Indonesia’s Jokowi Show

Politically, the still-young presidency of Indonesia’s Joko “Jokowi” Widodo has already had at least three acts – one promising, one disappointing and one somewhat hopeful. But they all remain fundamentally prologue.

In the first act, a young leader emerges from rural Java and upends Indonesian politics by going from modest businessman to small-city mayor to governor of Jakarta and then president. He infuses his supporters with hope for a better day free of the corruption, mismanagement and lost opportunities that have held Indonesia back.

When Jokowi was sworn into office in October 2014 it seemed almost a miracle that this humble force for change had taken the reins of power. Those first months were marked by concern about his ability to forge an effective government without a traditional political power base but also great hope in this new leader.

The second act begins in early 2015, with executions of foreign drug convicts, political infighting and a crisis in the National Police force. As the global picture turned more sharply negative over China fears and falling commodity prices, Indonesian economic policy became even more sharply restrictive against foreign companies than it was under the previous government. Regulators acted seemingly without coordination or coherence and investors began to question the direction of the government and even their commitment to Indonesia.

Third Act Changes the Show

In July-August 2015, we see a third act emerge. With the rupiah softening toward 15,000 to the US dollar (its worst level since the 1998 Asian financial crisis) and GDP growth weakening to below 5 percent, there was finally talk of real reform, a cabinet reshuffle put in place brought some new economic leadership and the president pledged to get serious about attracting investment and spurring growth. By the end of the year, eight “packages” to “deregulate” one of the region’s most restrictive economies had been introduced and while few of the measures are sweeping enough to change the game, investors and the public began to see a president who seemed finally to be serious about growth.

On the job training

No one is sure what the next act will be. Jokowi seems more confident and hands-on in recent months, but the bureaucracy resists meaningful change and the loss of rent-seeking advantages for favored local interests. Politically, the government remains divided into camps. Vice President Jusuf Kalla is seen to be at odds with the president. Jokowi’s own political party, the Indonesian Democratic Party of Struggle (PDI-P), and its chairperson Megawati Sukarnoputri, is barely supportive of his leadership. Once the president’s closest advisor, retired general and current coordinating politics and security minister Luhut Panjaitan has lost much of his luster by involving himself in the battle to control the future of US mining giant Freeport McMoRan’s Grasberg gold and copper mine. The president has been lucky that the House of Representatives, controlled by the opposition, has not stood forcefully in his way.

Propelled into office as an outsider with little connection to the levers of power used by traditional elites, it is hardly surprising that Jokowi has found the road to running an effective government difficult. He had no prior experience in national government has quite literally had to learn how to be president while serving in office.

Many Jokowis

His carefully cultivated air of being an outsider also fueled considerable confusion among the public and political insiders. Is he really a democratic reformer out to slay the twin dragons of corruption and bureaucratic malaise? In his early months in office the assumption that he was a bold corruption fighter was sorely tested when the enormously popular Corruption Eradication Commission (KPK) saw its powers diminished in a fierce and public battle with elements in the National Police loyal to former President Megawati Sukarnoputri, who chairs Jokowi’s political party.

Insiders referred to the battle over the police as a Megawati “coup” after her handpicked choice for National Police chief was brought down by corruption charges filed by the KPK. After the officer, Budi Gunawan, was removed from consideration for the top post his allies in the notoriously corrupt force launched charges against the KPK itself, badly crippling it for months. The charges were quashed and Budi ended up the No. 2 in the National Police and he was widely seen to be running things from the deputy chief’s chair. It was a profound distraction.

Jokowi, whose candidacy was foisted on an unsupportive Megawati, seemed powerless to do anything about the maneuverings in the police force and many of his supporters were bitterly disappointed at the time.

Similarly, the president’s support in early 2015 for two rounds of executions of mostly foreign drug convicts – several of whom had been on death row for years and had credible claims to either new evidence or rehabilitation – shocked foreign governments and human rights organizations. The seeming urgency to execute foreign convicts while numerous high-level Indonesian police officers have been implicated in the drug trade seemed only to fuel the image of Indonesia as hostile to foreigners.

Shuffling the deck

Given the external pressures on Indonesia’s economy, the lackluster policy performance of the government severely eroded investor confidence and sapped the willingness of– or even the ability – of many companies to increase investment in the country. Work permit restrictions, local content rules, tax audits, continue difficulties in the natural resource sector and a sense that the country was simply not open to investment combined to create a frankly dismal business climate.

And then the president seemed to wake up. In July-August, he started to move on problems in the police and he announced a cabinet reshuffle that changed or moved several key officials. Rumored for months, the key point about the reshuffle is that he put in place some officials with the ability to move policy forward in a more business-friendly direction – assuming that the political will to do so remains.

There were four key appointments. The naming of US-educated former investment banker Tom Lembong as Trade Minister gave the government credibility with advocates of more open economic policy. He pushed the psychologically important decision to embrace at least the idea of the Trans Pacific Partnership and he has spoken sensibly and consistently about the damage the closed, overregulated and rent-seeking bureaucracy does to the quality of life for Indonesians.

Putting veteran bureaucrat Darmin Nasution in place as coordinating economic minister gave Jokowi a tough insider who has been an architect of past protectionist policies from within the central bank and the Ministry of Finance. But Darmin is no ideologue. He is simply a tough official who has the respect of many senior civil servants and knows how to maneuver the levers of power inside the ministries.

