Indonesia’s ‘Constitutional Jihad’ Could Cost Growth

As the Philippines, Vietnam and Thailand aggressively woo foreign investors with incentives, tax holidays and appeals to boost growth, Indonesia, under the leadership of President Joko Widodo, continues to go the other direction.

While Jokowi, as he is known, has used every overseas trip to invite foreign investment, the message from his government is almost exactly the opposite. On numerous stages Jokowi and other officials tell audiences foreigners have taken advantage of Indonesia, causing its people unspecified harm.

Nationalist voices from both within government and outside are reinforcing the view that Indonesia increasingly wants to resurrect the now-discredited policies of import substitution abandoned by most fast-growth economies decades ago.

The most tragic example in Asia is Myanmar, which has only now begun digging itself out from a half-century of isolation and import substitution, which wrecked the economy. That period reduced Myanmar’s gross domestic product from one of the highest in Asia in 1962 to 170th in the world in 2015.

Courtroom Jihad

While nobody is suggesting Jakarta is going the way of Rangoon 50 years ago, the current atmosphere is far from reassuring. With Indonesia posting 4.7 percent growth in the first quarter, down substantially from 5.4 percent a year earlier, its Asian neighbors seem destined to eclipse it. The World Bank is projecting 6.5 percent growth for the Philippines, 5.6 percent for Vietnam and 6.7 percent for the region as a whole. For Indonesia, annual growth in fact has been slipping since 2011, when it topped out at 6.5 percent according to the World Bank.

The Bank does give Jokowi credit for bold fuel subsidy reform early in his term, which paved the way for a revised 2015 Budget in which priorities, especially capital expenditures, are being shifted away from wasteful and inefficient subsidies to infrastructure development and programs for social uplift.

Nonetheless, the nationalist rhetoric also seems to support, at least indirectly, moves by Muhammadiyah, the nation's second largest mainstream Muslim organization, representing 29 million of Indonesia’s 252 million people, to use the Constitutional Court to turn the nation inward. Muhamidiyah succeeded in overturning the nation's upstream oil and gas regulator in 2013 in the Court. In April, a judicial review resulted in overturning a 2004 Water Law that leaves soft drink bottlers, water companies and even privatized city water providers with no legal basis for the permits they rely on to do business. Numerous lawsuits have already gone after private companies on the basis of the ruling and potentially any private company using water for industrial use could be at risk.

Three other cases now will seek to overturn the 1999 Foreign Exchange Law, the 2007 law on Investment and the 2009 Electricity Law. If successful, private electricity suppliers could become illegal, holding foreign exchange may be banned for all but the government and foreign investors could be marginalized.

The group has also claimed an additional 100 laws may violate the Constitution, which states in generic terms that all natural resources shall be under the powers of the state and for the good of the people. In each case, Muhammadiyah says it is pursuing a "constitutional jihad" to in effect reverse privatization and concentrate power in the hands of the state for the "benefit" of the people.

“Muhammadiyah makes an aggressive challenge against the current legal foundation of investment and commercial activity in the country,” wrote Robert Milbourne, a partner of the Australia-based international law firm K&L Gates, in the Australian Financial Review. “Outsiders should be wary that the balance of power, and the stability of the legal regime, could be under real threat.”

The government “doesn't really support these judicial reviews," said a foreign executive, "but nationalist rhetoric is so prevalent, starting with Jokowi, that the fear is the court will see such thinking as mainstream."

Regulators Gone Wild

In other areas, the government is poised to introduce regulations to require local content for smartphones – although Indonesia has virtually no top-drawer tech industry to supply the content. A pending data center regulation is designed to require all businesses including banks and social media giants like Facebook to keep all their data centers in-country. This again is moving forward despite a worrying lack of infrastructure, security concerns and the global movement of data to cloud providers.

On July 1, the country will ban foreign-denominated currency transactions, requiring settlements in rupiah instead. Work permits for expatriates are increasingly difficult to obtain despite a skilled labor shortage.

"There is no vision in government of how these policies work to the benefit of the country," a senior government official said privately. "It is all tactical and the policies are not coordinated."

The chief culprit may be a weak president and a top-level policy structure that is beset by political turmoil as Jokowi seeks to defy Megawati Sukarnoputri, the former president and aging leader of the Indonesian Democratic Party of Struggle, or PDI-P, which sponsored his candidacy in the 2014 general election. For all his promise and popularity, won first as mayor of Solo and then governor of Jakarta, the worry that Jokowi's inexperience would prove a disability at the national level is proving to be sadly true.

The result is at least four power centers vying to control the country -- none of them working together.

Jokowi's powerful chief of staff Luhut Panjaitan, Vice President Jusuf Kalla and Megawati are all striving to control the government and are all at odds with one another in varying degrees. Guessing where the president stands in all of this is a favorite parlor game in Jakarta – but nobody has the answer.

The opposition parties, which control the legislature, can sit by and watch the government flail about. "It could be the president is brilliant and is waiting out the turmoil of his first months in office," said the foreign executive. "But I doubt it. I think he is lost and investors are getting very nervous."

That is not to say the multinationals are pulling up stakes. Many companies are mostly taking a wait and see approach and they are wary of giving up on the massive Indonesian market – 40 percent of the Association of Southeast Asian Nations – that is still growing and has enormous potential. But the country may want took over its shoulder at now faster-growing neighbors like the Philippines, which encourage foreign investors to move operations their way and make it much easier to obtain visas and clearances, according to business executives.

After decades of endemic corruption, the Philippines’ president, Benigno S. Aquino III, is beginning to make inroads against the country’s corruption. By contrast, Jokowi appears to be standing by as the National Police, one of the country’s most corrupt organizations, carries on a campaign to emasculate the one agency in Indonesia with a genuine mission to clean things up, the Corruption Eradication Commission.