Economic challenges facing Jokowi in his second term
After winning the presidential elections in April this year, President Jokowi’s focus will be on boosting economic growth to 6% per annum in his second term. To surpass the current 5% growth rate, Indonesia needs to boost both investment and exports growth simultaneously. This will not be easy given today’s unpredictable global economy and rising protectionism around the world.
Although Jokowi’s administration has improved the country’s rank in the World Bank’s Ease of Doing Business from 120th in 2014 to 73rd in 2018, Indonesia can still do more to make herself attractive to international investors. The current US-China trade tensions are a good case in point. Indonesia has not been able to attract significant benefits even though manufacturers are relocating from China to Southeast Asia. This is because foreign investors find Indonesia's neighbours, such as Vietnam, Malaysia and Thailand, more attractive as new production bases. In view of Indonesia’s lack of competitiveness, President Jokowi has promised to accelerate structural reforms in the areas of human resources, infrastructure, and institutions. These factors are important for improving Indonesia’s competitiveness in the global economy.
Stronger growth is needed to create decent jobs for an estimated 3-4 million new workers each year. In his first term, open unemployment declined slightly from 5.9% in 2014 to below 5.3% by 2018. Nevertheless, the declining official unemployment figures disguise the real employment situation. More than half of the total workers in Indonesia are engaged in informal employment. Youth unemployment has reached as high as 17%.1 Unemployment Rate by Age Group, 2015 – 2018’, Statistics Indonesia; https://tinyurl.com/urag2015-2018; accessed 21 August 2019. Moreover, the labour force is dominated by low skilled labour, with about 40% of the total labour force armed with only primary school qualifications, while only 9% of the labour force have a university degree.
This has been complicated by an ongoing structural change in the labour market. Rapid technological change, especially in IT-related activities, requires Indonesia to train and equip its labour force for the new economy. However, Indonesia’s educational performance continues to lag, despite significant increases in education sector funding over the past decade.2 Pellini, A. 2016. ‘Indonesia's PISA results show need to use education resources more efficiently’, The Jakarta Post, 18 December 2016; https://tinyurl.com/pellini18dec2016; accessed 21 August 2019.
Given this concern, Jokowi has re-emphasised that in his second term, his administration will focus more on human capital development. To boost human capital quality, Jokowi’s administration will continue to spend 20% of its annual budget on education. This spending will complement the expansion of a number of social policies such as conditional cash transfer for poor households through the Family Hope Programme (PKH); the Health Care and Social Security Agency (BPJS Kesehatan); and the pre-employment card (Kartu Pra-Kerja). Though these programmes may seem populist in nature they are critical in supporting lower income households and the unemployed. However, implementation challenges such as financing, targeting, and monitoring remain complex. Specifically, improving the targeting mechanism and inter-jurisdictional coordination are the biggest challenge for effective service delivery.
President Jokowi also plans to reduce the regional inequality by “building from the peripheries (villages)”, and spending generously on infrastructure to improve connectivity across the nation-wide land, sea and air areas. However, not all things are moving smoothly. For instance, his flagship tol laut (sea highway) project may face financing difficulty given a wide imbalance between the supply and demand of ships needed to transport goods between Java and the outer islands. Jokowi’s proposed plan to shift the capital from Jakarta to East Kalimantan is also challenging. He hopes that capital relocation will boost development outside Java and thus promote regional equality. However, considering the current infrastructure bottlenecks, attracting investors to the outer islands such as Kalimantan might be wishful thinking. The recent major blackout across West Java and Greater Jakarta might make investors think twice about the state of infrastructure in the country, especially on the outer islands.
Finally, all government spending commitments (for infrastructure, education, social programmes and subsidies) will eventually have to face the reality of a weak financing capacity. The country’s persistently weak tax revenue is a structural issue which will constrain the implementation of various government policies and programmes going forward.
Maintaining macroeconomic stability amidst growing global uncertainties will be high on the agenda. Jokowi administration will maintain an expansionary fiscal policy to counter the slowing growth momentum. The country’s persistent weak tax effort is likely to carry on, dragging the overall fiscal balance down as his administration continues with gradual tax policy reforms. On state spending, there will hardly be any significant changes to the existing expenditure priorities such as infrastructure, education, health and various social safety-nets programmes.
Considering the complexity of regional and multilateral trade agreements, Indonesia will prioritize bilateral trade and investment deals that are considered beneficial to its domestic economy. One case in point is China’s Belt and Road Initiative (BRI). Jokowi’s administration has been keen to join BRI as it is perceived to be an opportunity to support his infrastructure ambitions. While there are no official BRI projects in Indonesia to date, there has been a significant increase in Chinese FDI since 2016. However, China’s investment to Indonesia has declined by 29% to $2.4 billion in 2018 because of US-China trade tensions.3 ‘China Turun ke Posisi 3 Negara dengan Investasi Terbesar di Indonesia’, Kompas.com, 30 July 2019; https://tinyurl.com/chinindoinvest; accessed 21 August 2019. Indonesia will have to look for other alternative sources to compensate for China’s FDI dip.
In conclusion, success in attracting FDI will depend partly on the progress of Indonesia’s deregulation process and policy reform. However, policy reform at the sector and sub-national level will be more difficult. There are still too many problematic local regulations that hinder investment. While Jokowi’s administration has tried to scrap some of such regulations, the Constitutional Court has ruled that the central government cannot annul regional bylaws. The Court’s decision will adversely affect the deregulation process and hinder investment.4 Wirayani, P. et al. 2017. ‘Red tape “wardens” legally win’, The Jakarta Post, 7 April 2017: https://tinyurl.com/wirayaniredtape; accessed 22 August 2019. Finally, Indonesia needs to reform its outdated labour regulatory regime in order to accommodate the development in digital economy and new types of industries. However, a strong political will is required when dealing with trade unions, and it remains to be seen if Jokowi can surmount all his second term challenges.
Siwage Dharma Negara is Senior Fellow at ISEAS – Yusof Ishak Institute and Co-coordinator of the Indonesia Studies Programme (ISP)