6 April 2020

Rizal Ramli: Getting Indonesia's slowing economy back on track

By Rizal Ramli*

Reshaping policies, however, will not be easy due to the many vested interests at play, and previous administrations have passed or kept in place an unfriendly business environment.

WHEN Indonesian President Joko Widodo first entered office in late 2014, there was widespread optimism within the local and foreign business community - voters were elated by the fact a politician not tied to the old elite was finally elected to higher office, and the national bourse climbed on the back of positive sentiment.
More than halfway through his five-year term, Mr Widodo has proved his political chops; despite the fact that he came from a small city in Central Java and had no experience in national politics, he has managed to win the grudging respect of Jakarta's movers and shakers and consolidate his power.
His ratings in popularity polls show, in fact, that he could easily win a second term in office in the 2019 presidential election. Still, presidential fates can change easily, and much of his electability will depend on the trajectory of the Indonesian economy over the coming few years.
Were Mr Widodo to have an Achilles' heel, it would be the current state of the economy. In fact, if you ask investors about their willingness to risk more capital or consumers about their confidence in the future of the Indonesian economy, the verdicts are clearly lukewarm, if not dispirited.
Surely it could be worse. Indonesia's economy is poised to grow slightly above 5 per cent this year, roughly the same as the 2016 growth rate. Compared to its peers in South-east Asia, however, Indonesia's economic performance has been disappointing: The Philippines is the fastest-growing economy in Asia after China, Thailand is experiencing its fastest growth in four years and Malaysia in more than two.
Certainly a 5 per cent growth rate was not on the mind of Mr Widodo when he first entered office; on the campaign trail he envisioned 7 per cent. Now the government is targeting 5.4 per cent in 2018. Why the radical change?
To be fair, many of the challenges confronting Indonesia now are not the consequence of mistakes made by the president and his Cabinet; rather, it has been the result of heavily misguided industrial policies from previous administrations.
An example of where the entire blame can't be laid at the doorstep of the Widodo Cabinet is the disastrous policies in the oil and gas, and mining sectors. A treasure trove of natural resource riches in fossil fuels, base and precious metals, not to mention having great potential in renewable energy, Indonesia has consistently underperformed over the past decade. It should never have been so.
To wit, multinational oil giants have been reducing their exposure to Indonesia over the years because of relatively uncompetitive laws and regulations as compared to other producer nations. Indonesia was once a net exporter of oil. Now it is a net importer while large amounts of untapped offshore oil deposits stretch across the archipelago.
The picture in the mining sector is even worse: The Fraser Institute, a Canadian public policy think tank that conducts an annual survey on mining investment, has consistently ranked Indonesia over the years as a top destination in terms of its potential but one of the worst when it comes to mining policy.
The Widodo government has done a couple of things to redress failed past policies, that in the end have served nobody's greater interests. It is time for the Indonesian government to rethink what policies should strive for, which is to enhance the people's welfare. The past set of policies has only denigrated that welfare, primarily in the poorer eastern provinces of the country where the mining industry has the greatest potential.
In other industries, especially in the labour-intensive manufacturing sectors, Indonesia is losing out to its competitors in the region. Indonesian policymakers often wax eloquent about their country's demographic dividend, but so far the dividend side of the equation has been scant. Current manufacturing output is growing by only 4 per cent; in the 1980s, it was growing in the double digits. With an annual economic growth rate of 5 per cent, Indonesia is punching far below its weight class in manufacturing.
Previous administrations have passed or kept in place an unfriendly business environment, while Indonesia's neighbours, such as Vietnam, have learnt from their past mistakes and adjusted their policies. Samsung, for example, now manufactures its Galaxy Note 7 mobile phones in Hanoi and is set to build a US$300 million research centre there. Vietnam currently exports US$35 billion annually in electronics goods, dwarfing Indonesia's performance many times over.
Given its large and relatively young labour pool, there is little doubt Indonesia could also compete for such lucrative investments by world-class manufacturing companies. But rather than trying to dictate the terms of investment and passing unfriendly regulations as has been the case in the recent past, policymakers should take a page out of Hanoi's playbook and court investors by having a sincere dialogue about what types of new policies would be needed to attract investment capital and therefore generate jobs for its fast-growing ranks of underemployed and unemployed youths.
Reshaping industrial policies will not be easy; there are many vested interests at play, and navigating the politics driving those policies is fraught with tripwires, even for the most talented of leaders.
There is some good news, however, for Mr Widodo. A quick fix for Indonesia's subpar growth story can be found by reigniting household consumption, which for many years has had more than a 50 per cent share in Indonesia's gross domestic product.
Unfortunately, recent surveys by AC Nielsen on household expenditures have indicated signs of weakness in the second half of 2017. This is in part because of the high prices of food for lower-income groups. Less well-to-do Indonesians are also suffering due to an import quota system on basic necessities such as sugar and meats, resulting in prices twice the international average.
Making matters more difficult for those who can least afford it, the government has cut electricity and gas subsidies, which adversely affects the purchasing power of lower and middle-income Indonesians.
Most perplexing, however, is the government's failure to address the slump in domestic demand in its recently revised state budget. After creating extra fiscal space by slashing energy subsidies, a large part or 630 trillion rupiah (S$63.7 billion) of the budget was committed to debt servicing, 416 trillion rupiah to education and 380 trillion rupiah to long-term infrastructure projects.
Clearly, there is no growth story behind the government's fiscal policy. Instead of towing the conventional Washington Consensus-type line of thinking, Mr Widodo's economics team should have put on their Keynesian hats and found ways for a short-term stimulus; this could have easily been done by temporarily increasing other subsidies for basic needs as a means of boosting private consumption and, most importantly, by removing rent-seeking food import quotas.
And as has been done in the past when I served in current and past administrations, the debt-servicing burden could have been eased through loan swops and loan-to-nature swops, hence freeing up the budget for a larger stimulus to the economy.
Finally, while infrastructure development is a critical factor for increasing Indonesia's potential growth into the far future, it is wrong-headed to rely only on budget financing and rely heavily on state-owned enterprises to carry out such an important mandate. It is no secret that state-owned enterprises in Indonesia have been and remain notoriously corrupt and inefficient: Financial leakages and cost overruns in infrastructure projects are legion.
Indonesia would benefit by devising better policies, relying more on non-budget financing, such as build-own-operate and build-own-transfer schemes, to attract private investors to construct the roads, ports, water systems and energy grids it needs and therefore pave the way for Indonesia to meet its true economic potential.
*  Writer is a former Indonesian coordinating minister for economics, minister of finance and, more recently, he was the coordinating minister for maritime affairs


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