Steering Indonesia towards sustainable economic growth

Mr Joko Widodo (right) visiting a traditional food market in Jakarta. With a slowing economy, the Indonesian President needs to attract investments. But to do that, he must address bureaucratic bottlenecks, reform the civil service, broaden the inves
Mr Joko Widodo (right) visiting a traditional food market in Jakarta. With a slowing economy, the Indonesian President needs to attract investments. But to do that, he must address bureaucratic bottlenecks, reform the civil service, broaden the investment base and focus on infrastructure.PHOTO: AGENCE FRANCE-PRESSE

PRESIDENT Joko Widodo's historic election win has ushered in unprecedented expectations for transformative change. He has emerged from outside of the established elite with popularity fuelled by a corruption-free and "down to earth, man of the people" approach. His unannounced visits to mingle with the working class - known locally as blusukan - have become his trademark, which is fitting for a man who began as a furniture salesman, progressed to mayor of Solo, then governor of Jakarta, and is now President of the world's fourth-largest democracy.

But the new President faces strong headwinds. The softening of the commodity markets has taken the wind out of the sails of Indonesia's economic growth. In the past decade, growth averaged between 6 per cent and 7 per cent but, by last year, growth slowed to 5 per cent, well below the 6.9 per cent average for East Asia and the Pacific. Although a modest rebound is expected this year to 5.58 per cent, the President's target of 7 per cent growth is likely to remain elusive.

Undaunted, Mr Joko has vowed to tackle some big issues, such as what he's termed the "dangerous inequality" facing Indonesia. Improving education, ensuring equitable and universal access to healthcare, and expanding the social security system are among his top priorities. He also has a window of opportunity to harness the 43 per cent of Indonesia's population that is below 25 into a powerful human capital resource base capable of driving long-term and sustainable growth. The challenge is, of course, finding the capital to invest in these areas now without widening the deficit gap and neglecting other pressing areas.

According to the Indonesia Investment Coordinating Board, foreign and domestic direct investment totalled US$37 billion (S$50 billion) last year. Although a 16.2 per cent increase over the previous year, it is only a small fraction of what is required. And while Mr Joko has signalled his willingness to make tough decisions as demonstrated by the 30 per cent reduction in the fuel subsidy, the savings are not enough to drive his economic agenda. What can he do in the near to medium term to attract the investment and partnership of the private sector to help meet his challenges?

Address bottlenecks

THE chronic bureaucratic bottlenecks that have stifled investment must be a priority to facilitate new capital inflows. Indonesia ranks a disappointing 114 out of 189 countries in the World Bank's 2015 Doing Business report. Bureaucracy at the central and regional government levels add unnecessary complexity for investors. The report ranks Indonesia 155th for starting a business, 153rd for dealing with construction permits, and 172nd for contract enforceability.

Mr Joko intends to bring reforms he implemented as Governor of Jakarta, such as the concept of "one-stop service", to the national level. Quick wins will generate investor confidence: Removing duplicative processes and putting in strict timeframes for responding to investor interest are certainly low-hanging fruit.

Reform the civil service

STRUCTURAL reforms aimed at transforming the civil service to be more customer-centric are important to improve Indonesia's investor friendliness. This requires a mindset change. Reducing fraud and putting in place governance processes, management systems and tools to support on-time and within-budget project delivery is of equal importance.

Broaden investment base

AS THE competition for global capital becomes increasingly fierce, Indonesia needs to diversify and expand its traditional geographic base for investments. A coordinated marketing strategy is critical to ensure its economic agenda aligns with foreign and trade/investment policy. Investor concerns must first be understood thoroughly, and policies need to be clearly articulated. The local shareholder agenda currently informing policy in the financial services sector, especially banking and insurance, needs to be reversed in order to attract foreign direct investment and boost liquidity and funding capacity.

Focus on infrastructure

THE new government has committed US$22 billion this year to infrastructure development. This is higher than in previous years, but well short of the US$80 billion annually that the government estimates it needs to sustain and improve infrastructure. The infrastructure deficit in ports, railways, roads and utilities has hampered Indonesia from reaching its full economic potential.

Infrastructure development creates jobs, improves productivity, and facilitates new economic development, including expanding small and medium-sized enterprises and the middle class. Given that the banking system can support only US$40 billion to US$50 billion based on existing loan-to- deposit ratios, external funding is therefore a sine qua non when it comes to addressing the infrastructure deficit. Indonesia, however, has to address the problem that when compared to some of its neighbours in Asean, it does not have the best track record in successfully designing and executing public-private partnerships (PPP). Indonesia needs to urgently address shortcomings in its regulatory and legal framework, prioritise which projects have the highest likelihood of success under a PPP structure, better assess the risks associated with those projects, and execute the PPP process in a transparent and efficient way. The success in addressing the bottlenecks with PPPs could translate into a potential game changer for Indonesia.

Indonesia is not alone in navigating these challenges. India and Indonesia are the region's largest democracies. Both countries have elected a new political leadership that came into power with tremendous promise and enthusiasm.

India's Prime Minister Narendra Modi understood early on that aggressively targeting investors would be critical to achieving his broader political agenda. He recently promised investors "unlimited economic reforms" aimed at changing India's image as a difficult place to do business.

Both leaders have charted a progressive course that would see their countries take their place among global economic powerhouses. For Mr Joko to be successful, he must now move swiftly to deliver much-needed reforms in the short term while also focusing on the broader structural adjustments needed to steer his country on its journey towards long-term and sustainable growth.

stopinion@sph.com.sg

The writer is director, Strategic Solutions Group, Marsh & McLennan Companies. The 24th World Economic Forum on East Asia, which began in Jakarta yesterday, ends tomorrow.