Joko Widodo, known as Jokowi, won the presidential election of Indonesia in 2014 by vowing to boost growth, attract investments and improve infrastructure, making him the first president outside of the political and military elite.
Having worked as a carpenter and later as a furniture exporter before he was elected as the mayor of Jakarta, Jokowi is portrayed as a reform-minded and liberal president. Since assuming the top post in late 2014, he has carried out numerous reforms to fuel growth, albeit with different degrees of success. Nonetheless, he has improved the country’s fiscal credibility, improved public infrastructure, and created a market-friendly investment environment.
Fuel subsidy cuts and tax amnesty programs boost Indonesia’s fiscal credibility
Indonesia has a long record of budget and current account deficits, and Jokowi’s efforts in cutting fuel subsidies and his tax amnesty program have helped to improve the government’s fiscal space, regarded as his greatest achievement in the first two years of his presidency.
During the first three months of his presidency, Jokowi ended the decades-long subsidies that created a huge burden on government spending. The World Bank along with other international institutions had advised Indonesia to abandon its energy subsidies. With the help of low commodity prices, Jokowi’s administration pushed through with the reform. The cuts freed up 19.8 percent of the 2015 state budget, with a total of $20 billion to fund public spending for infrastructure and education.
To deal with tax evasion and fund government spending, Jokowi’s administration also launched a tax amnesty program in July 2016, which will run until March 2017. The first two phases of the program saw the government collecting an extra 107 trillion rupiah ($8 billion) worth of tax revenue, almost 10 percent of the total tax revenue in 2016.
Economic reforms improve ease of doing business in Indonesia
Indonesia is ranked among the worst countries to do business with according to the World Bank’s ranking, and Jokowi has made improving the index one of his top priorities.
Between September 2015 and August 2016, with over 200 business regulations, his government has introduced thirteen economic policy packages, which include reducing processing time for establishing a business, issuing permits, cutting administration costs, measures to support small and medium businesses, and fiscal incentives to attract investments. A series of reforms have generated waves of optimism that Indonesia is eager to integrate with the global economy. Foreign investors responded favorably to the economic reforms and saw an increase in foreign investment in 2015 by 19.2 percent.
So far, the reforms have helped the country to improve its ease of doing business index from 106th to 91th place in 2017. But this is still very far behind Jokowi’s goal to move Indonesia’s position to 40th by the end of his first term.
Another significant part of Jokowi’s economic reform is the change of foreign ownership, which has helped to create more opportunities for foreign investment. With the support of Jokowi, the revised foreign ownership rules, known as the negative investment list (DNI), which outline the industries and to what extent foreign investment is allowed, have reduced the restricted sectors and raised the foreign ownership limit for industries such as travel, pharmaceutical, and creative. While the liberalisation remains restrictive, it nonetheless demonstrates the government’s commitment to further liberalise the economy and foreign access.
Public infrastructure took momentum under Jokowi’s presidency after a slow start
Improvement in infrastructure has been an icon of Jokowi’s administration. Suffering from a minority parliament that was dominated by opposition parties, Jokowi’s administration was slow in the execution of public spending for infrastructure projects. However, over the last 12 months, Jokowi has consolidated his political power and spending has finally picked up momentum. Last year, several big projects came underway, including a third terminal opening at Jakarta’s Soekarno–Hatta International Airport, the construction of a metro network system in the capital, and a high-speed railway connecting the capital to the country’s West Java province.
Infrastructure projects continue to face structural challenges such as land acquisition and weak cooperation between central and regional governments, especially land acquisition issues that have at times raised concern for human rights. But Jokowi has showed determination to push for infrastructure development and has appeared at the groundbreaking of several big projects despite land acquisition processes still being underway. While this may be seen as controversial, it ultimately boosts investor confidence.
Political consolidation frees up Jokowi’s efforts for more policy focus
Improving fiscal credibility and speeding up infrastructure spending were the key achievements of Jokowi’s first two years, but these could not have been achieved without the success of his political manoeuvring through the complexity of the Indonesian political system.
Jokowi began his presidency with a parliament dominated by opposition parties, but within the last 12 months, he has gained support of other political parties, including the opposition party, Golkar, which is also the second largest political party in Indonesia. With the help of Golkar, Jokowi has nearly 70 percent of the parliament behind him, making the legislative process easier.
With a majority parliament, he was able to pass through the controversial tax amnesty bill and reshuffle his cabinet in July 2016, a second time within a year. His appointment of Sri Mylyani Indrawati, a World Bank managing director, as a finance minister is widely welcomed by investors as a sign of the government’s commitment to fiscal discipline.
Despite coming from the outside of the political circle, Jokowi has exhibited great political navigation skills. He is now in a much stronger position to carry out his reforms and it is looking increasingly likely that he will be re-elected in 2019 for a second term.
Looking ahead, logistics and infrastructure deficiencies will continue to prevent Indonesia from reaching its growth potential. Internal power struggles, especially within the ruling party, the Indonesian Democratic Party of Struggle (PDI-P), and chairwoman and former president, Megawati Sukarnoputri pose the greatest challenges to Jokowi’s political position. External factors such as the competition between China and the US and the uncertainty of the global economy will weigh on Indonesia’s economic development.
But investors have reasons to be hopeful for Indonesia. Unlike many southeast Asian political leaders, who are either suffering from international criticisms, tangled in corruption scandals, or constrained by entrenched power struggles, Jokowi has the political power, and his reform-minded and pro-business attitude is a sign of optimism in the Indonesian market. Jokowi has set a target of 7 percent GDP growth by 2019. While this is a rather ambitious target with the World Bank predicting Indonesia to grow 5.3 percent in 2017, if Jokowi manages to secure a second term, it is very likely he will be able to achieve it after 2019.