New coordinating maritime minister Rizal Ramli, who is an ideological nationalist, is also a shrewd and veteran economist and former cabinet minister who has the ability to pound tables and get things done. The new maritime perch, created by Jokowi in 2014, is central to the president’s infrastructure vision for the country and Rizal could play a major role. Unfortunately he is also an outspoken protectionist on resource policy, which also comes under his purview. Jokowi will have to keep Rizal’s tongue in check and manage him well to keep him on side.

The most interesting move in many ways was the essential demotion of retired general Luhut Panjaitan from chief of staff to coordinating politics and security minister. As chief of staff, Luhut, a Christian Batak from Sumatra, had made a bold move to grab the reins of national energy policy and was campaigning actively to remove well-regarded energy and mines minister Sudirman Said. By intervening in the very public battle over the fate of Freeport’s Papua mining operation, Luhut may have overplayed his hand.

In his current portfolio he is proving useful to the president by keeping the military in the Jokowi camp in the ongoing battle with Megawati and the police. Luhut is tough and shrewd but his ambitions seem to know almost no boundaries. He remains a star player and he was an early Jokowi backer but he is no longer the most important supporting figure on stage and some of his enemies – chiefly Vice President Kalla, another savvy old warhorse – are making a comeback with Luhut partially out of the way.

More to come?

Certainly since the reshuffle, the president appears more focused on the economy and real change to reignite confidence among both local and foreign investors. The series of eight deregulation packages carry within them signs of incremental movement in areas like tax incentives, permitting regimes, expatriate work rules and minimum wage guidelines. The country’s infamously strict Negative Investment List, known by the Indonesian acronym DNI but called by some businessmen the “Do Not Invest” list, is under revision and the results will be widely taken as a sign of future directions.

If rent-grabbing restrictions on foreign investors are lifted in sectors as diverse as power generation, e-commerce, retail trade, agriculture, film distribution and production and numerous infrastructure sectors, it will be taken as a concrete sign of greater openness and could give the economy a needed bump.

The government has already taken the psychologically important step of renaming the list “Investment Guidelines” to remove the word “negative” but it is by no means certain that the revision, due in the first quarter, will be sweeping or dramatic. The DNI was created to protect domestic companies and there are numerous powerful vested interests who want their share of the economic pie shielded from international competition. These insiders have little regard for the greater good of Indonesia as a whole and they have long-dwelled in the recesses of an import substitution model that rewards bureaucratic connections more than excellence.

Early press announcements on the DNI have been largely positive from an investor viewpoint but insiders say there is fierce resistance within the cabinet to sweeping changes. “Get rid of that list,” one foreign business leader told investment board head Franky Sibarani not long ago. “Indonesia starts the investment discussion with a ‘no.’ How is that helping?” It is too early to say if that advice will be heeded.

Getting it together

In other areas, the president seems to be at least holding his own. He has, after more than a year in office, finally put in place a spokesperson in the form of Johan Budi, a well-regarded public official who had been slated to the run the anti-corruption commission before legislators rejected him, presumably for being too clean and incorruptible. That the president has given him a vote of confidence is another psychological boost.

Perhaps more than any other official, energy and mines boss Sudirman Said has been the target of the old guard for removal from office but he has clung to his position. Energy executives give him high marks for trying to clean up a notoriously sleazy ministry and he spearheaded the disclosure of a massive bribe attempt by the Speaker of the House against Freeport. That scandal – involving a shakedown worth billions of dollars – did not end with the speaker’s abrupt resignation from his post and may yet result in criminal charges. If it does it would be seen as a victory for Sudirman.

Energy companies say the battered sector remains problematic and over-managed by regulators despite the global collapse of prices, but Sudirman at least pays attention, a far cry from past ministers who tolerated and even encouraged massive corruption.

The broader future of the cabinet is uncertain and virtually every day a new rumor surfaces that various ministers will be replaced as a result of grudges or to settle political debts. Predicting who will go and why is a favorite parlor game in Jakarta and it seem pointless to add to it. Should Sudirman Said be removed in a rumored future reshuffle, it would be taken as a dark message that reform is not in the cards.

The agenda moving forward

The president rose to power on an image of reform and change and he ran directly into a wall of political resistance and complexity driven by vested interests built up over decades. In recent months he seems to have come to terms with what he is up against but it remains to be seen if he can develop a strategic vision for change. His allies say he is passionate about reforming the literally thousands of regulations that are a self-inflicted wound on Indonesia’s ability to compete effectively for investment dollars but he is a tactician rather than a visionary thinker.

There are positive signs that the government massive infrastructure drive is finally moving in the right direction, albeit guided by the heavy hand of a state-owned sector that remains a huge force in the economy. Investors are being told that restrictions on power generation will be lifted and licensing regimes have been streamlined for at least some big-ticket investors. It helps.

Tax collections, however, remain erratic as large multinational companies are targeted for outsize assessments and long delays in refunds. Executives say they still struggle with work permits for needed expatriates and abrupt regulatory shifts are still common. The legal system is a dark hole.

Consumer confidence, however, has rebounded somewhat but Indonesia has wasted years building a closed-door economy. It will take years to undo that damage at a time when the international climate is perilous and neighbors like Vietnam and even the Philippines are more open and friendly to investors under the looming TPP and the fledgling ASEAN Economic Community.

In his first 18 months in office the president seemed like an affable and concerned mayor, looking for park benches to repair and potholes to fill. That distracted goodwill may have worked in Solo and even Jakarta. It failed on the national level. If he has found his mojo and can bend the system to his will he may yet be a dynamic leader. Perhaps the next few acts of Indonesia’s long national drama will reveal the answer.

This was written for the Hong Kong-based financial advisory firm Asianomics Inc. Reprinted with permission