Jokowi and the Hopes for a More Dynamic Indonesia

Economic issues will be at the top of Indonesian President Jokowi’s agenda as he visits the United States. His goal is to attract investment from U.S. firms to bolster Indonesia’s struggling economy.

However, unless he manages to drive through the economic reforms that many, including him, hoped he would when he was elected a year ago, that will be very difficult.

There is a thicket of trade barriers and restrictions that make Indonesia a difficult place to do business.

With a population of 255 million, the United States and other Western companies have long looked at Indonesia as an attractive market. Key drivers are its growing middle class, large and youthful population and need for new infrastructure.

Many potential partners hoped that Indonesia’s economy would take off in the same way as those of its neighbors Malaysia, Thailand and Vietnam.

China’s resource-intensive growth powered Indonesia’s economy in recent years, adding to its allure to foreign investors as a high-growth emerging market. Due to China’s slowing economy, Indonesia needs to turn away from resource-driven growth.

The challenges

Jokowi faces mounting domestic political pressure to act. While 4.7% growth in the latest quarter sounds impressive, it represents a six-year low for Indonesia.

The declining demand and prices for coal, palm oil and other commodities have hit Indonesia’s economy hard.

Indonesia has become too dependent on natural resources, which accounted for 68% of total exports in 2011.

This is reminiscent of the first time Indonesia dealt with the “resource curse” after the rise and fall of oil in the 1980s.

During the boom time of the last decade, Indonesia’s economic policy became more and more exposed to populist policy impulses, as well as vested interests seeking to protect their respective economic turfs.

As a result, Indonesia ended up embracing once again the tried-and-failed state-directed development and protectionist policies.

This not only diverts policy focus from the productivity-raising reforms that are necessary for broad-based growth. It also does nothing to serve the interests of Indonesia’s large and youthful population.

Unfriendly business atmosphere

Indonesia ranks 114th on the World Bank’s global ranking of how easy it is to do business there — far behind neighboring Malaysia (18th) and also below the regional average (92nd).

The United States Trade Representative’s (USTR) list of Indonesian trade barriers is extensive: forced localization (including for pharmaceuticals, cell phones, laptops, tablets and data storage), local content requirements, import licensing for many ICT products, onerous equipment certifications, high tariff rates and forced technology transfers as a condition of market entry.

Indonesia’s poor protection of intellectual property means it remains on the USTR’s “priority watch list” of the worst offenders.

Indonesia’s investment climate is burdened by legal uncertainty and economic nationalism. The country’s policies limiting foreign investment in certain industries have raised foreign equity limitations in sectors such as telecommunications and pharmaceuticals, while closing off investment in e-commerce and other sectors.

All of this underscores the strong protectionist streak amongst many Indonesian political elites and policymakers.

It wasn’t supposed to be this way. Jokowi came into office with high expectations of reform, thanks to his record as governor of Jakarta and the fact that he was not from the corruption-tainted political establishment.

Jokowi’s economic program has thus far been unimpressive. He has reshuffled his cabinet, bringing in a Harvard-trained private equity executive as trade minister and a respected former central banker as chief economic advisor.

Unfortunately, his various stimulus and reform measures don’t address the major impediments.

Jokowi has not been able to overcome an inept and inert bureaucracy or to alter its persistent attachment to failed industrial policies, including within his own government.

Jokowi’s half-hearted approach has rekindled fears that he has succumbed to the calls for further counterproductive state intervention in the economy.

This raises the risk that he will at least keep, and maybe double down, on exactly the policies that have weighed down Indonesia’s economy.

The upcoming visit

Jokowi’s visit this week is the latest in a growing number of high-level meetings that the United States has pursued with Indonesia under the ”Comprehensive Partnership” framework that Obama and former president Yudhoyono launched in 2010.

While the political and security relationship certainly seems to have improved, the same can’t be said for the trade and economic relationship.

Jokowi states that he wants to boost productivity, growth and competitiveness, including in high-tech sectors and through new and revamped infrastructure.

The question is whether he takes home the message from his U.S. visit that the interests of U.S. companies and his reform agenda are aligned.

U.S. technology, capital and knowhow can play a key role in helping a reform program that refocuses Indonesia back toward the productivity-enhancing policies that can put the country on a path to long-term growth and prosperity.