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Monday, January 21, 2019
By Hal Hill, ANU
Indonesia has achieved almost 20 years of continuous economic growth.
The country navigated the 2008 global financial crisis with little difficulty and effectively weathered the emerging market volatilities of 2018. It has adjusted to the end of the China-driven commodity boom more effectively than the commodity-exporting members of the now-forgotten BRICS (Brazil, Russia, India, China and South Africa) group.
Despite this record, the economy isn’t growing fast enough to meet the growing aspirations of its people or to make significant inroads into poverty — a challenge compounded by the sizeable increase in inequality this century. The new normal is 5 per cent growth. While that’s faster than the global economy, it’s well behind contemporary Asian frontiers set by India, China, Vietnam and even the Philippines.
It’s also well short of President Jokowi’s 2014 election campaign pledge of 7 per cent growth. The difference matters: 7 per cent growth implies a quadrupling of real per capita incomes every 28 years, whereas 5 per cent growth delivers just a doubling every 23 years.
Why isn’t Indonesia growing as fast as the two Asian giants and some of its neighbours? Jokowi had the misfortune of coming to office just as the commodity boom was ending. Government and businesses were being forced to adjust to the end of a decade of easy growth. Some slowing down in the economic momentum was inevitable. But four years on, economic growth has yet to accelerate despite a moderate increase in commodity prices and the ongoing income effects of the boom.
The factors explaining this lack of economic dynamism are mainly domestic.
There is more or less a consensus around the desirability of appointing highly competent technocratic professionals to run the two key macroeconomic agencies, the Ministry of Finance and Bank Indonesia. As a result, Indonesia’s macroeconomic policy framework is functioning effectively. There has been an impressive fiscal consolidation since the crisis, the flexible exchange rate regime is working well, and the financial sector is now much better supervised and regulated.
But microeconomic reform — trade and investment policy, the business environment, the sectors, and labour and social policy — is basically in the hands of the political parties and subject to the rules of the political market place. ‘Veto players’ proliferate in a system where the president governs by consensus in the legislature, manages a diverse ‘rainbow cabinet’, presides over more than 500 subnational leaders and occasionally is checked by an unpredictable judiciary.
The result is that the sweeping economic policy reforms and institutional innovations needed for faster economic growth (and that were the government’s response to the fading of the earlier boom in the 1980s) are more or less off the agenda.
Jokowi came to office with a reputation as a ‘can-do’ politician. There was optimism following his first major economic policy decision, which was to substantially reduce the petroleum subsidies that had been crippling the government’s budget. This freed up fiscal space for desperately needed infrastructure investments, as well as an ambitious social policy agenda.
Jokowi’s well-known impatience with bureaucracy is also facilitating ongoing regulatory simplifications. The country is ascending the World Bank’s Ease of Doing Business rankings, the most widely used business environment indicator. Among the 190 jurisdictions, Indonesia has risen from 114 when Jokowi took office to its current ranking of 73.
The fact that Indonesia elected an ‘outsider’ of modest means to the highest office reflects admirably on the country’s democratic progress. But one result of this background is that Jokowi has led from behind on the big issues of economic nationalism and reform.
Take his trade ministers, for example. The three in his administration have ranged from an ultra-nationalist to a liberal reformer to something in-between. As a result, significant trade policy reform is on the backburner. The country’s large state-enterprise sector too remains basically unreformed and is seen as an ‘agent of development’ despite its indifferent commercial record and (for some) compromised governance structure.
Of course, there are small steps here and there. Elements of the 16 reform packages introduced by the Jokowi administration have been useful at the margins. Capable reforming cabinet members, such as the current head of the Investment Board, are able to take some small steps. But in the grand scheme of things these are not enough to accelerate growth.
There can also be no doubting the President’s sincerity in social policy reform, including in the form of conditional cash transfers and improved access to education and health facilities. But the country’s fiscal policy space is severely limiting the scope for these much-needed services. The subsidies have crept back, the tax effort remains an anaemic 12 per cent of GDP (despite the much-heralded 2016 tax amnesty) and there are large unfunded spending commitments in practically all areas of social policy.
The 2019 election campaign is now under way, but the economic debates are mainly about symbols and slogans. A Jokowi victory would almost certainly usher in more of the same. It would not be a reformist administration, but it would be pragmatic, cautious and focussed on infrastructure. Perhaps Jokowi would be bolder in a second (and final) term. He might also follow the well-established political dictum of administering any tough medicine early in the term, as he did almost immediately after his 2014 election victory.
What are the implications for the region? Indonesia will be fully occupied by elections in 2019. Jokowi has also shown little interest in international affairs, except in cases where business deals are in prospect. Although Indonesia has had some of ASEAN’s most creative thinkers on regional affairs, mainly associated with the Centre for Strategic and International Studies, the country is unlikely to adopt a leadership role in regional and international commercial diplomacy, from ASEAN and RCEP to climate change and other pressing global challenges.
