Mon, 26 Oct 2015


By Karen Brooks
Indonesian President Joko Widodo will meet U.S. President Barack Obama on Monday in his first official visit to the United States since assuming office last October. Domestic reviews of Mr. Widodo’s performance are mostly negative due to deteriorating economic fundamentals. But the president’s tenure has exceeded expectations in other ways, and he is undertaking economic reforms that could help restart growth. As a potentially transformational leader, he deserves U.S. engagement and support.

Over the past year, the Indonesian economy has grown at its slowest pace since 2002. The rupiah lost more than 11% of its value, trading at its lowest level since the Asian financial crisis of the late 1990s. The Jakarta Composite Index is down more than 7%.

Slowing growth in China, a prolonged commodities slump and weak overall external demand have hurt Indonesia. But the country’s problems are not just a function of external headwinds. The administration disappointed early on with a proliferation of self-defeating protectionist measures, continuing a trend of narrow nationalism under way since the previous administration.

Some policies, such as bans on certain food imports and the imposition of local-language requirements on expats, were so clearly counterproductive that they were quickly walked back. But the policy flip-flops created an air of dysfunction exacerbated by open conflict within the ruling coalition. Meanwhile, contract disputes continue to plague Indonesia’s natural-resource sector. It’s no wonder foreign direct investment has slowed.

So it would seem that there is little to celebrate as Mr. Widodo comes to Washington. But that perception is resoundingly wrong.

For starters, the democratically elected president is still in office, and the nation with the world’s largest Muslim population is at peace. This was all in doubt when Mr. Widodo narrowly won the most bitterly contested election in Indonesian history.

The president’s opponent, a former special-forces commander accused of human-rights abuses, refused to accept the results until the courts ruled in favor of Mr. Widodo. Bloodshed was averted, but the newly elected president still faced an opposition juggernaut in the legislature, with hostile parties controlling 63% of the seats. The prospects for Mr. Widodo’s legislative agenda looked bleak.

Through a combination of good luck and deft maneuvering, Mr. Widodo lured opposition legislators both formally and informally to his camp. Within a matter of months, the coalition aligned against him had all but collapsed, enabling the president to pass critical pieces of reform. That included the restoration of direct elections for local government posts, which were controversially rolled back in the waning days of the previous president.

Mr. Widodo’s consolidation of legislative power also enabled the passage of a revised state budget, in which the president implemented his campaign pledge to dramatically cut fuel subsidies. During the prior 10 years, those subsidies accounted for more than 12% of government spending. This ballooned to almost 14% in the budget handed to the president by his predecessor. Mr. Widodo slashed that number to about 3%, enabling a reallocation of resources into more productive areas of the economy, the first and foremost being infrastructure development.

In addition to expanding the budgets for public works and transportation, Mr. Widodo made an unprecedented capital injection into state-owned enterprises, more than 70% of which was allocated for infrastructure projects. He then sought and received $50 billion in infrastructure loans from China.

The importance of the president’s focus on infrastructure can hardly be overstated. For years, the Asian Development Bank, International Monetary Fund and World Bank have cited Indonesia’s poor infrastructure and resulting high logistics costs as the main reasons for Indonesia’s lack of competitiveness in manufacturing.

Pleas for higher infrastructure spending fell on deaf ears during the commodities boom, when natural resources drove years of economic expansion. The end of the commodities cycle laid bare the costs of complacency, as the current account swung into deficit and the rupiah suffered steep declines.

Mr. Widodo’s big infrastructure bet aims to reduce dependency on commodities exports. He has rolled out ambitious plans for the building of roads, ports and power plants. While the hard work of implementation lies ahead, dozens of state-funded projects have already broken ground.

Mr. Widodo has also started to overhaul Indonesia’s education system to better prepare students for the jobs of the future. He has provided more resources to vocational programs and put greater emphasis on information technology. The president will bring this message to Silicon Valley on Wednesday, where he will seek to drum up investment from the likes of Apple, Facebook and Google.

That will require sustained efforts to improve Indonesia’s investment climate. To that end, President Widodo reshuffled his cabinet in September, placing seasoned technocrats in important economic posts. Since then the team has rolled out five economic stimulus packages, aimed at cutting red tape and facilitating investment and exports. It has also taken an initial step to tackle the politically sensitive problem of labor reform.

While these reforms don’t go far enough, they signal an awareness of the urgent need for pro-market policies. If Mr. Widodo delivers on even a portion of his infrastructure promises and continues to deregulate Indonesia’s economy and provide greater legal certainty, he has a real shot at transforming the world’s third-largest democracy into the economic powerhouse it should be.

Ms. Brooks is adjunct senior fellow for Asia at the Council on Foreign Relations.