New Cabinet, Same Challenges

KOMPAS/HERU SRI KUMORO

President Joko “Jokowi” Widodo (right) together with Vice President Ma’ruf Amin (left) answers reporters’ questions after being sworn in as President and Vice-President in the People’s Consultative Assembly (MPR) General Session at the Senayan Legislative Building Complex, Jakarta, Sunday (20/10/2019).

The announcement of the second volume of the Work Cabinet by the president and vice-president for the 2019-2024 term in the near future will eventually end various speculations after drama and tug of war of political interests that drain emotions, both from the supporting political parties and competitors.

The market and business world certainly await the composition of the new cabinet. After the inauguration, the ministers must immediately step on the gas to work due to the magnitude of the challenges being faced, while space, time and resources are relatively limited. The vision of President Jokowi for the next five years focuses on building superior human resources (HR) to improve competitiveness, in addition to continuing to build various infrastructures and reforming regulations and bureaucracy.

Jokowi and the Work Cabinet II should be able to immediately work towards realizing the economic agenda considering that the 2020 State Budget was made during his administration. It is different from the beginning of the administration in 2014, where the preparation of the 2015 State Budget was carried out during the term of President Susilo Bambang Yudhoyono. Jokowi\'s political capital in the House of Representatives (DPR) is also large and relatively conducive considering that the majority of DPR chair seats are held by the supporting coalition of political parties (PDI-P, Golkar, Nasdem, PKB, and only Gerindra in the competitor\'s position).

At the beginning of the 2014 government, we can clearly see how Jokowi was disturbed by the DPR so that practically 1.5 years of his work term were used up to stabilize the tension and commotion in the House. Nevertheless, Jokowi-Jusuf Kalla together with the Work Cabinet I succeeded in answering doubts with real work. Several important achievements in the economy deserve to be appreciated and could be important capital for the next term. The budget deficit to GDP has improved from 2.59 percent (2015) to 1.93 percent (2019 projections).

The primary balance deficit has improved to minus Rp 34.7 trillion or 0.22 percent of GDP (outlook 2019) from the previous minus of Rp 142.5 trillion or 1.23 percent of GDP in 2015. The quality of the state budget is more productive and healthy. Since the energy subsidy reform in 2015, the controversial and counterproductive energy subsidy budget has been reduced by 58.3 percent compared to 2014 and is directed towards increasing infrastructure spending (up 158.4 percent), education (up 35.4 percent), and health (up 96.3 percent).

Indonesia\'s GDP growth increased from 4.87 percent in 2015 to 5.17 percent in 2018. Growth of 5.17 percent made Indonesia stay in the third highest economic growth after India and China in the G-20. Rising economic growth, which is supported by maintained low and stable inflation rate (from 8.36 percent in 2014 to an average of 3 percent in 2015-2019), and consumption growth which is stable at 5 percent, has positive implications for poverty alleviation from 10.96 percent (2014) to 9.41 percent (March 2019), inequality (Gini ratio) decreases from 0.414 (2014) to 0.382 (March 2019), and unemployment from 5.94 percent (2014) to 5.01 percent (February 2019) after there are around 11.21 million jobs available during the 2015-2019 term.

Challenges in 2019-2024

Macroeconomic condition and state fiscal management are good and must be maintained. However, the government should not be too satisfied with the euphoria of this achievement. The cabinet is new but the challenges will still be the same, namely in increasing competitiveness and boosting investment growth. Slowing investment and declining competitiveness can erode the trade balance and current account balance. Indonesia will increasingly be left behind by other countries, especially in ASEAN. Investment flowing out will cause household consumption to decline and unemployment to rise again.

Indonesia is unable to compete with Vietnam, Thailand and Malaysia, and is about to be taken over by mediocre countries such as Bangladesh and Sri Lanka.

The Work Cabinet II must leave the old paradigm of business as usual in economic policy, which does not only make us stagnant, but also plunges us into a dark corridor of deterioration amidst the threat of recession and global uncertainty. It is true that we should be thankful to the stable economic growth of 5 percent in the midst of the escalation of the US-China trade war, but this growth is actually not in line with the ambitious target of 7 percent of President Jokowi with the Work Cabinet I. The World Bank and International Monetary Fund even lowered Indonesia\'s growth projections to only 5 percent in 2019 from the previous 5.2 percent. Jokowi\'s promise to increase industrial competitiveness has not been fulfilled. Indonesia is unable to compete with Vietnam, Thailand and Malaysia, and is about to be taken over by mediocre countries such as Bangladesh and Sri Lanka.

The acceptance of all economic and business stakeholders will be good if the ministers of the Work Cabinet II have the plainness and speed of executing policies to increase industrial competitiveness according to the new paradigm of the digitizing industrial revolution. According to the Global Competitiveness Index released by the World Economic Forum, Indonesia\'s global competitiveness in 2019 has dropped by five ranks in the 50th position out of 141 countries. Indonesia is unable to compete with Singapore, Malaysia and Thailand. Even though Vietnam is in the 67th position, the ranking has jumped 10 ranks from 2018. The indication of the low competitiveness of Indonesia makes friendly export and import policies be badly needed. Various overlapping regulations and the difficulty of land acquisition makes investors who leave China as a result of increased trade tariffs with the US prefer to choose Vietnam.

