Indonesia’s economy; the unstimulating stimulus
- The Economist
- Oct 22, 2015
- 3 min read
IN EARLY September, Joko Widodo, Indonesia’s president, promised a “massive deregulation” aimed at attracting foreign investment. Outsiders were thrilled. Mr Joko’s predecessor, Susilo Bambang Yudhoyono, left the country’s business climate choking on what Adam Schwarz, a consultant, calls “a regulatory miasma” that strongly discouraged investment, whereas Mr Joko, best known as Jokowi, has openly courted foreign capital.
Over the past six weeks his administration has unveiled a series of deregulatory measures. On September 9th the government made it easier for foreigners to open bank accounts, struck down import restrictions on goods such as tyres and cosmetics that were designed to protect local industries, and eliminated some onerous and silly business regulations. No longer, for instance, must Indonesian-language labels be affixed to imported goods before they arrive; now they can be printed in Indonesia and attached before public circulation.
A couple of weeks later Jokowi cut the time required to process some investment permits, and cut taxes for exporters who deposit foreign-exchange revenue in Indonesia or convert it into rupiah—a move to shore up the country’s wobbly currency. This month he announced discounts on overnight electricity prices and the streamlining of some land-procurement rules, as well as cuts to subsidised-fuel prices (though these may do little more than raise questions about Jokowi’s commitment to market pricing).
Tom Lembong, Indonesia’s Harvard-educated, ex-Morgan Stanley new trade minister, says that Jokowi, who developed a reputation as a pragmatist while governing Jakarta and his hometown of Solo, loves these sorts of “simple, practical…measures that are completely and directly felt by industry.” And to its credit, Indonesia has resisted the temptation to panic in the face of a plunging currency and rising bond yields. It has, for instance, maintained fiscal discipline—aided by a law that caps the budget deficit at 3%.
Markets nonetheless seem unconvinced. The rupiah continued its slide after the first two announcements. It has recovered some ground this month, along with other emerging-market currencies, but has still fallen by 8% against the dollar this year. Economic growth is at its slowest since 2009. Nobody doubts the new deregulatory measures are better than nothing, but they are hardly “massive”.
One foreign businessman, long resident in Indonesia, assesses them as resulting from “bureaucrats talking to themselves about how we can be a better bureaucracy rather than how we can be more receptive to foreign investment.” For the most part, Jokowi’s measures remove regulations that should never have been implemented in the first place. They neither fundamentally change Indonesia’s investment climate nor signal to investors that Jokowi is preparing for bigger reforms.
Indonesia’s negative-investment list, which details the sectors that are barred to foreign capital, remains sizeable. Hiring foreigners is still a burdensome process: one rule requires businesses to hire ten Indonesians for every foreign worker. Businesses complain that bureaucrats pass rules hastily, without even trying to understand their effect on the private sector.
A rule banning metal-ore exports remains in place; it was intended to encourage a domestic smelting industry but instead has cost thousands of jobs and billions in export revenue. Infrastructure development—the centrepiece of Jokowi’s ambitious economic plans—has begun to pick up, but only after severe delays, and the programme remains well below its targets for this year.
Rules and disorder
Perhaps most damaging is a pervasive sense of disarray. Policies are announced and then scrapped, whether because of objections that should have been aired before, as with a law to force foreigners to pass a language test, or because they conflict with other plans, as happened with a proposed road tax. Ministries seem to pass rules independently, without consulting each other or the president. Decentralisation—meaning a huge devolution of power from the national government to the regional level—may have held the country together in the early 2000s, but today it impedes infrastructure development and hinders policy co-ordination. Poor communication from the president compounds these problems.
The good news, as Mr Schwarz notes, “is that Jokowi has come to an intersection and said, ‘I’ve got to do something different because what we’ve been doing isn’t working.’” Mr Lembong says that deregulation is “something the president intends to do every year he’s in office…The broad thrust is that we want to become less interventionist in the economy.” These bold words are welcome. But bold actions would be better still.
Source: Economist.com
