Homework for "Jokowinomics"

KOMPAS/SHARON PATRICIA

Andry Satrio Nugroho

The General Elections Commission (KPU) confirmed that Joko “Jokowi” Widodo and Ma\'ruf Amin had been elected as the president and vice president of the 2019-2024 term, immediately after the Constitutional Court (MK) rejected all arguments that the Prabowo Subianto-Sandiaga Uno camp put forth during the 2019 election dispute resolution.

The administration under Jokowi’s first term has made several economic achievements, ranging from the decline in the poverty rate to below 10 percent (single digit), decline in open unemployment, controlling inflation of basic goods, and realizing 100 percent of the state revenue target. However, these achievements have been overshadowed by other economic indicators that remain discouraging.

These indicators include the alarming balance of trade and declining foreign investment. President Jokowi and his new cabinet need to immediately address these two major indicators during his second term. It is even ironic, since Jokowi championed the idea of investment-driven economic growth at the beginning of his leadership.

Jokowi envisioned transforming the Indonesian economy from consumptive to productive. No doubt, Jokowi had strongly promoted investment opportunities in Indonesia at every meeting with an international audience, in order to reap the necessary capital to develop industrial and trade infrastructure.

Trade challenges

The reality is far from what was expected because the trade performance has not improved. The lowest point was in early 2019, which saw the worst performance in the trade balance. For the first time in history, Indonesia recorded a trade deficit of US$2.56 billion. This deficit was largely the result of the poor performance in non-oil and gas trade, which recorded a surplus of only $204.7 million, 10 times lower than the $2.48 billion recorded in the same period in 2018.

External and internal factors both played a role, with the main external factor being the US-China trade war. Trade wars are capable of changing the trade map at both regional and bilateral levels. Even though Indonesia has a global value chain (GVC) that is relatively low compared to fellow ASEAN countries and its trade-to-gross domestic product (GDP) ratio is a mere 32 percent – lower than Thailand and Malaysia – it still felt the impact of the trade war between the world’s two largest economies.

The trade war has produced winners and losers. At least three Southeast Asian countries have come out on top as regional manufacturing centers: Vietnam, Thailand and Malaysia. The Economist Intelligence Unit (EIU) noted that Vietnam and Malaysia had become information technology-based manufacturing centers. In addition, several well-known manufacturers have moved their production bases from China to the two countries: Dell (US), as well as Sony and Panasonic (Japan), to Malaysia; Samsung (South Korea) and Intel (US) to Vietnam.

The US-China tariff war also involves automotive products and components. This has benefitted Thailand, which has become a regional manufacturing center in the automotive sector. German carmakers Mercedes-Benz and BMW are now building factories in Thailand in hopes of entering the Chinese luxury car market, which was once dominated by US exporters. The situation has also prompted Malaysia take advantage of the vacancy. Even though its automotive product exports are not very large, more than 800 manufacturers of export-ready automotive components operate in Malaysia.

So what about Indonesia? China and the US are respectively the first and second largest trade partners for Indonesia. This means that the two countries fill important roles in Indonesian trade. Indonesia\'s main export commodities, palm oil and palm oil derivatives, have been restricted by protectionist measures in its main markets like the US, Europe and India, not to mention that commodity prices are continuing to show a downward trend. Luckily, China has become the largest buyer of Indonesian crude palm oil (CPO).

Indonesia’s dependence on China for its mainstay exports is certainly a double-edged knife. Even though China is still a profitable market, the trade war has caused its economic performance to slow: export is one of China’s economic drivers, and the US is its largest export destination. The slowdown in the Chinese economy has caused a downward trend in its demand for raw materials. This threatens Indonesia with the risk that our palm oil products will not be absorbed. Of course, this risk also applies to Indonesia’s other mainstay exports to China, like coal.

The weaker the rupiah, the more expensive imports will be. This vicious circle continues to overshadow our trade performance.

Aside from external factors, internal factors also play a role in slowing our exports. A distinctive feature of Indonesia’s industry sector is its dependence on large imports of raw materials. Up to 75 percent of all imports are capital goods. Thus, the country’s efforts to increase its exports will always face exchange rate volatility and foreign exchange erosion. The weaker the rupiah, the more expensive imports will be. This vicious circle continues to overshadow our trade performance.

Other internal factors are institutional. Several deregulation policies have been undertaken, but minor investment problems remain. Complicated investment licenses make entrepreneurs wonder if the 13 policy packages have had any impact on simplification. As for licensing, the dispute surrounding the online single submission (OSS) and one-stop integrated services (PTSP) still needs to be resolved. The 12 special economic zones (SEZ), which are intended to boost regional export growth, are apparently not running optimally. On the one hand, basic infrastructure remains unresolved; on the other, regional incentives remain unfulfilled.

Focus on building economic pillars

The various problems above generate at least four matters that should be the focus of the President and his new cabinet: encouraging non-oil and gas exports, reviving foreign investment, developing import substitution industrialization and managing the foreign exchange machine.

Encouraging non-oil and gas exports is not easy at the present time. Looking at its characteristics at a time when ASEAN countries like Vietnam, Malaysia, Thailand and even the Philippines are exporting high-tech products, such as electronics and electronic components, Indonesia\'s exports are still dominated by natural resources from both plantations and mines. The tough challenge now is to diversify exports with high value-added products.

In reflecting on exported products, let’s not forget that Indonesia also has an opportunity to export automotive products. The automotive industry is one of the five largest contributors to GDP. This opportunity can be used, even though the work that must be done now is to develop production and assembly according to the Euro 4 and 5 emission standards of developed countries. Indonesia\'s weak competitiveness in the automotive market is due to the low emission standards of its automotive products. Of course, this is caused by the fact that the domestic automotive market still uses Euro 2 fuels.

Growing exports certainly requires large capital. Foreign investment is the fastest way to raise capital. Foreign investment plays an important role in introducing an export-oriented manufacturing sector. To do so, Indonesia can learn from its neighboring countries by pursuing reform – not just at the central level, but also at the regional level.

Avoid policies that can change overnight just because of politics. Several overlapping regulations have also been found: while they free foreign investment by cutting down the negative list of investments, derivative rules at the ministerial level shackle investment. The most important issue is incentives: they should not be a blanket offer, like the existing tax holiday, but should be aimed at investors and the sectors that need them.

Investment is also expected to support industry by reducing the rate of capital goods imports. Aside from downstream efforts, it is frequently forgotten that improving the supply chain also requires efforts in the upstream. This means reducing the upstream sector\'s dependence on imports or, alternatively, heading towards import substitution industrialization. This will be difficult work because it involves not only the manufacturing sector but also building a link with the agricultural sector, which is currently experiencing declining growth.

These incentives can focus on human resources, a supporting variable that is critical to developing regional tourism.

Besides exports, tourism also has the capacity to generate foreign exchange. Of course, the central government needs to offer various incentives to enable regional governments to develop their tourism sector. These incentives can focus on human resources, a supporting variable that is critical to developing regional tourism.

Even though it is very difficult to find a destination like Bali that can promote natural wealth as well as cultural and religious experiences, it does not mean that other regions should not be given the same opportunity to develop tourism. In the future, we hope that the President and his new cabinet will focus on meeting these objectives. These efforts might not be completed in the next five years of his second term, but the foundation needs to be built so that the torch of productive economic development can be carried on by the administration that succeeds him.

Andry Satrio Nugroho, Researcher, Institute for Development of Economics and Finance (Indef)