Hal Hill is the HW Arndt Professor Emeritus of Southeast Asian Economies at The Australian National University.This article is part of an EAF special feature series on 2018 in review and the year ahead.These issues are discussed in more detail in the author’s ‘Asia’s Third Giant: A Survey of the Indonesian Economy‘, The Economic Record, December 2018.
Posted by Ross B. Taylor AM at 10:39 PM
By Ida Bagus Made Bimantara
“If I go, there’s just no telling how far I’ll go.” declared Moana, the charming Polynesian character from the 2016 Disney animation film. A similar analogy was used by President Joko “Jokowi” Widodo at the Archipelagic and Island State conference in Manado, North Sulawesi last November.
There is no telling how far the partnership between Indonesia and South Pacific island countries can go.
Located in the same Pacific region, with a common heritage and sharing similar challenges, the interests of Indonesia and the South Pacific naturally align. These are the foundation for Indonesia’s future engagement with the region.
Indonesia’s easternmost provinces jut and form a natural sea and land bridge into the southwest and northwest of the South Pacific. Comprising many islands facing the constant threat of natural disasters and climate change, Indonesia and South Pacific countries face the challenge of connecting the islands throughout the vast ocean.
Indonesia is a multi-ethnic and multicultural country, mostly including those with Austronesian or Melanesian origin. The Austronesian family includes the languages spoken by Indonesians and Malays, Malagasy, Filipinos, as well as Polynesian peoples including Maori, Samoan, Tongan and Hawaiian.
Similarly, Pacific islanders are mainly of Polynesian or Melanesian descent. Melanesian descendants in Fiji, New Caledonia, Papua New Guinea (PNG), Solomon Islands and Vanuatu make up 94 percent of the South Pacific population and 92 percent of its gross domestic product.
Indonesia, as a middle-income developing country experiences varying rates of economic growth among its provinces. Likewise, the South Pacific region experiences uneven and fluctuating rates of economic growth. Some countries enjoy growth of between 3 and 4 percent while others grow below 3 percent.
Early last year, Indonesia’s commitment to the South Pacific was outlined by President Jokowi in a directive to his top diplomats to focus less on obtaining international assistance and more on giving international assistance to those countries in need including in the South Pacific. Indonesia is thus committed to “graduate” out of aid receipt and create an international assistance program of its own.
Over the past few years, Indonesia has provided modest assistance to countries struck by natural disasters or humanitarian crises, including US$5 million for Fiji and $2 million for Vanuatu after typhoons Winston and Pam. Other forms of cooperation that Indonesia is engaging with Pacific island countries include protocol and security training for PNG as host of the latest summit of the Asia Pacific Economic Cooperation forum and various programs to share experience and knowledge.
In the years to come, Indonesia’s international development program, currently in its infancy, is set to gain a significant boost commensurate with the country’s growing wealth. Last year, Foreign Minister Retno Marsudi announced a plan to form an Indonesian aid agency with an initial fund of about $100 million. This single agency will be responsible for managing international assistance for natural disasters, humanitarian crises and other challenges in the region including the South Pacific. The agency will also bring together technical cooperation and capacity building programs that many Indonesian agencies now have with a number of Pacific island nations.
Furthermore, there is ample room to improve Indonesia’s modest economic relationship with the South Pacific. Total trade between Indonesia and all the Pacific island countries in 2017 was $450 million, an improvement of $140 million from 2016. The largest contributors for the increase were from PNG and the Solomon Islands. Indonesia has a long way to go to catch up with the region’s biggest trading and development partners: Australia, China, Japan, New Zealand and the United States.
Currently only a few Indonesian companies have a presence in the South Pacific, including construction company Audie Pacific in Fiji and Emtek Media in PNG. In the next two decades, improvements in connectivity between the easternmost parts of Indonesia and the South Pacific will be key to Indonesia’s attempts to expand its trade and investment footprint in the region.
Such improvements are already happening. The improved and more frequent air links between Mount Hagen and Port Moresby in PNG and Jayapura in Papua are opening up business and personal connections between Indonesia and PNG and the rest of the South Pacific. The expansion and upgrade of 24 strategic ports, including the ports of Bitung in North Sulawesi and Sorong in West Papua, will further cut costs for both domestic and international freight.
As connectivity between the regions improves even further, the tyranny of distance will be eroded. It is this confluence of events and initiatives that should be on top of our thinking as we shape the kind of cooperation and partnership that Indonesia should have with the South Pacific island countries. A partnership that encompasses all the sectors that will greatly impact people’s livelihoods. A partnership that takes advantage of each other’s strengths and opportunities while filling the remaining gaps.
In her journey, Moana saw the line where the sky meets the sea which called her to explore further. That line on our common horizon is waiting for all Pacific islanders and Indonesians to see and explore.
Posted by Ross B. Taylor AM at 10:35 PM