ANALYSIS: Jokowi & Subianto Have Few Answers for Faltering Indonesian Economy

ANALYSIS: Jokowi & Subianto Have Few Answers for Faltering Indonesian Economy
Credit: Reuters/Beawiharta
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Presidential challenger Prabowo Subianto fired his first shot at incumbent Joko Widodo's economic policy, but both candidates have plenty to prove.

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Indonesia’s presidential campaign season is already kicking into high gear, with Prabowo Subianto, a retired army general and incumbent Joko “Jokowi” Widodo’s main challenger in next April’s elections, firing his first shot at the current administration’s economic policies.

“We are gravely concerned with the endless weakening of the rupiah,” said Subianto along with his newly minted running mate, Jakarta vice-governor Sandiaga Uno, in a statement sent to the Straits Times. Indeed, Indonesia’s currency has fallen about 9 percent against the U.S. dollar this year, sliding to its weakest valuation since 2015.

“It’s becoming a burden on our national economy [and] for the most vulnerable of Indonesians,” they continued, “who sooner or later will face rising prices on basic commodities like the goods they consume daily.”

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Credit: Antara Foto/Sigid Kurniawan via Reuters
Prabowo Subianto (left) and running mate Sandiaga Uno announce their 2019 presidential bid in Jakarta on Aug. 9, 2018.

It comes as no surprise that the rupiah has emerged as an early topic of debate on the campaign trail. Beyond personalities – which both candidates, especially the incumbent-cum-motorcycle stuntman Jokowi, have in spades – voters will demand answers to what seems on its face to be a flagrantly failing economy, chronically weak since the country first lurched into deindustrialization.

Indonesia has often run a current account deficit, meaning the value of its imports exceeds that of its exports. Its trade deficit hit US$1.52 billion in May 2018, then ran a surplus in June before dropping back to a US$2 billion deficit in July. This deficit – which projections indicate could hit a whopping US$25 billion this year – has long hurt the economy at large and put pressure on the faltering rupiah.

Since Indonesia adopted a floating exchange rate, allowing the rupiah’s valuation to be based on comparative supply and demand, the central government has had difficulty fending off external shocks and maintaining the stability of the rupiah against the U.S. dollar. This year, the rupiah exchange rate against the U.S. dollar rose above the 14,000 rupiah to US$1 mark, and it has shown no signs of improving.

And the volatile rupiah has a root cause: the consistently inconsistent trade balance.

This lies at the crux of Sunday’s criticism of Jokowi courtesy of the Subianto campaign. Since mid-2015, a total of 16 economic policy packages have been issued by President Jokowi to accelerate the economy and industrialization. However, these packages have done little to stimulate economic activity.

Indonesia's economy has consistently logged GDP growth of about 5 percent over the last five years, and an uptick to 5.3 percent in the second quarter this year is viewed more as an anomaly rather than an indication of things to come.

Slow growth

A primary cause of Indonesia’s current account deficit is the slow growth of exports, which lag behind the growth of imports. While analysts have argued that Indonesia’s trade gap is justified by its emphasis on importing goods for infrastructure projects that will drive long-term growth, this does not address Indonesia’s inability to strengthen domestic production.

The current administration favors curbing imports to narrow the import-export gap. The Coordinating Ministry for Economic Affairs is currently reviewing 900 imported goods for potential restriction. The Jokowi administration’s tariff-raising habits are not new; previous presidents have favored the same quick-fix approach.

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Credit: Antara Foto/Puspa Perwitasari via Reuters
President Joko Widodo (C) and Prabowo Subianto in October 2016. The two are now rivals in Indonesia's 2019 presidential election.

However, these policies create market inefficiencies which lead to domestic products not being competitive on the international market. When it restricts imports, the government creates protectionist policy instruments which run contrary to market interests by creating obstacles like tariffs and non-tariff barriers (NTBs), including quotas on particular importers and imported goods. Such policies allow savvy actors to monopolize and engage in rent seeking, operating within the protectionist ecosystem to extract unreasonably high profits while the economy at large suffers.

Instead of falling back on import restrictions, the government should instead move towards robust export development policies. Indonesia’s industrial sector should reorient itself towards developing products for export which are competitive in the global market. This is a necessary first step towards creating a competitive economy, free of rent seeking cartels and open to real growth.

The government has taken some steps towards encouraging re-industrialization and export development, spearheading initiatives to create special economic zones (SEZs) and industrial estates. However, these policies have not brought change and remain puzzling. At present, out of Indonesia’s 12 SEZs, only four are currently operational.

Indonesian economic development is also swamped in bureaucratic inefficiency – business development in Indonesia has to cut through so much red tape, any attempt at entrepreneurship often gets entangled in bureaucracy before it can even launch. Needless to say, this is a longstanding problem that must be addressed with vigor.

Export-oriented economic development has a large multiplying effect, impacting both the extractive and manufacturing sectors and allowing their products to be absorbed into the market. The government will see significant savings as these sectors develop through market mechanisms without absorbing large amounts of state spending.

To develop export-oriented industries, the government must first determine which industries are saturated and which “future industries” deserve further development. For instance, Indonesia has a well-established maritime industry, but growth in fisheries and similar sectors is limited by the high cost of vessel materials and the rapidly decreasing profitability of fishing. Indonesia’s domestic industrial production also need a reboot – only about 1 percent of manufacturing products are competitive when traded in the ASEAN economic zone.

Conversely, Indonesia’s burgeoning startup scene has seen some sparkling successes. Domestic darling Go-Jek is investing in other burgeoning startups, and Singapore-based Grab’s seed accelerator Grab Ventures recently announced US$250 million of investments into new Indonesian enterprises. Indonesia would do well to support further tech development, potentially branching out into the region’s competitive low-cost manufacturing sectors as labor costs in East Asia rise.

Subianto’s campaign may have fired the first shot on Sunday, but his initial bluster over Jokowi’s failing economic policies must be followed up by change of his own. The Indonesian people have certainly had enough of economic stagnation, and both candidates are surely aware that they are prepared to speak with their votes come April 19, 2019.

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Editor: Nick Aspinwall (@Nick1Aspinwall)

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