Where’s the Transformation ?

Commentary by Wayne Forrest

It keeps happening over successive Indonesian presidencies: a transformational figure is elected (Susilo Bambang Yudhoyono, Joko Widodo) who appoints transformational ministers, who propose reforms. But, then things bog down. Frustration sets in, or the person leaves the Cabinet. Growth atrophies and the language of discourse remains in the pluperfect tense. “We expect to, we hope to, we are planning to” are often the phrases that accompany proposed reforms. Susilo Bambang Yudhoyno (SBY) was elected in 2004 as the first directly elected President with popular support far in excess of that for his political party; it gained only 7% of Parliamentary seats. He seemed to signal a desire for fundamental reform by appointing the world class economists Mari Pangestu as Trade Minister and Sri Mulyani as Finance Minister. Also, with his appointment of influential tycoon Aburizal Bakrie, a Chamber of Commerce Chairman, many thought Indonesia would implement the kinds of structural reforms (legal, judicial, and bureaucratic) businesses would need to boost GDP above 7%. However, within a few years Pangestu and Sri Mulyani were replaced and whatever reforms they began atrophied. The second term of SBY was characterized by multiple corruption scandals, and legal decisions that stood commercial law on its head. Some remain under litigation. Many trade and investment policies rewarded insiders, allowing their “rice bowls” a measure of protection under a misplaced sense of nationalism. We in the international business community voiced our concerns, occasionally they were acted upon, more often they were ignored. 5% GDP growth became the norm.

Joko Widodo was elected 4 years ago to much acclaim by a local and foreign community eager for a fresh approach. He appeared somewhat immune to transactional politics, possessing a practical business-like approach to pressing needs such as infrastructure and healthcare. Again, Cabinet appointments were hailed: Bambang Brodjonegoro as Finance Minister, Thomas Lembong as Trade Minister, Sudirman Said as Mining and Energy Minister. All came in touting open trade, structural reforms, and a major push for foreign investment. Within a few years Lembong was sidelined to the Investment Coordinating Board (BKPM), Brodjonegoro was replaced with Sri Mulyani and Said, who told many of his desire to recast the investment snuffing 2009 Mining Law, was out altogether, his replacement doubling down on resource nationalism. Sri Mulyani has revived reform in the Finance Ministry, and Lembong continues the good efforts of his predecessors. But as stories in this issue indicate, the sustainability of current policies is in doubt: Indonesia remains woefully uninsured, the healthcare scheme is bankrupt, and the widely touted scheme to cut red tape has not led to an easier doing business rating.

Throughout their presidencies SBY and Jokowi, in their speeches and meetings, welcomed foreign investors and praised the benefits of trade. Jokowi, in particular, has admonished Indonesian businessmen to be more competitive. But, the positive rhetoric meets a harsher reality for many foreign businessmen who continue to experience a regulatory and legal environment that remains mired in red tape and patronage even with several years of deregulation packages. This month Indonesia moved backwards in the World Bank’s Ease of Doing Business rankings after leaping forward early in Jokowi’s tenure. In addition, foreign direct investment contracted in Q3 prompting BKPM Chairman Tom Lembong to plainly say “However, I have to admit that in 2017, we lost our focus. Our spirit was not as high as in 2014 to 2016.” Behind his remarks I hear a man frustrated that his recommendations for opening the Indonesia to more foreign investment via changes to or abolition of the negative investment list have not come to fruition.

I asked many on my visit to Indonesia in October about the reform atrophy in these two Presidencies. Some said, “par for the course, business as usual”; others pointed to “entrenched interests”; some discoursed on “patronage norms”; others mentioned a culture with many “personal rules of behavior” but not much of a history with “public ones”; some officials pointed to Indonesia’s need to set its own course now that its economy has grown up. I believe all these answers are in part correct.

I worry that Indonesia remains stuck with a larger than necessary bureaucracy and state-owned enterprise sector that has created its own gravity irrespective of who is in power. More than that I am afraid that Indonesia has lived with this system for so long it cannot see its inefficiency, vulnerability to patronage, and how it can ultimately stifle new directions such as the digital economy and private investment in infrastructure. In fact, even though they are saddled with oceans of debt institutions such as Pertamina, PLN, and state mining companies, are all celebrated. As several former US ambassadors to Indonesia have pointed out, China’s system looks much the same way and may already be the model for future economic development.

It increasingly looks like we did get a transformation, it just wasn’t what we expected.

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

About the Author:

Wayne Forrest is President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

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