SINGAPORE: Joko Widodo (Jokowi) recently clocked his 100th day in office during his second term as the President of Indonesia.
The occasion though was overshadowed by the novel coronavirus outbreak around the world, which is likely to adversely affect trade and investment as well as tourist arrivals from China, one of Indonesia’s largest economic partners.
Even before that, the Indonesian economy has been feeling the impact of slowing global growth.
As commodity prices remain low, its economic growth, which relies heavily on commodity exports, has hovered at around 5 per cent since 2013.
TRAILING POTENTIAL GROWTH
With the threats to global growth increasing this year, even maintaining that perennial 5 per cent expansion rate may prove difficult for Indonesia without a clear growth stimulation strategy.
While an annual expansion of 5 per cent is not bad in today’s low-growth environment, it is less impressive when you consider that Indonesia’s actual GDP figures over this period have consistently underperformed expected growth levels.
Moreover, much of this modest growth has been sustained on the back of successive interest rate cuts since 2016. From July to November last year alone, the Bank Indonesia slashed rates four times in a desperate bid to boost growth.
Yet, it was not enough for Indonesia’s economy to meet the growth expected of it.
This consecutive subdued growth of around 5 per cent is also less than the more than 6 per cent seen during the commodity boom from 2001 to 2012, with the exception of the global financial crisis in 2008.
This reflects weak macroeconomic fundamentals in exports, investment and government spending.
The lack of vibrant growth has also taken a bite out of rising household incomes and a growing middle-class, which had expanded during the commodity boom years.
While growth at about 5 per cent a year is solid by international comparison, it is inadequate for meeting Indonesia’s development needs and ambitions. In the most basic sense, this trajectory will not be enough to end widespread economic vulnerability, even by 2030: On current trends, poverty will persist and about half of Indonesian workers will still work in insecure informal sector jobs,
Roland Rajah of the Lowy Institute wrote in a 2018 report.
STABILITY AND NOT A BOOST
Part of the problem is that much of Jokowi’s economic strategy since 2014 has mainly focused on infrastructure projects - the building of toll roads, sea and air ports, and power plants, to stimulate growth.
While there is nothing wrong with this focus as infrastructure expansion has contributed to economic progress and development, its impact has not been fully observed as it is a long-term investment that takes longer to deliver value.
A focus on infrastructure development has only helped stabilise the Indonesian economy and not boosted it. Can Jokowi and his cabinet do better economically and set the foundation for growth acceleration in his second term?
Unlike his first term, this time Jokowi has not explicitly set a targeted level of growth.
But it is clear that he will need the economy to grow faster than 5 per cent to expedite poverty eradication and to resolve unemployment, which also hovers around 5 per cent.
Although Indonesia has made commendable gains in poverty reduction, slashing it from 23.4 per cent in 1999 to 9.4 per cent in 2019, much of that happened during the commodity boom when growth was higher.
Arguably, many of those who were alleviated were also those who were just slightly below the poverty line then and therefore it required less effort and growth to help them climb out.
According to the World Bank, there are about 26 million Indonesians still living in poverty with a large proportion of those close to the bottom of the base and more than 20 per cent of the population, though above the poverty line, have incomes just marginally over and are in real danger of falling back into it. Clearly, Indonesia needs higher growth to help it combat poverty.
What does it need to get there?
As Jokowi reiterated in his inauguration speech in October 2019, his economic policy in the second term will continue to focus on infrastructure development, human resource development, and improving Indonesia’s investment climate – the same as in his first term.
MUCH REFORM NEEDED
But this time round, Jokowi has a last shot at boosting the country’s economy as he cannot seek re-election, given Indonesia’s two-term limit on the presidency.
That need to be less politically conscious may allow Jokowi to be bolder in pushing for much-needed economic reform and launch unpopular but critical policies that correct fundamental problems in the Indonesian economy, including reducing fuel subsidies, rice price subsidies, and revising manpower laws.
For a start, the government’s policy in keeping politically popular subsidised fuel and rice prices can be replaced with a subdued expenditure on welfare that focuses on providing better support in education and healthcare.
For many years, the subsidies have squeezed the government’s limited fiscal space, which is predicted to shrink further as tax revenues decline due to weaker growth.
However, there is no sign of movement on these subsidies.
Revising the labour laws of 2003 is also critical to remove excessive costs for investors given the crushing weight of severance pay, minimum wage and layoff provisions on the costs of business and the need to remove restrictions on outsourcing.
But these have been proven politically challenging for any political leader in the country, including Jokowi.
Even the hugely popular Susilo Bambang Yudhoyono was unable to make progress in these areas.
For one, besides pushing for reform, Jokowi needs to be clearer in what his economic strategy is.
On the one hand, he wants Indonesia to play a more globalised role to attract more foreign direct investment (FDI). On the other hand, his industrial and trade policies are built on a nationalistic angle emphasising self-sufficiency and reduced import content.
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Also, his administration seems to be paying too much attention on reducing the country’s current account deficit, which has been widely seen as an indicator of macroeconomic vulnerability. Conventional wisdom has it that current account deficits in excess of 5 per cent of GDP provide a warning signal to financial markets.
However, Indonesia current account deficit- at around 2.7 per cent of GDP – is well within the safe zone
As a result, his administration has been restricting imports to reduce the current account deficit. However, import restrictions on raw materials in particular are actually taxing Indonesia’s domestic production and exports.
This provides a disincentive to the country’s export sector. Therefore, the policy is not helping its own manufacturing sector, which needs a boost.
WHOSE JOB IS IT?
Part of the lack of movement on Jokowi’s economic agenda arises from the way the Indonesian government is structured and how the power centres relate to each other.
For example, on the investment front, there is a potential coordination problem between the roles of the Coordinating Minister for Maritime and Investment with the role of Coordinating Minister for Economic Affairs and the role of the Investment Coordinating Board (BKPM).
Add to that the role of Deputy Minister of Foreign Affairs to promote trade and investment promotion. The latter reports to the Coordinating Minister for Maritime and Investment, instead of the Minister of Foreign Affairs. Thus, one may see potential issues of accountability, conflict of interests and lack of focus within the new cabinet.
It is perhaps these issues that have tainted public sentiment and that is why the report card on Jokowi on his first 100 days in office from commentators has not been glowing.
His focus on economic issues, though sensible and necessary, has not earned the President the necessary plaudits.
“This (economic priority) has its consequences and risks. Other sectors are being less prioritised,” Yunarto Wijaya from think-tank Charta Politika said in media reports.
Much will hinge of his ability to implement his planned omnibus laws to achieve massive deregulation.
The omnibus laws is a set of laws that acts as a single legislation that revises several other laws simultaneously. The government has identified 1,194 regulations, 82 laws to be superseded by the omnibus laws.
Jokowi has asked the Indonesian Parliament to pass two omnibus laws - one on job creation and support for small- and medium- sized enterprises and another aiming to reform the tax system - by April.
Though this timeline seems unrealistic, amending the laws on labour and land acquisition, which are considered the biggest constraints hindering investments into Indonesia, will be a fillip for Indonesia and Jokowi.
However, the challenge remains whether the omnibus laws, which require expensive tax incentives and grants to nudge businesses to achieve its economic modernisation aims, and will come at an expense of other national priorities amid Indonesia’s tight fiscal space, will give the Indonesian economy a boost.
Its high stakes for Jokowi, who has touted himself as a reform-minded president unafraid of pushing through difficult but needed policies, and must transform the country in order to secure his legacy in these last few years.
Siwage Dharma Negara is a Senior Fellow and Co-coordinator of the Indonesia Studies Programme at the ISEAS – Yusof Ishak Institute.