How Jokowi Could Solidify Reforms

Since August, when Indonesian President Joko “Jokowi” Widodo reshuffled his cabinet, and then promised a wave of new deregulatory reforms, it has appeared that the president finally was going to embark upon serious policy changes. Jokowi had been criticized by Indonesian commentators, during most of his first term as president, for offering mixed and sometimes directionless policy messages. But his new team of ministers includes a new chief of staff renowned as a corruption-fighter, as well as a respected former central banker as his new head economic minister. Among the many reforms that Jokowi has outlined since August, he has vowed tax holidays for certain new investments in Indonesia, government support for cutting red tape in building infrastructure, and streamlined regulations for large new investors in the country and for many big domestic start-ups.

These announced reforms were welcomed by much of the Indonesian business community, especially given the country’s weak growth in the first half of the year, the continued weakness of the rupiah, and the many structural impediments to investment in the archipelago. As Societe Generale economist Kunal Kumar Kundu notes, Jokowi’s proposals are unlikely to boost Indonesia’s flagging growth in 2015---the measures are more likely to have an impact over five or ten years. For now, the country’s commodities companies, critical to the Indonesian economy, will remain vulnerable to a slowdown in China, while high domestic inflation will continue to hinder the Indonesian economy as a whole. The rupiah will probably remain at its weakest level in nearly two decades.

Still, Jokowi’s proposed reforms send an important signal---if he follows through on them. Over the next year, successful implementation of these economic reforms, and a further set of economic and political changes, could show that the president, who came into office as a political outsider, is truly going to change Indonesia’s political and business climates.

But actually following through will be tricky. For one, Jokowi will need to completely remake Indonesia’s licensing and permitting process to achieve the goal of making approval processes for new investments competitive with the speed of approvals in neighboring states like Malaysia, Thailand, or Singapore. Remaking licensing and permitting could include forcing agencies to computerize all functions, create real performance incentives for workforces, and potentially fire staff who slow down permitting---all challenging tasks in Indonesia today. In addition, to make the tax holiday proposal effective, Jokowi will have to overcome continued strong opposition to tax breaks for foreign firms among many leading politicians from Jokowi’s own party, PDI-P.

Second, Jokowi will have to pass tougher measures to stem illegal capital flight, as well as creating more positive incentives for Indonesian and foreign investors to keep their money in the country’s stock exchange, which is heavily dominated by foreign equity investors. Capital outflows, both legal and illegal, remains a severe problem---in September, Standard and Poor’s estimated that Indonesia is currently even more vulnerable to capital outflows than Malaysia, which has been rocked by an alleged scandal in its state funds, has seen its stock market plunge, and is in the midst of a no-confidence debate about Prime Minister Najib tun Razak.

Finally, Jokowi’s reforms need to include significant steps to modernize state enterprises, make them profitable, and utilize them as engines of development, in the manner of some Chinese and Singaporean state companies. Most Indonesian state enterprises remain bloated and often loss-making and uncompetitive with regional peers. So far, Jokowi has shown only moderate interest in making state enterprises more efficient and competitive. Although his state enterprises minister has sacked the boards of two prominent SOEs and promised to hold state enterprises up to benchmarks of efficiency in the private sector, the Jokowi administration also has placed state enterprises at the center of his plan to rebuild Indonesia’s physical infrastructure. Jokowi has given state firms large new tenders for megaprojects without requiring any real change in how SOEs in construction, electricity, and minerals operate.