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Chance for Jokowi to transform the economy

Jakarta Post, 2 December 2014 - Rookie president Joko Widodo is about to discover that while economic nationalism seems like a great idea during good times, it becomes a distinct handicap when things aren't going so well - as is happening now with Indonesia's slowest growth rate in five years.

His predecessor, Dr Susilo Bambang Yudhoyono, was fortunate. While Indonesia's economy may have still been recovering from the 1997-98 financial crisis when he took office in 2004, he was able to ride on a commodity boom through almost his entire decade-long presidency.

It allowed him to introduce popular nationalist policies, particularly the ban on unprocessed mineral exports, and it also meant he did not have to tackle the knotty question of fuel subsidies, which weigh down the budget and the economy as a whole.

But Dr Yudhoyono's second term saw a steady deterioration in policymaking and an increase in inequality.

Joko has inherited all this, along with a minority coalition wrestling with a House of Representatives which, emboldened by Dr Yudhoyono's timid leadership, has turned a presidential system into much more of a hybrid.

A minority government is not the end of the world. By homing in on stalled projects alone, Joko doesn't need to pass legislation or difficult reforms to get things done.

He didn't need approval, for example, to pass the recent 30 per cent fuel price hike.

It hardly drew a whimper of protest and, in one stroke, showed up Dr Yudhoyono's lack of courage and the media's habit of hyping public unrest when there is none.

On the anti-corruption front, the tangible steps he has taken to clean up the mines and energy ministry may well lead to the collapse of the so-called Oil Mafia - a significant triumph.

But after new conditions imposed on foreign investors and an election campaign full of nationalist rhetoric, it seems Joko will now have to recalibrate his message and make policy shifts if he is to encourage inward investment.

But there has to be incentives. Even before the mineral export ban was put in place, mining exploration was at a standstill - and had been for a decade. Oil and gas drilling this year has slumped to a quarter of what it was in 2012.

In their new book, The Economic Choices Facing The Next President, economists Gustav Papanek, Raden Pardede and Suahasil Nazara outline an approach they believe is the answer to accelerated growth: a return to labour-intensive industry.

Alternative strategies do not create jobs. The mineral ban may be aimed at achieving more value add, but smelters don't employ large numbers of workers. Factories producing more technologically advanced goods don't either.

In fact, the authors argue that Joko faces a stark choice between a business-as-usual scenario of 5 per cent growth - and fewer than a million new jobs a year - and what they call a "once-in-a-century" opportunity to transform lives.

That, they say, is because Indonesia is well-placed to take over some of the lower-end manufacturing China is abandoning, now that it has become less competitive.

The only question is whether Indonesia is competitive enough itself. A wise move away from the almost cultural adherence to a strong rupiah may have made exports cheaper, but the twin problems of poor infrastructure and the high cost of an underskilled labour force have still to be addressed head-on.

Infrastructure is already top of Joko's agenda. Ignoring diplomatic norms, he delivered what amounted to a 13-minute sales pitch at the Asia-Pacific Economic Cooperation's CEO conference in Beijing - and even raised the subject in his first meeting with United States President Barack Obama.

Under increasing pressure from its Asean neighbours, with its workers trailing in skill and expertise, Indonesia will need to grow at 7 per cent - far greater than next year's forecast 5.8 per cent - just to create three million to four million new jobs a year.

Dr Papanek figures a new emphasis on labour-intensive manufacturing could absorb an estimated 20 million surplus workers in agriculture and the informal sector who currently work long hours for very little pay and contribute little to output.

The plan would be good news for youth employment as well. The number of the two million school leavers finding employment each year has shrunk from 800,000 to 300,000 since 2007 - and then mostly in less productive sectors.

Employers complain at the way the minimum wage has become an annual political entitlement without any attention to increased productivity.

With a minimum monthly wage of US$200, Jakarta and surrounding West Java may compare favourably against China's US$330-US$460 - but not with the US$114-US$146 in more productive Vietnam and US$38-US$68 in Bangladesh.

While Indonesia does enjoy a competitive edge farther afield in Central Java, where the minimum wage is only US$84, the cost of moving finished goods by road to Jakarta's already congested Tanjung Priok tends to take away that advantage.

It is dichotomies such as this that may frustrate planners. But Dr Papanek, an expert on developing economies who has been visiting Indonesia since the late 1960s, says the rewards would be considerable.

With the tough new reforms they propose, he and his team estimate the average annual income per person would rise from the current 34 million rupiah (US$2,760) to 69 million rupiah by 2024.

To paraphrase another Indonesian expert, Northwestern University's Jeffrey Winters, in a foreword to the book: Can Indonesia update and expand the scope of nationalism, from a narrow interpretation to one where it embraces the world and dramatically improves the prosperity of its people? (***)

(US$1 = 1,2320 rupiah)


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