Onward/Backward                                                                                                                                        November 1, 2019

Commentary by Wayne Forrest

I recently met an Indonesian friend who had switched from an Iphone, which he had proudly used for years, to a Huawei phone. I was taken aback, but Huawei meets Indonesia’s local content rules and Apple doesn’t (although you can buy them as they were given a waiver because they invested $44 million in a research facility). My friend insists he is still a great fan of US technology (he told me he still loves his Ipad) and this was not trade war politics at the personal level. I was thinking about his shift as I gathered input from many Indonesian friends about the “Onward Indonesia Cabinet”, trying to view it through their eyes. I realized its symbolic of the mixed messages generated by President Jokowi’s choices and perhaps the US-Indonesia relationship. It depends who you talk to whether things are improving (onward) or falling back. At times Indonesia looks like its moving toward China’s state-driven economic model, other times, the US. A big concern of the academic community and students is the backward trajectory of Indonesia’s democracy, especially with the appointment of Jokowi’s rival in the last two elections, Prabowo Subianto, as well as proposed changes to Indonesia’s criminal code and the weakened anti-corruption commission. But most of my contacts view the Cabinet as a realistic assembly designed for stability. Indonesia is comfortable as a “keluarga”: a family where everyone has a seat at the dinner table, including those you don’t always get along with. It simultaneously feels empowered by its large and growing domestic market and yet operates under the threats of super power rivalries, periodic droughts, natural disasters, and jihadist Islam. The battle over scarce but valuable resources is tectonic, engendering a patronage system that although slowly changing, remains at the heart of Indonesia’s politics. The younger generation and outsiders do not always see the inner turbulence inherent in the nation’s diversity or the high degree to which stability is generally preferred over reform.

The new Cabinet has a well-defined security posture with a former general as Religion Minister for the first time since 1978 and a former Chief of National Police as Interior Minister. After several years of church and mosque bombings, the stabbing of a senior Minister and a perception that radical Wahabbi ideology has infiltrated the bureaucracy, President Jokowi and the pluralists are pushing back. In a tradition dating back over several Presidencies, the Cabinet comprises a majority of professionals with 45% of the posts given to a coalition of political parties who supported the President’s reelection who themselves have very few policy differences. There are a few new and younger additions but plenty of continuity, especially in the small group surrounding the President as well as the key economic ministries.

It may not be a 100% “reform” Cabinet but the President is looking for innovation, especially in the development of “human resources”. He has appointed 35-year old Harvard MBA Nadiem Makarim, creator of the unicorn “GoJek”, a ridesharing company based on Uber/Lyft, as Minister of Education and Culture and charged him with better equipping students to join the labor force. Slightly older is the new Minister for State Owned Enterprises, Erick Thohir, who comes from a conglomerate that includes Adaro, one of Indonesia’s largest coal companies well known for his partial ownership of Inter Milan and the Philadelphia 76ers. He has been tasked with making the SOE’s more competitive internationally and ready for private sector partnerships. We can expect the reappointed Finance Minister, Sri Mulyani, to accurately mesh government spending with Bank Indonesia’s monetary policy to maintain macroeconomic stability as well as further reforms to tax collection, customs, healthcare spending, and government procurement.

The choice of the new Minister of Industry, Agus Kartasasmita and the elevation of his predecessor Airlangga Hartarto as Economics Coordinating Minister, and some of the things the President has asked them to do, is in the category of looking back. Like their fathers Ginandjar Kartasasmita and Hartarto Sastrosoenaerto, both Soeharto-era economic ministers, they have been tasked with advancing Indonesian manufacturing through import substitution. How they do this is of concern. Creating added value is a laudable goal but when combined with mandatory policies such as local content rules and import/export bans, distortions often occur. A small number of local players usually benefit, overall revenue suffers, and local prices rise. Sometimes you make more money shipping raw materials to distant markets than holding them back for local processing that then makes the cost of shipping downstream products too high. Similarly, Indonesia’s Coordinating Minister for Maritime Affairs (includes mining and energy), Luhut Pandjaitan, who has promoted rules mandating local mineral processing first promulgated under President SBY, remains in his position with the addition of investment in his portfolio. I would expect Indonesia’s resource nationalism to continue at the expense of foreign investment in new exploration in high value/high tech minerals, a paradox that will eventually have to be addressed as exploration investment has atrophied. Although he is not opposed to US investment, Luhut has been more successful courting Chinese investment and technology. The additional responsibility of investment may also be due to the fact that the new BKPM Chairman does not speak English.

Its not clear how much judicial and legal reform we can expect in the new Cabinet. The new Coordinating Minister for Law, Politics and Security Mahfud MD, has reformist credentials, especially when he was Law Minister under President Wahid. But, Yasona Laoly remains the Law Minister, and he did little to end the judicial mafia that is notorious in “fixing” cases or change the system for judicial appointments, where lack of experience with modern financial practices is widespread.

Indonesia’s foreign affairs remain in the competent hands of Retno Marsudi, one of only a handful of women ministers, who remains Foreign Minister. However, she will now have a deputy, Mahendra Siregar, (currently Indonesia’s ambassador to the US and one of its best senior technocrats) to handle sensitive trade issues surrounding palm oil and the renewal of US trade preferences. Mahendra’s professionalism and keen global awareness will help Indonesia balance the competing US and Chinese economic systems. American and Indonesian mutual business interests will definitely be maintained in this Cabinet. But how far the dial can move remains a question. The Indonesia Maju Kabinet (“Indonesia Onward Cabinet”) may turn out to be more of a stay-in-place affair.

(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)