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Tinkerer in chief: One year of economic leadership under Joko Widodo

Tinkerer in chief: One year of economic leadership under Joko Widodo
Published 5 Nov 2015   Follow @Busch_Matthew

Indonesian President Joko Widodo marked his first anniversary in office on 20 October. Following the highs of a victory that 'saved' democracy, the ride has been bumpier than expected.

High-priced staple goods and a sputtering economy have dampened voters' approval of the president – down from over 70% last year to just above 50% in October 2015. Once a down-to-earth, social-media-friendly candidate who enraptured voters and commentators, Widodo has often seemed flat-footed and overwhelmed by politics.

Discarding the more cosmopolitan leanings of predecessor SBY, Widodo has emphasised everyday 'kitchen table' issues. He has expanded health and education access, especially for his core constituency of rural, poor voters, while reacting to economic headwinds facing Indonesia. 

His economic approach has exposed both strengths and weaknesses: on the one hand a preference for action and simple, technical adjustments, on the other a limited interest in complex, structural challenges. A recent pledge to join the Trans-Pacific Partnership – a non-sequiter to Indonesia watchers everywhere – requires reforms not even on the table. It is already provoking distracting domestic blowback.

Taking office at the tail-end of the China-driven commodities boom, Widodo drew a challenging hand, including weak global demand and impending structural adjustment. He inherited a culture of over-regulation and protectionism, especially for imports, and curious policies continued on his watch, with interventions in everything from beer sales to foreign exchange transactions. [fold]

He fulfilled a campaign pledge to cut large fuel subsidies and shifted savings to infrastructure development, but things continued to worsen during 2015, with large export declines (both goods and commodities) and a GDP growth forecast of 4.7%. Finally in September, with the economy in the doldrums and the rupiah at rates not seen since the Asian financial crisis, Widodo reversed course, promoting 'massive deregulation' and warning ministers to deliver results.

The outcome has been packages to cut red tape, roll back trade and investment restrictions and boost the domestic economy. Deregulation is a smart idea, and Widodo – promising 'hundreds' of packages, if necessary – has honed a productive and resolute message. Unwinding regulatory overreach is a win for both government and business, while removing non-tariff trade barriers should help consumers.

The question is, how long will this work for an economy suffering a competitiveness problem? Some measures, like abandoning a failed and oft politicised framework for minimum wage negotiations, glimpse the courage many expected from the new president. Many, however, are little more than nibbling at the margins: interest tax exemptions for exporters holding earnings onshore (with the best treatment for longer, rupiah-denominated deposits), or reducing some permits for land acquisition and forestry approvals. None approach structural changes to help diversify away from commodity exports and domestic consumption. Indonesia has a tradition of 'technocratic' reform, but big-picture changes tend only to follow political shocks. 

Instead, most 'reforms' are pure Widodo: 'simple, fast, efficient, and functional', according to his energy minister at a recent 'Jokowi: Functional Leadership' seminar in Washington, DC. The new trade minister, a former private equity manager elevated in the August cabinet reshuffle, claimed Widodo prefers 'practical...measures that are completely and directly felt by industry.' Widodo often extols his business background. Stephen Grenville observed that Widodo seems to believe 'running an economy is just like running a scaled-up business'. 

Unfortunately, this is not the case, and while demanding rapid, simple fixes, Widodo's approach also facilitates the inclusion of a grab-bag of uninspired policies. New subsidies for electricity, rice and diesel fuel, preferential credit for SMEs, and a scheme to steer cheap natural gas to state-favoured industries like fertiliser, are re-treads of stale, dirigiste policy ideas. Some provide brief stimulus to an economy in need of a hit, but do little about competitiveness. Revival of an old plan to temporarily discount tax rates on the revaluation of fixed assets is just a one-off trick to boost the balance sheets of the most inefficient state enterprises (most businesses regularly revalue their assets). Promoting it underscores a tendency towards quick, almost sleight of hand, changes over more difficult measures. 

There has been little discussion of structural changes, for instance removing tariffs (including those introduced as recently as July 2015), more than nibbling at the margins of stifling labour rules, scaling back the extensive Negative Investment List, or merit-driven bureaucratic reform (something Governor of Jakarta Widodo prioritised). Even the early fuel price stand has subtly eroded, with Pertamina covering price gaps and Widodo himself spruiking the idea of reducing prices below market rates.

It is true that many bad policies were already in motion through legislation passed years earlier, but Widodo's aversion to big ideas is also manifest, given he has done little to push for badly needed bills. One example is his deference to the legislature on a new Oil and Gas Law after an explicit campaign promise to provide temporary certainty with an immediate decree-in-lieu-of-law followed by passage of a bill within one year. The prevailing uncertainty, the result of a 2012 Constitutional Court ruling, simply discourages long-term investment in a sector essential for state revenues and to confront an emerging energy crisis

The issue of oil and gas (and extractives more broadly) further illustrates a downside of Widodo's economic leadership. Direct investment in the extractives sector (usually foreign) is a crucial component of Indonesia's economic story. Indonesia should – and, indeed, under the 1945 Constitution, must – get the best possible deal for its natural resources. Unfortunately, however, resource deals carrying nearly US$50 billion in investment over the next decade are being held up. The causes are various, but in each case, the Government has failed to articulate its objectives, stick to a timeline, and failed to curtail intrigue from politicians' noisy barracking and backgrounding of journalists. Moreover, posturing actually comes from within the cabinet, with ministers actively undermining each other and, in one case, impugning colleagues' commitment to the national cause. Non-existent leadership and a free-for-all atmosphere prevent Indonesia from effective negotiation. As a result, a policy area critical to the national interest becomes a chaotic, unseemly bloodsport. 

Widodo's first year of economic leadership demonstrates both strengths and weaknesses. It shows his flexibility, desire to 'work, work, work' on domestic issues, and expectation that his charges do the same. But it also shows how he shrinks from complex or controversial challenges, and has yet to adopt many real innovations. He has yet to show strong leadership, especially on high profile investment issues, and his cabinet remains a work in progress, even after a reshuffle with sound economics appointees. This, of course, is perhaps a result of his political weakness and tenuous position in his own party, but it is also surely in part a product of his penchant for simple, quick solutions. Unfortunately for Indonesia, its challenges cannot be resolved quite so simply.

Photo courtesy of Flickr user Hendrik Mintarno.

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