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Jakarta Post

President Jokowi'€™s long and winding road to economic reform

  • Winarno Zain

    The Jakarta Post

Jakarta   /   Mon, September 14, 2015   /  04:34 pm

As the era of the commodity boom has ended and the Indonesian economy is stuck in sluggish growth and the question of '€œWhat'€™s next?'€ arises, President Joko '€œJokowi'€ Widodo has tried to answer through his economic policy package announced on Wednesday. The substance of his response is contained in the 91 new regulations being drafted and in the 89 regulations being amended. It seems a wide ranging and comprehensive response that if implemented successfully should diversify the Indonesian economy into more manufacturing and toward becoming less dependent on commodity exports.

The policy packages attempt to simplify business procedures, providing more legal certainty, accelerating the development of national strategic projects and expanding fiscal incentives. On the monetary side, Bank Indonesia (BI) and the Financial Services Authority (OJK) contributed to the policy package by easing rules for dollar deposits, managing better supply and demand for foreign exchange and expanding financial markets.

The key element of the policy package is of course deregulation.

Deregulation, if it is meant as freeing business initiatives from strangling bureaucracy, could be a very effective means to bolster economic competitiveness, as has been shown in many countries that experienced high growth after executing deregulation. The Indonesian government in 1986 implemented deregulation after oil prices fell to below US$10 per barrel.

Coupled with rupiah devaluation, the policy prevented a further slowing down of the economy and succeeded in accelerating economic growth and exports in subsequent years. Deregulation matters because it is related to the ease of doing business.

Ease of doing business in Indonesia has been a hurdle for investment. Investors have been facing bureaucratic inertia. For investors, it does not make sense that it takes months or even years to get a license for a building project.

Despite moving up three slots in the ranking of doing business by the World Bank to 114th out of 189 nations in October 2014, Indonesia'€™s ranking is still well below those of its peers, like Malaysia (18th),
Thailand (26th), Vietnam (78th) and the Philippines (95th). That means that even with easier licensing from this package, Indonesia has still long way to go to catch up with its neighbors.

The problem of slowness and delay in the disbursement of the state budget has been well documented. This has suppressed activities and growth. Accelerating national strategic projects by eliminating bottlenecks has been put as one of the priorities in the policy package, but its smooth implementation of the projects in the regions would be a challenge.

Accelerating disbursement for projects would need coordination and cooperation from regional governments. Remember, one-third of state budget expenditure is transferred to regions and this means regional governments have substantial responsibility in streamlining project execution. The challenge here is the competency of regional governments to carry out their tasks.

The full implementation of the policy package will bring consequences for the government to change its paradigm on trade and investment. Strengthening competitiveness of Indonesian manufacturing would involve more competition through more opening of investment and trade. It is in this area that the government instinctively resorts to inward-looking policies on trade and investment every time there is problem. In recent years we have seen the escalation of tighter controls on trade, quotas and licenses. It would be interesting to see how, in implementing its policy package, the government would keep the balance between protection, nationalist sentiment and openness.

No less important is government action to address the immediate, short term problems to stabilize the macro economy. These include stabilizing the rupiah exchange rate, maintaining purchasing power, especially among the middle and lower classes, and containing inflation.

Maintaining the rupiah exchange rate and inflation would be the keys to attracting investment because they are closely related to confidence. You cannot attract investment solely by simplifying license and procedures. You need to have investor confidence in the Indonesian economy. At present it is confidence that is the main issue for investors.

The erosion of confidence in the Indonesian economy is reflected in the continuing decline of the surplus in the capital and financial accounts from $14.7 billion in September 2014 to only $2.5 billion in June 2015. Foreign direct investment (FDI) was $5.9 billion in the first six months, $1 billion less than in the same period last year.

Accelerating the disbursement of Rp 20.8 trillion in village funds and expenditures for infrastructure projects '€” two items included in the policy package '€” would help to bolster purchasing power through their multiplier effects and, hence, consumption. Stabilizing food prices would be crucial for maintaining purchasing power and this means securing an adequate food supply, if necessary through imports. Therefore, importing food should no longer be a subject for debate among policy makers and politicians.

If we consider this policy package to be economic reform, then this reform has not included two crucial areas: energy and labor. Indonesia'€™s oil production has been declining and with oil prices low, oil companies are reducing their spending for exploration. We have not seen any breakthrough from the government to encourage oil companies to spend more for exploration and, crucially, there is not yet any policy breakthrough in developing renewable energy, especially geothermal, of which we have an abundant supply.

Labor reform is urgently needed because minimum wages have been escalating out of control recently in most regions. Labor-intensive industries have been declining and have been losing their competitiveness because of the rising wage costs. If the policy package is to be more comprehensive, it should not exclude these sectors.

There was no enthusiastic response from the market for Jokowi'€™s economic reforms. The Jakarta Composite Index (JCI) tumbled by 0.27 percent the next day and with an external headwind on the horizon, it would be a long and winding road for President Jokowi to turn the economy around into a higher growth trajectory.

The writer, an alumnus of the University of Indonesia'€™s School of Economics, is a commissioner at a publicly listed oil and gas service company.

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