In­done­sia's econ­omy has stopped emerg­ing

The Pak Banker - - OPINION - Wil­liam Pe­sek

In­done­sia has come a long way since Oct. 20, when Joko Wi­dodo was sworn in as pres­i­dent. Un­for­tu­nately, the dis­tance the coun­try has trav­eled has been in the wrong di­rec­tion. Ex­pec­ta­tions were that Wi­dodo, known as Jokowi, would ac­cel­er­ate the re­forms of pre­de­ces­sor Susilo Bam­bang Yud­hoy­ono -- up­grad­ing in­fra­struc­ture, re­duc­ing red tape, curb­ing cor­rup­tion. Who bet­ter to do so than In­done­sia's first leader in­de­pen­dent of dy­nas­tic fam­i­lies and the mil­i­tary?

In 10 years at the helm, Yud­hoy­ono dragged the econ­omy from failed-state can­di­date to in­vest­ment-grade growth star. Jokowi's man­date was to take In­done­sia to the next level, hon­ing its global com­pet­i­tive­ness, cre­at­ing new jobs, pre­par­ing one of the world's youngest work­forces to thrive and com­bat­ing the rem­nants of the pow­er­ful po­lit­i­cal ma­chine built by Suharto, the dic­ta­tor de­posed in 1998. Af­ter 291 days, how­ever, Jokowi seems no match for an In­done­sian es­tab­lish­ment bent on pro­tect­ing the sta­tus quo.

Growth was just 4.67 per­cent in the sec­ond quar­ter, the slow­est pace in six years. What's more, a re­cent MasterCard sur­vey de­tected an "ex­treme de­te­ri­o­ra­tion" in con­sumer sen­ti­ment, which had plum­meted to the worst lev­els in Asia. In­vestors are al­ready vot­ing with their feet. The Jakarta Com­pos­ite In­dex has fallen 13 per­cent from its April 7 record high, one of Asia's big­gest plunges in that time. And for­eign di­rect in­vest­ment un­der­whelmed last quar­ter, com­ing in at $7.4 bil­lion, lit­tle changed from a year ear­lier in dol­lar terms.

Jokowi has plenty of time to turn things around; 1,535 days re­main in his five-year term. But the "halo ef­fect" MasterCard's Matthew Driver says Jokowi car­ried into of­fice is fast fad­ing as In­done­sia's 250 mil­lion peo­ple flirt with buyer's re­morse. First, Jokowi must step up ef­forts to bat­tle weak­en­ing ex­ports. In­done­sia's weak gov­ern­ment spend­ing, sti­fling bu­reau­cracy and con­flict­ing reg­u­la­tions would be im­ped­i­ment enough; slow­ing world growth makes mat­ters much worse. Jokowi must green­light in­fra­struc­ture projects to boost com­pet­i­tive­ness and in­crease the num­ber and qual­ity of jobs.

Next, Jokowi must de­cide what kind of leader he wants to be: a craven pop­ulist or the mod­ern­izer In­done­sia needs. He has too of­ten re­sorted to na­tion­al­is­tic rhetoric that hear­kens to the In­done­sian back­wa­ter of old -- a turnoff for the multi­na­tional ex­ec­u­tives Jakarta should be court­ing. Last month, Jokowi raised im­port tar­iffs, while ask­ing vis­it­ing U.K. Prime Min­is­ter David Cameron to do the op­po­site by cut­ting U.K. du­ties for In­done­sian goods. Jokowi isn't help­ing his con­stituents by driv­ing up prices for goods while their cur­rency is weak­en­ing. "Rather than pur­su­ing in­ter­ven­tion­ist poli­cies the In­done­sian gov­ern­ment needs to re­turn to the ba­sics: in­fra­struc­ture, lo­gis­tics, and con­sis­tency of rules and reg­u­la­tions," econ­o­mists Arianto Patunru and Sjamsu Ra­hardja wrote in a re­port for the Lowy In­sti­tute for In­ter­na­tional Pol­icy.

That means tak­ing on en­trenched in­ter­ests and think­ing big­ger. Take Jokowi's in­dus­tri­al­iza­tion push. Un­der­stand­ably, he wants to sup­port the de­vel­op­ment of man­u­fac­tur­ing to boost ex­ports and cut a per­sis­tent cur­rentac­count deficit. But Jokowi needs to com­ple­ment that pol­icy with in­vest­ments in ed­u­ca­tion and train­ing. With more than 26 per­cent of its pop­u­la­tion un­der 15 (ver­sus 17 per­cent in China), In­done­sia must pre­pare for the in­for­ma­tion econ­omy of the fu­ture, too.

While it's still early for Jokowi, In­done­sia is al­ready pay­ing a price for his mis­man­age­ment. The ru­piah is down 13 per­cent over the past 12 months -- and the Fed­eral Re­serve's first post-quan­ti­ta­tive-eas­ing rate hike is still loom­ing on the hori­zon. It's not an ac­ci­dent that econ­o­mists now in­clude In­done­sia among the emerg­ing mar­kets are now due for a lost decade. The prob­lem for coun­tries like Brazil, Rus­sia, China and In­done­sia is their gov­ern­ments grew com­pla­cent af­ter multi-year in­vest­ment booms. "Very few emerg­ing mar­kets his­tor­i­cally have ever been able to make it to the de­vel­oped coun­tries," Mor­gan Stan­ley's Ruchir Sharma told Bloomberg News. "This is a re­turn to nor­malcy." It's also a mo­ment to ques­tion how far the en­tire South­east Asia re­gion has come in re­cent decades.

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