Jokowi 2.0 could open Indonesia’s door to foreign investors

Foreign investors desperate for more access to Indonesia’s huge market can take comfort from the re-election of Joko Widodo as president for a second and final term on Wednesday: according to government insiders he is poised for a splurge of reform.

On the list of areas he might tackle is sagging foreign investment, the troubled education system and restrictive labour rules.

“If the president’s victory ranges from 52-55 percent that would be the sweet spot,” said a senior government official who works closely with Widodo. “That would spur him to continue and maybe even accelerate economic reforms.”

Widodo - popularly known as Jokowi - looked set to hit that ‘sweet spot’ as early election results came in, showing he was set to win the popular vote and at least eight percentage points ahead of challenger Prabowo Subianto, who investors feared would be a champion of economic nationalism.

Unofficial counts also suggest Widodo’s coalition will increase its hold on the national legislature.

Still, some analysts doubt Widodo will move much beyond the cautious reform agenda of his first five-year term.

That’s partly because of his plodding style, but also because conservative Muslims and nativists will remain a potent political force that is hostile to foreign capital, especially from China.

While the contest between Widodo and his challenger, former special forces general Prabowo, was characterised by nationalist posturing on both sides, government officials and advisers say Widodo recognises the need for more foreign investment to boost growth and raise productivity in Southeast Asia’s largest economy.

Citing internal government discussions, Mohamad Ikhsan, an economic adviser to outgoing Vice-President Jusuf Kalla, said Widodo was told that economic growth would likely slip below 5 percent without a more liberal approach to foreign investment.

“The president understands this very well. He also understands that it’s not only capital that must be injected, foreign capital ... we need to upgrade our human resources,” Ikhsan said.

“He promised that will be in the second term.”

That assessment was backed by the senior government official, who said a big part of Jokowi’s second-term reform drive would be opening education - and particularly universities - to foreign players and making the sector a business. He declined to be identified to speak openly about policy plans.

Legacy

Some analysts suggested that Widodo’s margin of victory in the election, which looks likely to be less than his campaign had hoped for, might be a brake on reformist plans. 

His predecessor, Susilo Bambang Yudhoyono, took 61 percent of the vote when he won a second term and is widely thought to have squandered that chance to address systemic flaws in the economy.

“We expect Jokowi’s victory, especially as it was not emphatic, to only result in modest economic reform,” said Peter Mumford of the Eurasia Group, a risk consultancy. “(It) will be insufficient to break him free of the constraints of coalition partners and vested interests — elite political, military, religious and state-owned enterprise leaders.”

Australian National University analyst Greg Fealy said Widodo was committed to leaving his mark.

“He’s determined to make the biggest impact on national life that he can. He wants more development. He wants more infrastructure. He wants greater prosperity. He wants that legacy.”

Fealy said Indonesia’s recently negotiated free trade deal with Australia, which includes zero-tariff access on many goods and services and provisions for Australian universities to set up campuses in Indonesia, reflected the free market instincts of Widodo, a former furniture entrepreneur and big exporter.

The first president from outside Indonesia’s political, business and military elite, Widodo prioritised infrastructure development in his first term, building roads, railways, ports and airports across the archipelago of thousands of islands.

His building programme has gone some way to address a major deficiency in the Indonesian economy, where logistics costs make many of its exports uncompetitive.

Ikhsan said more foreign capital would be needed to continue the programme, and budget-sapping subsidies of petrol and food staples would have to be trimmed.

Human resources

In his final campaign speech at Jakarta’s main stadium, Widodo said the next five years would bring a focus on developing “quality human resources”.

Indonesia’s education system has long been identified as substandard and a drag on development. Although 20 percent of the government budget is allocated to education, international surveys show math, reading and science skills among secondary students badly lag those of the country’s neighbours.

Business leaders say poor schooling and a weak tertiary education sector also deter investment, as do the country’s restrictive labour laws.

According to the senior government official, labour market reform “is something the president is very passionate about”.

“It’s very difficult to terminate or lay off people, therefore people are reluctant to hire. It’s pushed employment dramatically toward informal employment.”

Even so, “it would be the mother of all dogfights in parliament” to get labour reforms passed, he said.

Education reforms are no fait accompli either.

Many academics, nationalists and some Islamic bodies are opposed to liberalising the university sector and bristle at suggestions that a modern curriculum might be imposed on pesantrens, the network of religious schools.

- Reuters