Sometimes nice guys do come first. When commanding a 30 percentage point lead over his rivals for the presidency of Indonesia in early 2014, Jakarta mayor Joko Widodo seemed a shoo-in for the position. Then came the rise of Prabowo Subianto, a former general under the unlamented dictator Suharto. He used a well-funded political campaign, fiery rhetoric and a tough guy image to close the gap to within a few percentage points by the time of voting in June.
Yet despite running a lacklustre election campaign that was funded principally on voluntary donations, Widodo had done enough. Indonesia’s election commission on July 22 announced he had received 71m votes, or 53.15% of the popular vote, versus Subianto’s 46.85%.
The latter did not take defeat gracefully. As Asiamoney went to press Subianto had filed a challenge to the result in Indonesia’s constitutional court against the election commission for failing to prevent fraud. However, it appears there is insufficient evidence to swing the result. Barring a drastic shift in circumstances, Widodo looks to have won.
The markets had long preferred a victory for ‘Jokowi’, as Widodo is popularly known. He is seen as being untainted by corruption or scandal, and not overly beholden to vested interests. His rise from furniture maker to Jakarta mayor to country president makes for an ideal rags to riches tale.
In contrast Subianto built an election campaign based his self-styled strongman image, the backing of his millionaire brother and the Gorkal Party that once supported Suharto. But his links to alleged human rights abuses as head of the special forces under Suharto and links to the country’s traditional elite left investors fearful cronyism and corruption would rise if he won.
Even so, Subianto’s strong showing points to popular dissent over the direction Indonesia should take. This is a nation with a great deal of potential. The average age of its people is just 28 years, offering it a potential demographic dividend if it can get these people into good jobs. But it is also at risk of insufficient infrastructure or productivity.
Widodo has many goals he must aim to hit if he is to meet the hopes of his supporters and ease the concerns of his critics. We suggest five targets he should focus on first.
Build a political consensus
The rising levels of antagonism between the Widodo and Subianto campaigns suggest a high degree of polarisation in Indonesian politics.
Many people liked Subianto because he appeared strong enough and connected enough to push policies through a political system mired in vested interests, a contrast to the last few years of president Susilo Bambang Yudhoyono, which has seen political and policy inertia, mounting corruption allegations and rising nationalism.
There are fears that the fact Widodo doesn’t hail from a political dynasty or wealthy background could leave him struggling to implement his policies.
The first thing he must do is forge a political consensus to support his government. The Indonesian Party of Democratic Struggle and other parties that supported his presidential bid comprise only 40% of Indonesia’s parliament.
“Since neither candidate is likely have a substantially commanding share of the popular vote or parliamentary seats, efforts to build common ground for action and reforms would be critical,” Taimur Baig, chief economist for Asia at Deutsche Bank, told Asiamoney a few days before the final election result.
Widodo will probably need to offer opposing parties political influence and perhaps even cabinet seats in exchange for their political support. The plum jobs should of course go to his own party backers, but the support of Golkar, Indonesia’s largest party which supported Subianto, would be as useful as its opposition would be painful. It is likely to be eager to negotiate too, given that it has been a part of every democratic government since the fall of Suharto.
Reduce subsidies
Widodo then needs to improve government finances. His first priority must be to cut subsidies.
Indonesia’s subsidies on fuel, electricity and some food have proven costly, particularly the fuel subsidies, as more people get cars and motorcycles and the cost of oil has risen. The Yudhoyono government began to pull back on the fuel subsidy by raising the effective cost of petrol by 40% last year. But the subsidies still account for over $20bn a year, and this rises to nearly $30bn once food and electricity subsidies are included. It also adds to Indonesia’s mounting fiscal and current account deficits.
“The fuel subsidies are pretty much the root of all the problems in the economy now,” says Gundy Cahyadi, an economist at DBS. “If they reduce the fuel subsidies they can spend the money somewhere else and put less pressure on the country’s fiscal deficit and narrow the current account deficit.”
Both candidates recognised the wastefulness of the subsidies in their election campaigns, and Widodo has promised to reduce them in a gradual manner. He needs to live up to these words, reducing and ideally eliminating the subsidies for all but the neediest.
Invest in infrastructure
The government needs to save money on subsidies in part because it must spend so much on infrastructure.
It’s an oft-discussed issue in Indonesia. The trouble is the archipelago has spent years failing to invest enough into new roads, railways, ports and power plants. A frequently mentioned example is that a bag of cement costs more to move from Jakarta to Irian Jaya in the far east of the country than to send to Europe. Meanwhile brownouts are common in several parts of the country.
These infrastructure failures inevitably create bottlenecks, which increase production costs and slow economic development. Indonesia must begin resolving these issues if it is to raise its growth from 6% towards the 8% the government would like to see.
Wellian Wiranto, economist at OCBC, thinks that Widodo will be willing to try. He says the president elect’s decision to officially announce his victory from a traditional commercial boat in Jakarta’s port was designed to underline his oft-talked campaign trail point about making a ‘sea toll road’, or a chain of deep sea ports across the island.
Kalla will also likely be an infrastructure advocate. “When last in power 10 years ago [as vice president under Yudhoyono], he proposed a set of 10,000 megawatt power plant projects, but these failed to really materialise after he left [in 2009], so he may want to pick that up again,” says Wiranto.
Raise foreign investor confidence
Improving infrastructure would be greatly helped by more foreign investment. It’s an area Widodo should focus on.
International investors like the overall trajectory of Indonesia, but Yudhoyono’s government introduced some worryingly nationalistic policies in its latter years, including a 40% cap on foreign ownership in banks in 2012, the requirement for oil producers to set up expensive refineries onshore and a mining tax on mineral exports.
The rhetoric of the presidential campaign became very nationalistic too, largely at the behest of ‘strongman’ Subianto, but it led Widodo to become more protectionist too, lest he be seen as anti-Indonesian or weak.
Economists believe Widodo is not wedded to overly nationalistic policies, and the country certainly doesn’t need more such policies souring foreign investors. A useful test of his openness to foreign companies will be how he deals with Newmont Mining. The US company filed for arbitration against the current government in early July over a six month mining dispute that halted its copper concentrate exports from its Batu Hijau mine. The dispute centres on the government’s mining export tax, which Newmont and fellow miner Freeport claim conflicts with their mining contracts.
“It will be a good sign if Jokowi is more open to negotiating with Newmont. Practically speaking there are few options other than to sit down and talk,” says Wiranto.
Increase productivity and diversity
Foreign investment could also be used to make Indonesia’s economy broader and more productive. DBS’ Cahyadi says it’s the country’s key long term issue.
“Increasing productivity is the big challenge for the next 10 years. Productivity in manufacturing has gone down over the last decade and not even returned to the levels of the 1997-1998 crisis. In part it’s happened because Indonesia enjoyed a good run in the commodity boom, which led to too much investment in commodities and a lack of investment elsewhere.”
Widodo said relatively little about these issues on the campaign trail, but he must address them. Fail to do so and Indonesia could end up becoming ever less competitive. That’s a particular concern given that raising minimum wages across the country was a campaign issue.
Cahyadi says there is no easy answer; instead it requires the government to consider a variety of means to improve productivity.
“It could mean giving companies tax rebates or incentives if they train their workers more,” he suggests. Encouraging other areas of Indonesia to flourish outside of Jakarta would help too, as the capital is sprawling and struggling to cope with the number of people it has without a good public transportation system.
None of these tasks are simple or easily solved. But Widodo will earn a lot of faith from investors and his own people if he makes sincere efforts to do so immediately after his inauguration, on October 20.