This article first appeared in Forum, The Edge Malaysia Weekly, on October 5 - 11, 2015.

THE standard refrain in much media commentary on Indonesia’s one year under Pre­sident Joko Widodo is disappointment. Commentators wring their hands over the lowest economic growth in a decade; the rupiah is at a historic low; there are complaints about rising nationalism, how ineffective Jokowi has been in tackling corruption, and vested interests and the failure to kick-start infrastructure projects.

However, while we concede there have been setbacks and that Indonesia really should do better, our view is that it was never realistic to expect a rapid turnaround in the country’s fortunes in the first place, given the legacy that Jokowi had inherited. More than that, we also believe that, slowly but surely, the president is ­indeed coming to grips with the challenges he faces and is likely to perform much better in the remaining four years of his first term.

Why the ‘poor’ performance?

At one level, Jokowi was unlucky; he took over the presidency just as a decade-long commodity boom was ending. Booming demand from ­China had caused coal, rubber and base metal prices to soar, while ­prices of food commodities such as crude palm oil had also surged, providing Indonesia with a huge windfall that boosted growth. But as China began to slow, commodity prices reached a peak and by the time Jokowi was sworn in, commodity prices were falling sharply and an economic slowdown was beginning.

And unfortunately, Indonesia had done little during the years of easy growth to diversify its economy so that it could still keep up its growth when the inevitable downturn in commodities happened. Labour market regulations which scare away investors remained in force, infrastructure bottlenecks were left largely unaddressed, and little had been done to improve an onerous business environment or to address skills shortages. Neither had an effort been made to improve the bureaucracy’s weak ability to implement budgetary spending decisions: Each year, a considerable portion of the budget would remain unspent because bureaucrats hesitated to make decisions or were unable to put together shovel-ready projects.

Moreover, Jokowi took over just as the economy was adjusting to tighter monetary policy and new macro-prudential regulations to cool what had been an excessive build-up in debt. Tighter credit inevitably added to the headwinds the economy faced. Jokowi was not helped either by the slew of increasingly nationalistic policies that had been put in place by his predecessor, including a poorly thought out policy of banning the export of unprocessed mineral ores. He had little choice legally but to implement such policies that reinforced the weakness in exports, the last thing the economy needed when it was trying to strengthen its external accounts in the face of financial market pressures.

Constraints on all sides

So, Jokowi had been dealt a pretty poor hand upon taking power. Still, he could perhaps have done ­better if he had acted more decisively. He began his term strongly, with a bold decision to eliminate fuel subsidies and replace them with direct cash transfers that were better targeted. However, he did not succeed in building on this decisive act of leadership. He struggled after that to fulfil high expectations among voters that he would tackle corruption forthrightly, remove bottlenecks which had impeded infrastructure construction and improve government efficiency. One major problem was that he had been forced by his political party, the Indonesian Democratic Party of Struggle, as well as his coalition allies, to accept Cabinet ministers who were not his choice. Many of his Cabinet appointees were not only disappointing in terms of their competence and honesty, several also pursued contradictory policies which left an impression of a Cabinet that was sometimes at cross purposes.

Jokowi also faced the challenges that any serious reformer has faced — the dogged resistance of those who stood to lose if his reforms succeeded in weeding out corruption and cronyism. A determined pushback by the less salubrious elements entrenched in the legislature, bureaucracy and other key agencies saw ­reformers being tripped up and reform measures reversed. The worst example of this pushback was when the ­entire ­senior echelon of the anti-­corruption commission, the KPK, was forced to step down after all manner of strange cases were brought against it by ­other agencies.  

Why things could be turning around

After months of being on the defensive, Jokowi has begun to reassert his authority and appears to be rein­venting his presidency.

First, he reshuffled his Cabinet, bringing in several new members who are clearly loyalists.

•     The key appointment was that of Luhut Panjaitan as coordinating minister for political and security affairs. Luhut is not only a ­Jokowi loyalist but is a highly effective political operator and competent administrator. He is bringing more discipline to Cabinet performance and will better protect Jokowi’s political interests.

•     Jokowi also appointed a new ­coordinating minister for ­econo­mic affairs, the highly ­respected former central bank governor, Darmin Nasution. Darmin has extensive experience in the econo­mic bureaucracy and a reputation as an honest and competent official.

•     The new trade minister has also started well. An early decision to reverse some of the nationalistic policies of the past went far in boosting foreign investor ­confidence.

We suspect Jokowi is not done yet with political changes. We expect another Cabinet reshuffle before year-end, which he is likely to use to remove the remaining ministers who were imposed on him by others. Over time, a more coherent Cabinet will emerge that will be more competent and effective.

Second, Jokowi has also made changes to the bureaucracy, bringing in loyalists and competent professionals who will strengthen his capacity to conceive and implement policies. A prominent appointment was that of Teten Masduki as presidential chief of staff. Teten has a sterling reputation as a reformist and is unstintingly loyal to Jokowi.

Third, Jokowi is making progress in expanding his coalition’s position in Parliament. Where before his coalition had just about 37% of seats in Parliament, his recent success in coaxing the National Mandate Party to join his coalition means he now has 46%. Over time, we expect him to bring in more Parliamentary support. Not only will this give him a comfortable majority in parliament, it will make him less beholden to his own party, whose leader, former ­president Megawati, has not been entirely supportive of his reform agenda.

Fourth, Jokowi is now ­leveraging this progress to start introducing more policy changes. He has already introduced one set of stimu­lus measures and has promised considerable deregulation to cut red tape and remove the opportunities for corruption. The disbursement of govern­ment funds to villages will be sped up and export financing will be strengthened as well. Raising the tax-free ­threshold from IDR2.4 million to IDR3.6 million will take many lower-income workers out of the tax net, boosting disposable income. The government is also promising more low-cost ­credit to small businesses.

Conclusion: Jokowi is gaining traction but has a long way to go

Still, Jokowi has some distance to go. While these reforms and stimulus measures are promising, they are not enough. Improving government efficiency and boosting government spending will help, but structural reforms are needed if the economy is to diversify and seize the opportunities.

First, there has to be a clear signal sent where Jokowi stands on nationalistic policies: saying nice things at foreign investor meetings but allowing ministries to introduce all manner of inward-looking policies erodes policy credibility.

Second, a better effort has to be made to improve labour market regulations — current policies are ­scaring away investors, which means ­Indonesia has failed to gain a decent share of the massive relocation of manufacturing activity out of China.

Third, policy needs to address the true bottlenecks that impede infrastructure development. The reforms to the Land Acqui­sition Act were positive, but implementation remains a challenge. Much more needs to be done to make projects viable — ensuring the right pricing regimes in toll roads and ­power purchase agreements would help attract more private sector money in infrastructure, for example.

Jokowi’s steady and cautious assertion of authority may well be the only politically feasible way of firming his grip on policies. However, time may not be in his favour — the external environment remains fraught ­owing to the instability in financial markets that continues to place pressure on the rupiah and threatens higher inflation in the country. He may have little choice but to take more risks in pushing his reform agenda more forthrightly.

Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an ­economics consultancy

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