Great anticipation has followed Indonesian President-elect Joko Widodo (nicknamed “Jokowi”) and his transition team as they prepare to assume office on October 20th after sweeping more than 53 percent of Indonesia’s electorate in the July 2014 presidential election. This is in significant part because surprisingly little hard information has been made available about what Jokowi’s new government will actually do. Much ink—both real and digital—has been spilt on defining the big economic policy issues facing the Jokowi presidency, which include governance issues around bureaucratic reform and reducing corruption; the need for mass infrastructure improvement such as roads, ports, airports, and electricity generation; educational policies to increase the capabilities of the Indonesian workforce; and reducing energy subsidies—which currently consume almost one-fifth of the national budget—to help pay for these improvements. Southeast Asia’s largest economy, Indonesia’s growth rate sank to 5.2 percent in the first quarter of 2014, its lowest point in four years. Addressing economic challenges will therefore significantly determine Indonesia’s ability to return to economic growth above the 7 percent per year benchmark that Jokowi has mentioned.
These policy challenges are well-known, and tackling them is more a matter of acquiring enough political will and legislative skill than determining the optimal policies to pursue. Much remains to be revealed in the coming weeks about the political apparatus with which Jokowi will be working after the inauguration. The legislative balance of power—which, as in the United States, greatly determines a president’s ability to get things done—is not in Jokowi’s favor. (There are rumors, however, that a select few small parties may switch to his coalition.) Jokowi also continues the process of selecting a presidential cabinet, which will reveal to what extent he is the independent, transformational figure some hoped he would be rather than one controlled by the elite political interests essential to winning the national election. Observers are concerned that cabinet seats will be doled out largely as spoils for allied political parties, as has often been the case in the past, rather than on the basis on merit.
Beyond headline-grabbing policy issues, a number of other factors that have received less media attention also will determine how effective the new government will be in reaching its broad objectives. Jokowi’s private-sector development policymaking—an area that is particularly appropriate given his notable and remarkable rise from humble beginnings as a furniture exporter in central Java to the office of president—merits specific consideration. Three key issues in this regard will be critical.
First, Jokowi’s new government will have to balance national protectionist pressures against sensible efforts to develop certain industries. This is a particular challenge for countries on par with Indonesia’s stage of development, which seek to transition from economies based on extractive and agricultural activities and low-end manufacturing aided mostly by low-wage costs to higher, value-added production activities. While a few of Indonesia’s more northerly Asian counterparts have seen some success in managing this transition, replicating the achievement has historically bedevilled Indonesian policymakers. While Jokowi employed much nationalist rhetoric during his election campaign that might suggest an overtly protectionist policy stance, most pundits argue that his rhetoric was mostly driven by the realities of election politics. As president, he is likely to be more pragmatic than his initial language might suggest.
A pragmatic course will require strong and independent government institutions to manage the transition process in particular industries, balancing industry concerns while also considering the realities of international markets. Targeted protectionist policies—whether banning certain imports or exports for limited periods of time or altering the costs of imports and exports through phased taxes and fees, or even through subsidies—can be powerful policy tools. Recent examples in Indonesia include bans or high taxation on exporting unprocessed materials, such as rattan and cocoa beans, in an effort to stimulate domestic processing industries. Timing is key. Government policies must reduce barriers quickly enough to keep the industry’s feet to the fire and avoid scaring off foreign direct investment from an overly coddled industry while not so fast as to overwhelm the domestic players with international competition. Whether Jokowi’s government will be able to responsibly manage these dynamics is a critical question still awaiting answer.
Second, Jokowi and his coalition will have to develop a philosophy concerning the division between the role of government and that of private-sector actors. The Indonesian government’s tendency, at times, has been to interfere preemptively with overt policies or even to create a government institution to carry out activities that private sector actors could deliver in a cost-effective manner if given the time to develop. One (apparently) better-managed recent case has been the Kredit Usaha Rakyat (KUR) or “People’s Business Credit” program. The KUR began in late 2007 as a mechanism to increase lending to micro-, small- and medium-sized enterprises (MSMEs) by providing government-sponsored credit guarantees to worthy enterprises with low levels of bankable collateral. In the case of KUR, the government, laudably, did not directly interfere with the credit provision process. Banks—to date, only partly state-owned ones—are at liberty to accept or reject borrowers; the government has been restrained to playing a back-door role as the partial guarantor of accepted loans. Apart from a few relatively minor rumblings about misuse, the KUR seems to have departed from the long and largely shoddy history of government credit programs in Indonesia. The program has reached millions of borrowers with close to $10 billion in U.S. dollars since its inception, with average default rates well below the central bank’s mandate of 5 percent for this loan category.
However, as the KUR appears to be approaching a natural saturation point in some parts of the country, there are rumblings about greater government intervention in the program. Assuming the Jokowi government renews the program—which seems more likely than not—it will need to resist the instinct toward impatience and a long history of forcing government intervention on economic issues. Anecdotal evidence suggests that the KUR stimulated real financial deepening, as a host of participant banks expanded their MSME lending operations during its operation. The Jokowi government would be best served by considering the possibility that the KUR is reaching a natural saturation point where continued annual volume growth is not sustainable. Moreover, it should seek out more reliable evidence about the nature of this saturation point and investigate barriers to private sector expansion that can still be overcome. It should then seek to initiate similar market-led approaches in other lending areas. Potentially concerning is the fact, however, that Jokowi and Vice President-elect Jusuf Kalla’s so-called nine-part “Nawacita” election platform included the objective to “build a bank for farmers and small businesses.”
Third and finally, the Jokowi government must firmly define its commitment to evidence-based policymaking. There are certainly promising signs, from Jokowi’s choice of advisors before the election to his commitment to research and knowledge-capacity development in a number of areas in the Nawacita. The right take on Indonesia’s largest economic policy issues is arguably widely known and predominantly faces political impediments to passage; on a host of micro-issues, however, sensible policy is much less clear. Indonesia’s previous government, led by Susilo Bambang Yudhyono, made some promising advances in development policy through an independent policy think tank inside the government known as the National Team for the Acceleration of Poverty Reduction (TNP2K). This approach could be further improved with evidence-based approaches as well as applied in a broader set of policy areas.
The Jokowi government has arrived on the Indonesian political scene with great potential. Like any new government, however, it also faces a host of challenges. These have been exacerbated by the uncertainty factor that obscures any concrete indication of Jokowi’s trajectory on critical economic issues that confront the nation. Until Jokowi unveils a clear approach, the Indonesian economy and people will continue to hang in the balance.