March 4, 2021

Asia

INDONESIA: Widodo’s reforms in perspective

BY Bob Herrera-Lim

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( 3 mins)

President Joko Widodo over the past three months implemented some of the most significant policy reforms since the early 2000s, specifically:

  • The passage of the Omnibus Law on Job Creation, which streamlines investment-related rules across 79 laws.
  • A new negative investment list that substantially reduced the number of sectors subject to ownership limits, removing some that had been in place for decades.
  • A more reasonable formula for future adjustments to the minimum wage.
  • A reduction of the more extreme cases of severance pay, especially for firms suffering financial difficulties.

These changes, together with the planned infrastructure buildup, the creation of the country’s sovereign wealth fund, the relocation of the capital (although likely to be delayed), and another planned omnibus bill for the financial sector, could generate positive perceptions of the country among foreign direct investors for the foreseeable future.

Widodo is sufficiently popular that there is unlikely to be any arbitrary rollback in these new policies for the next few years. And although he may have disappointed during his first term for seemingly lacking the broad strategic visions sought by foreign investors, he fully comprehends the policy framework for the reforms undertaken by his administration — which are rooted in his understanding of the policy and bureaucratic changes sought by investors

However, while the overall policy environment is better compared to even a few years ago, there are still likely to be significant differences in investors’ experiences for the medium term. One major variable is the uneven quality of governance at the regional level, which in many instances could be the more decisive factor than central government policy. Some regional-level heads such as former Surabaya mayor and current Minister of Social Affairs Tri Rismaharini have drawn significant attention for their attempts to improve local environmental conditions and public welfare, and to become more transparent in decision-making. Others are still heavily involved in corruption, such as Nurdin Abdullah, the governor of South Sulawesi province, who was arrested in February for road construction kickbacks.

Furthermore, interpretation of the new rules in a manner that would establish that bureaucratic and judicial decision-making are aligned with the president’s policy reform goals will also take time. Vested interests will continue to have influence, and courts have long been notorious as generators of uncertainty, either due to corruption or misguided application of the law. The Constitutional Court’s ruling on the legal challenge to the Omnibus Law on Job Creation, which is expected sometime mid-year, will therefore be closely watched.

And finally, the long-term outlook will still be influenced by the 2024 elections. The competition is wide open, and it could see nationalists, entrenched political elites, including some second-generation politicians of established names, or the up-and-coming regional heads or younger politicians taking the lead and establishing the next generation of Indonesia’s leaders — all with consequences for the future of reform. In fact, the 2024 vote may be the last for some of the older Suharto-era politicians such as Aburizal Bakrie, Prabowo Subianto, and Megawati Sukarnoputri to either participate or directly influence candidate choices. This transition will not be a guarantee of improved governance, but it will allow for a wider set of possibilities rather than the limited set of contenders during the past election cycles.

If Indonesia can reasonably pull off even only a part of Widodo’s reforms consistently and convince investors that the changes are becoming entrenched, this may result in a marked shift in external perceptions that further enhances Indonesia’s position as an alternative destination for some of the manufacturing that is relocating into Southeast Asia.

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