forum special feature series on 2021 in review and the year ahead.