Ease, consistency, and certainty of rules and bureaucracy are the key to success. There is no time to complain and make execuses as the fact shows that various Chinese companies and investments prefer Vietnam over Indonesia, even before the US-China trade dispute. A number of Vietnam\'s strong factors of excellence include: rules and bureaucracy are simpler, but with a high level of effectiveness, there is a unity of policies from the central to the regional administrations, relatively free of political interests, extortion and corrupt practices. It is in contrast with Indonesia, where there are problems in synchronizing and coordinating (policies) between the central and regional governments because regions have their own (and special) autonomy and among ministries and institutions.

The fact that Indonesia is left behind by Vietnam is not only in searching for new sources of investment, but also in maintaining existing investments. The relocation of the Xpander brand Mitsubishi car factory from Japan in 2020 -- after three years of production in the Cikarang industrial area -- is a clear evidence of the loss of existing investment. If there is no forward and fast step, other industrial sectors, such as textiles and electronics, have the potential to move to other countries, such as Sri Lanka, Bangladesh, and even Ethiopia. The relocation of the industry is made possible because the competitors increasingly adapt and innovate to improve competitiveness and are supported by clearer economic policies, uncomplicated bureaucracy, and immediate tax incentives.

The increase of the ease of doing business index has indeed progressed from a score of 59.15 (2015) to 67.96 (2019) and its rank which rise to the 73rd position out of 190 countries in 2018 from the previous position at the 106th in 2015. This is the result of the launch of 16 economic deregulation packages in 2015-2018, the issuance of Perpres (Presidential Regulation) No. 91/2017 concerning ease of business, relaxation of negative investment lists, expansion of tax allowance and tax holidays, incentives for Special Economic Zones (KEK) and the launch of online single submission (OSS) system in 2018 to facilitate business licensing. Even though several policies have been carried out, the investment realization is still not in line with expectations. The president is even furious with the fact that 33 investments from China did not enter Indonesia.

Homework

Cabinet Work II must continue the infrastructure development projects with an emphasis on connectivity between industrial estates and KEK because it will critically support industrialization.

The development of industrialization plays an important role in reducing the dependence of economic growth on commodity exports and household consumption. Growth in the manufacturing industry has fallen to 4.07 percent (2018) from 4.47 percent (2017), far from the Work Cabinet I target of 8 percent. In the next five years the government should create a road map and priority agenda to revitalize the manufacturing industry to reduce dependence on commodity trade. In 2000, manufacturing had contributed more than 50 percent of export volumes before being shifted by commodities mainly due to windfall from the palm oil (CPO) and coal bonanza in 2009-2013.

The second challenge deals with politics. The Jokowi-Ma\'ruf government apparently will only really focus on fixing the economic structure after 2022. In the next two years, the work of the ministry of economics seems to be safeguarding and improving short-term macroeconomic indicators, such as curbing the depreciation of the rupiah, reducing the pressure on inflation, curbing outflows of foreign funds, up to keeping economic growth from falling from 5 percent.

Unfortunately, after 2022, a number of ministers, especially political party representatives, will have a hidden political agenda in preparation for the 2024 election so that they can reduce the focus of the cabinet\'s performance. Since Jokowi cannot be re-elected in the next election, this is where the firmness in the flexibility of playing political trump cards is needed. Jokowi must be able to convince his ministers to continue to focus on working.

The condition of foreign politics, especially the US, also has an impact on the Indonesian economy. In this case, the results of the US 2020 Presidential Election will also greatly affect the global economy and its impact will also be felt by the Indonesian economy.

All differences of opinion should be resolved at cabinet work meetings and not in public spaces so as not to confuse the public and the market.

The third challenge is the importance of increasing coordination and communication among ministries and state institutions. Ministries must support each other and release their sectoral egos. Work solidity in the corridor of the same direction and vision is mainly aimed at improving the quality of human resources and employee productivity so that they are highly competitive. Quality and productivity will be critical aspects in the midst of the strong current of competition in the Industrial Revolution 4.0 era. All differences of opinion should be resolved at cabinet work meetings and not in public spaces so as not to confuse the public and the market.

Finally, attention to the management of state debt. The country\'s fiscal policy is already good, but there should be more attention on increasing the value of the country\'s debt, which has reached Rp 4,418 trillion or 29.98 percent of GDP in 2018 from Rp 3,165 trillion or 27.43 percent of GDP in 2014. State debt must be managed carefully for productive purposes. The position of the state debt as of August 2019 was Rp 4,680 trillion or 29.8 percent of GDP. Indeed, the debt ratio is still below the government\'s target of a maximum of 30 percent of GDP. However, it is better if the ratio is reduced to 20-25 percent of GDP to reduce the risk of potential defaults so that it will not to burden the government in the next term without disturbing the target of achieving national development in Work Cabinet II.

Santo Rizal Samuelson, Observer of Indonesian Economy and Politics