Joko Widodo’s recent cabinet reshuffle is meant to reinforce his ability to reform Indonesia and free it to pursue its development potential.
The gradual ascent of Indonesia is rarely given space in international headlines. Big-picture stories tend to favour ‘China’s rise’ or ‘Russia’s resurgence.’ Europeans and North Americans are often surprised when they are told of the massive size of Indonesia’s population (250 million), which is the world’s fourth largest behind China, India, and the United States. By 2050 Indonesia’s economy is also expected to become the world’s fourth largest when measured in terms of purchasing power parity at $12.2 billion.
This rise – while substantial in and of itself – is all the more important because of the accelerating diffusion of power in the international system. Europe is in the throes of an existential crisis while Russia continues to lash out in the face of economic and demographic deterioration. The United States is in relative decline and has become less willing to pacify and intervene in the world system. Meanwhile, America’s ostensible challenger – China – faces an uncertain future as it struggles to overhaul its exhausted economic model while maintaining social cohesion. China will no longer be the world’s low-cost factory; instead, a number of smaller developing countries – including Indonesia – will collectively replace China as the world’s low-wage, high-growth economic engine. It is in this context of systemic flux that Indonesia’s ascent is occurring.
CLEARING THE PATH TO GROWTH
However, Indonesia will have to surmount substantial obstacles in order to realise its potential – with the need for economic reform the most pressing issue. Indonesia needs to reduce its heavy dependence on commodities – coal, petroleum, rubber, and palm oil in particular – which make up about 60 percent of exports. To do this it must invest in manufacturing and create processing industries to add value to its raw material products. Yet this transition will be impossible without considerable improvements in Indonesia’s infrastructure. Transportation costs are prohibitively high in much of the country and it is often cheaper to import from China than transport goods made in other parts of Indonesia. This is compounded by the lack of an adequate electricity grid.
Moreover, implementing these crucial economic reforms requires governmental reform. Indonesia underwent massive decentralisation following democratisation in 1998. While this has largely prevented territorial disintegration, it also has created regulatory chaos, with the central government often lacking authority and spending power in vital areas. The authority that it does have is often offset by red tape and poor coordination between government bodies. Despite this tangle of problems, investor confidence in Indonesia soared following the election of President Joko Widodo (universally known as ‘Jokowi’) in 2014.
Jokowi campaigned on a reformist platform. He is Indonesia’s first leader not hailing from the country’s corrupt and dysfunctional elite, which fueled hopes that he might be able to weaken its grip on the state and the economy. Yet his status as an outsider – and his lack of a pre-existing patronage network – also has made reform quite difficult.
While Jokowi has installed a fairly technocratic government, he has had to award some positions based on political influence. As an outsider without a pre-existing base of power, Jokowi’s cabinet is a careful balancing act designed to placate the key factions in Indonesian politics. This has unfortunately reduced the overall performance of his administration – vested political interests are rarely eager for reform. Despite this, Jokowi can claim some big achievements in his first two years in office. The most substantial of these fall under the twelve economic reform packages he has created over the past year. These have been primarily directed at deregulation and tax reform, which improve ease of doing business, thus increasing foreign investment and stimulating economic activity.
The president has also increased infrastructure spending, created a tax amnesty program, and improved Indonesia’s electricity supply. Jokowi has also heavily reduced fuel subsidies, which were a huge burden on the public purse – the government spent more on these subsidies than healthcare in 2012.
On the other hand, allowing fuel prices to rise worsened Indonesia’s chronic inflation (which soared to 8 percent in 2015). As around 40 percent of Indonesia’s population lives close to the poverty line, a slight rise in inflation can have outsized human costs. Economic growth has also slowed from around 6 percent in 2013 to 4.8 percent over the past year. Plummeting commodity prices, which fell by more than half from mid-2014 to the beginning of this year, have contributed to this. These factors, combined with reduced demand from China and major capital outflows due to expected US Federal Reserve rate hikes have soured the economic outlook.
However, in the past year the rupiah (which is up 12 percent against the US dollar) and inflation (down by half) have both improved. A cabinet reshuffle one year ago rallied investor confidence in the country, and on July 27 Jokowi announced a second shakeup – consolidating his political authority. There were two reasons for this move.
The first reason was political. Jokowi replaced several rebellious and unpopular ministers with technocrats and confidants, and also rewarded new allies, Golkar and the National Mandate Party – which had opposed him in the 2014 election. The reshuffle was a compromise: while Jokowi did appoint some technocrats, he also replaced two highly capable ministers with political heavyweights in the education and trade ministries.
Second, Jokowi’s promotion of technocrats in the economic, maritime, and finance portfolios is intended to boost growth and investor confidence. The most notable of these is Sri Mulyani Indrawati, the former managing director of the World Bank, who has promised to improve the country’s budget deficit and its anaemic tax collection system.
Attention has also focused on the appointment of the former general Wiranto (who, like many Indonesians, goes by one name) as chief security minister. Wiranto replaces Luhut Pandjaitan, a close Jokowi ally who had recently become too influential. The new chief security minister was indicted by a UN-backed court in 2003 for crimes against humanity during the East Timor conflict, and his appointment has been criticised by human rights activists. Wiranto’s promotion also continues the trend of the military’s resurgent influence. For Jokowi, the armed forces represent a competent state organ that can bypass Indonesia’s sluggish bureaucracy and achieve his policy priorities.
The overall effect of the new cabinet should be both to increase Jokowi’s influence and improve Indonesia’s reputation as a destination for investment. The president’s political compromises will likely help him retain support for the 2019 election; a victory then would allow more time for the implementation of his reform program. A second term for the outsider president would also continue to free parts of the Indonesian state and economy of the narrow vested interests that have historically hobbled the country.
Indonesia is currently at an inflection point in its development trajectory. It is already considered a first among equals within ASEAN; if Jokowi’s reforms succeed and the country fulfils its potential over the coming decades, it could become an influential regional power and perhaps a major player on the world stage.