By Jeffrey Fung '17
Joko Widodo has a huge task ahead of him. As the newest president of Indonesia, he is going to be held responsible for the mission to rejuvenate an economy that grew at only 5.02% in 2014, the slowest pace in 5 years. All eyes would be turned to him as Indonesia has one of largest impacts on the world’s emerging markets, being the biggest economy in the Southeast Asian region. As such, he must take firmer, bigger steps to swiftly utilize government spending efficiently and bolster Indonesia’s investment climate. Widodo should take action to address the problems of run-down roads and infrastructure, troublesome foreign investment policies/services, and labor market inefficiencies.
All this being said, Widodo has made decent strides to improve Indonesia’s economic outlook. He has removed fuel subsidies – this move freed up fiscal budget for the government to engage in revival initiatives such as lowering transportation costs, improving the investment climate, and making healthcare provisions more accessible. Widodo has set out to build power plants for better electricity transmission and efficiency and revitalize the run-down seaports. With improvements in energy efficiency, factories in Indonesia will now be easier to operate and manufacturing industries will be able to thrive. Perhaps the biggest use of funds, however, is for development of infrastructure in the next 5 years.
Despite expectations for Indonesia’s economy to rebound at a growth rate of 6% this year due to the better business environment, there is still plenty Widodo can do to make Indonesia more attractive to investors. Widodo’s actions to facilitate ease of doing business in Indonesia, such as creating a single service allowing investors to gain business permits instead of requiring them to go through a convoluted process of seeking licenses from different agencies, have started to prompt more foreign capital inflows. Apart from the immediate economic benefits of investments, this would also assist in shifting Indonesia’s economy to a more diversified model in which more people can find work in the services and value-added manufacturing sectors. To streamline this process further and make it even more effective, Widodo should consider delegating the authority to the services personnel to approve foreign investment applications locally to minimize the length of time in obtaining the permits.
Indonesia faces a number of other challenges with regards to increasing capital inflows and foreign investments. Its Negative Investment List, a list of sectors in Indonesia that are restricted from foreign investment and ownership, has closed many sectors to foreign investment. Not only that, but there are also restrictions on the legal entity format available for foreign ownership. Despite their good nationalist intentions, such restrictions deter investors from investing in Indonesia and must be relaxed appropriately as soon as practicable. Additionally, there is now increasing pressure for foreign employees to pass an Indonesian language test before being eligible to work in Indonesia. Such rules should be eliminated as they limit the desirability of Indonesian companies as an investment target, being burdened with the local labor market’s inefficiencies. Other troubles with the labor market include stringent labor regulations that drag Idonesia to rank only 110th in labor market efficiency. The government should take bold actions to reform the labor market to make it more business friendly, such as trimming the excessive severance payment requirements that have led to many ineffective employees. Widodo must also take advantage of Indonesia’s high birth rate and low dependence ratio to train a skilled and productive workforce, bolstering the prospects of the country’s labor market, and thus the Indonesian economy. By providing better short term and long term incentive compensation rather than severance pay, companies will get more bang for their buck.
In the long run, if President Widodo can deliver his promises, Indonesia will gain from an economic revival supported by increased capital inflows and reflected in enhanced standards of living. The benefits of today’s heavy government spending will far outweigh the cost of the budget deficit. As Indonesia revamps its infrastructure and economy, it will become less dependent on its commodities exports and will move to build upon a healthy, well-educated, and resourceful workforce. There are high hopes for Indonesia’s future, but there is also much more work to be done to realize these dreams.
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