Making Indonesia work
Economist Feb 27th 2016
One Indonesian trade minister, Rachmat Gobel, once wanted to ban the import of secondhand clothing because, he said, it could transmit the HIVvirus. He also restricted imports of beef to promote the dubious goal of self-sufficiency; the result was not rendangin every pot, but soaring beef prices, butchers’ strikes and protests. Mercifully, Mr Gobel was shown the door last August, and his replacement, Tom Lembong, seems to believe that a country’s trade ministry should facilitate rather than impede free trade.
But Mr Gobel’s views remain all too common in Indonesia, and Mr Lembong’s all too rare. The world’s fourth-most populous country is blessed with a natural bounty of coal and oil under ground and, above it, forests and plantations producing rubber and palm oil. But its huge potential in other areas is still unrealised (see our special report in this week’s issue). As with many resource-dependent economies, protectionism and rent-seeking have flourished. The government shields large domestic players at the expense of consumers. In 2007 Indonesia expanded the number of industries in which foreign investment is barred or restricted from 83 to 338, making it South-East Asia’s most hostile country to foreign capital. When commodity prices were high and China was buying, this model appeared to work reasonably well. Indonesia’s economy grew, and if foreign companies wanted what was in Indonesian mines they had to play by Indonesian rules. Now that commodity prices have plummeted, output is
Joko Widodo, Indonesia’s president who is widely known as Jokowi, came to power promising reform. He has said a lot of sensible things about boosting infrastructure, reducing subsidies and attracting foreign investment, particularly the sort that brings high-value manufacturing and service jobs. But the kinds of firms that produce these jobs are choosy. If Indonesia does not create the right conditions, they will not invest, and Jokowi’s promise to return Indonesia to 7% growth—a tall order at the best of times—will go unkept.
Unfortunately, his record has fallen short of the reformist rhetoric. He got a few big things right after taking office, cutting wasteful fuel subsidies and introducing a one-stop shop for business licensing, which simplified a notoriously Byzantine process. More recently he has trimmed Indonesia’s negative investment list, removing barriers to foreign investors in 30 areas of the economy, including cold storage and warehousing, which should help stabilise food prices and help fishermen sell their catches.
Alas, these reforms have been countered by other policies that smack of the old protectionism. Even as Jokowi lowered some restrictions, he increased barriers to foreign investment in 19 other industries. In July he unveiled a law requiring that at least 30% of components in tablets and smartphones sold in Indonesia should be made in the country—despite lacking the industrial base to produce them.
This balance-sheet is not good enough. If Jokowi is to be the man to lead Indonesia to sustained prosperity, he needs to toughen his reformist mettle—and quickly. The to-do list is a long one, starting with slashing the negative-investment list and lifting restrictions on agriculture that keep rice prices high. None of this will be easy in a country where powerful vested interests have ensured that protectionism has predominated for decades. But it is not impossible. Indonesians have shown great bravery in their revolutions for independence and freedom. Now the economy needs to be unchained.