Indonesia’s Jokowi Wakes Up to Reform

After a year of seeming inability to get much traction on the country’s problems, Indonesian President Joko Widodo has exploded into action, naming an anti-corruption activist as his chief of staff, firing a controversial police general and vowing quick and "massive deregulation" in manufacturing, trade and agriculture.

A slowing economy, falling rupiah, sluggish growth and fears that it will all get worse seem to have motivated the president and his advisors to finally get serious about changing the investment climate. It may be an uphill battle against a bureaucracy that can be maddeningly complex and corrupt.

Since his inauguration in October 2014, Jokowi, as he is universally known, has seemingly disappointed the millions who voted for him in the hope that he could replicate on a national level the success he enjoyed in his brief term as governor of Jakarta.

After taking the bold decision early in his term to largely do away with budget-draining fuel subsidies, his ministers have been blamed for often contradictory policies that hamper rather than attract investment. It has seemed as if nobody was manning the ship as headlines were grabbed by everything from banning beer sales in mini-markets to police attacks on the government anti-corruption agency. None of it helped the private sector gain confidence.

In addition, he has had to cope with the behind-the-scenes power of former President Megawati Sukarnoputri, the head of the Indonesian Democratic Party of Struggle (PDI-P) to which Jokowi belongs. Megawati reluctantly endorsed his July 2014 run for president but she has since seemed an obstacle to good governance.

Jokowi’s hand was also strengthened this week when he completed a political deal to bring the moderate Islamist National Mandate Party (PAN), which has at least some reformist credentials and holds 49 of the 560 seats in the legislature, into the ruling coalition. The move gives the government a majority and leaves the once-fearsome opposition led by Jokowi’s presidential campaign opponent Prabowo Subianto and the Gerindra Party floundering.

Cabinet messes

In addition, many of the president’s initial cabinet appointments were dictated by the PDI-P with an apparent eye to the spoils of government. A battle several months ago over Megawati’s desire to name her former aide Gen. Budi Gunawan as national police chief led to open warfare with the independent Corruption Eradication Commission (KPK), which was left weakened after it named Budi a corruption suspect and became a target of police wrath.

In the end, Budi became deputy chief and according to most sources he effectively leads the force from the No 2 position.

Perhaps more damaging, top government officials continued the push towards economic nationalism that began in the last administration, making it more difficult for multinationals to operate and dragging down investor sentiment. To make the storm worse, as the nationalists narrowed opportunity the economy, still largely dependent on commodity exports including coal and crude oil, began to follow the rest of the world downhill.

Tight monetary policy, delayed infrastructure spending and other problems have pushed real GDP down from 5.1 percent in 2014 to just 4.87 percent forecast for 2015, a six-year low. The rupiah fell in August to RP14,146:US$1, levels not seen since the Asian financial crisis in 1998 .

An August 12 cabinet reshuffle brought in new blood, including Darmin Nasution, an ally of ousted reformer and current World Bank No. 2 Sri Mulyani Indrawati, as coordinating economics minister and Thomas Lembong, a Harvard-educated former chief executive of Quvat Management, a private equity firm, who also worked previously at Deutsche Bank and Morgan Stanley, as trade minister.

Signs and signals

Some observers believe Jokowi’s new clout was signaled by court decisions in mid-August nullifying a US$125 million lawsuit against the prestigious Jakarta Intercultural School and freeing on appeal two educators who were found guilty in April in a bizarre case charging them with repeatedly abusing kindergarten students sexually.

The case gained widespread notoriety outside of Indonesia because of its blatant unfairness and the important role the school plays in the international business and diplomatic community in Indonesia. The charges were believed to have been engineered by an unnamed but powerful tycoon who was trying to take over the school’s lucrative property.

The president is also preparing for an October visit to Washington and officials have been quietly removing roadblocks for selected US companies that have indicated a willingness to increase investment if conditions improve. “The president wants the US trip to be a success,” said one of the event’s planners. “And that means getting a number, a big dollar figure, for incoming investment deals.”

In any case, Jokowi has installed as chief of staff Teten Masduki, a well-known former anti-corruption activist and lawyer, who replaces retired Gen. Luhut Pandjaitan, a close Jokowi confident who has moved to become the Coordinating Minister for Politics, Legal and Human Rights. Teten is the former chairman of Indonesia Corruption Watch and an adamant backer of the KPK.

Jokowi also apparently has fired Police Cmdr. Gen. Budi Waseso, a Budi Gunawan ally and the powerful National Police detective chief, who has doggedly pursued the KPK with nuisance charges. Local media said Budi Waseso was called to a late-night meeting at the palace on Tuesday to admonish him for reportedly overreaching his authority in a wide range of cases. He reportedly has been shunted into a desk job.

Knocking heads

In a significant public action, Jokowi bustled top administration officials off to the city of Bogor, 60 km south of Jakarta, for a pressure-filled meeting starting Thursday to push through dramatic new reforms including a stimulus package and doing away with 160 restrictions on investment, according to new economic czar Darmin Nasution,.

"As a consequence we will meet continuously in Bogor starting from tomorrow," Darmin told reporters. "If we need to sleep overnight there, we will sleep overnight there."

The stimulus package is expected to include tax holidays and a new import policy for beef, which has been dogged by quotas and enormously high prices fueled by a desire to achieve food self-sufficiency by restricting numerous products that cannot be adequately produced in Indonesia. The system has led to massive corruption and consumer anger.

The mining sector is not among the industries targeted for deregulation, Darmin said. The sector has been hampered by a demand that virtually all companies mining minerals build smelters to process ore domestically instead of shipping it overseas. Foreign companies have also faced demands to divest large percentages of their holdings as the government seeks to build a “value added” domestic mining industry. Billions have been lost in export revenue but Darmin said he government is looking at how to provide incentives to accelerate smelter development.

The overall problem for investors has been that Jokowi tirelessly tells foreign governments and companies on his overseas trips that Indonesia welcomes investment only to have officials countermand those promises with more restrictive laws, difficulties securing work permits for expatriates, red tape and corruption.

"I want there to be revisions to laws that hinder anything, be it goods, services, procurement or the investment climate," Jokowi said this week.

“We’ll see,” said one investor. “We have heard these promises before.”

The investment board has estimated the country needs about US$250 billion of investment from both domestic and foreign sources to achieve its 7 percent annual economic growth target.