Government-led deregulation, attractive economic policies and an infrastructure boom is making investment in South-East Asia great again
The administration of President Joko Widodo, or ‘Jokowi’ as he is better known, is pulling out all the stops to increase the ease of doing business, attract foreign investment and build enterprise in Indonesia. Necessity has dictated these economic policies in the face of global conditions that have diminished commodity prices – the traditional base of Indonesia’s economy. The silver lining for the business community has been a slew of reforms from the government, including tax amnesties, deregulation, slashing red tape and increasing foreign ownership designed to boost other sectors.
This is largely a result of Indonesia’s reliance on natural resource exports. With weak global demand, economic growth in Indonesia has hovered at just under 5% for the first half of the year. First quarter growth for this year is actually higher when compared to 2015, largely as a result of government spending on infrastructure. However it is just not enough to create jobs for the fast-growing population of the world’s fourth most populous country.
Not a leader to shy away from making tough decisions, the President has directly addressed the country’s economic troubles through something of a hardware and software approach: by building infrastructure and introducing deregulation.
To this end, a baker’s dozen economic stimulus packages have been implemented over the last year. These have worked towards slashing red tape, introducing tax incentives for business and attracting offshore investment.
The government has ambitious targets to meet in terms of investment, as Thomas Lembong, Chairman of the Investment Coordinating Board (BKPM) explains, “For the 2015-19 period, we set a total investment target amounting to IDR 3,471 trillion (approx. $259 billion). This is a very optimistic goal, yet it is achievable. We will take several measures to accomplish this. First, we will accelerate the realization of strategic investment projects and facilitate the expansion of existing companies. We will continue with and expand ongoing reforms, including simplifying more procedures and strengthening investment services. We will also pursue bilateral investment treaties and support trade agreements with Indonesia’s strategic partners. Moreover, we will ensure the implementation of economic policy packages, including endorsing the issuance of relevant regulations.”
Despite these measures, which will bear fruit over the long term, public spending on infrastructure has been the short-term boost the country needs. Approximately $22 billion has been allocated to infrastructure development across the nation.
“This is a vast and complex series of national upgrades that can not be carried out successfully without highly motivated and capable leadership”, asserts Ir. Tumiyana, President Director of PT PP, Indonesia’s largest construction company.
The recent cabinet inclusion of Ms. Sri Mulyani Indrawati as Minister of Finance is a notable move towards strengthening the country’s leadership capacity in this area. Ms. Indrawati previously worked as Managing Director and Chief Operating Officer at the World Bank and is part of a government that some are calling the best economic team in all of South East Asia.
Certainly, effective oversight is needed to manage the funds allocated, which represent the largest infrastructure budget allocation in Indonesia’s fiscal history. The vast majority has been committed to developing hard connectivity links that include roads, railways, airports and maritime ports. As an archipelago of over 17,000 islands, movement over the sea dominates transport and logistical considerations for this country.
In terms of immediate benefits for the population, The One Million Houses Program is the 13th economic stimulus measure. As a five-year initiative, it is aimed at building home for Indonesia’s most vulnerable low-income families.
The process of deregulation as a long-term fix is one measure that has been aggressively implemented by the current administration. Decades of dictatorship until the late 1990s led to a culture of corruption, collusion and nepotism becoming embedded in government entities. Since the beginning of the democratic era, presidents have worked to fight this debilitating culture. However it is President Jokowi’s actions that have done much more to quash its existence.
Teten Masduki, Presidential Chief of Staff, was a career leader of human rights and anti-corruption organizations. According to him, beyond being a moral and rule of law issue, the economic implications of this reform are far-reaching, “The deregulation program, the second of our priorities, is very important. It is to make sure that our bureaucracy is efficient and more transparent. We want Indonesia to be attractive for investors. We want to fight corruption and take out more procedural bureaucracies.” The effect this plethora of reforms will have on small- and medium-sized enterprise (SME) growth, as well as big business is significant. Less red tape and opportunity for corruption as well as reduced taxation on a range of sectors has seen the potential for bribe elicitation from government agencies diminish. Furthermore, the implementation of soft loans for SMEs, and reduced energy tariffs for labor-intensive industries (a typical characteristic of Indonesian SMEs) has boosted the competitiveness of the sector. Protection measures for SMEs have also been implemented.
Small street vendors are ubiquitous in Indonesia, and are the stallwart SMEs of the country. These kind of business people have also benefited from reforms – they are not just for corporate giants. As such, free leasehold certificates were issued in 34 zones to promote economic activity. As President Jokowi himself was a self-starter businessman early in his career, his knowledge of what works to support grass-roots economic growth has clearly been applied in this instance.
One reality embraced wholeheartedly is that Indonesia cannot function without extensive foreign investment. No country is an island, not even one that is the world’s largest archipelago.
The idea of isolationism has been entrenched in politics since the republic’s inception and foreign ownership has been limited and international investment even excluded from certain areas of the economy. This paradigm has been changed by President Jokowi who has revised the country’s negative investments list and expanded areas available to foreign business interests.
Increasing foreign trade has been a long-standing priority of the government. Negotiations on the Indonesia-European Union Comprehensive Economic Partnership Agreement (IE-CEPA) are slated for completion by 2019.
“With the cabinet reshuffle in 2015, there was again some cautious optimism and we got the news that there were going to be reforms and economic policy packages, which were well received by the business community. The message from the Jokowi team was very positive and from a trade perspective. We think the reform packages have really set the right tone from the top and it seems Indonesia really recognizes that foreign investment can be good for the country,” explains Brian Arnold, President of the American Chamber of Commerce in Indonesia.
At the time of writing a 14th package is awaiting approval to encourage the development of e-commerce and the digital economy. This is expected to bring booms to the ICT sector while also greatly facilitating digital payments and transactions in this country of 260 million.