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Asean Affairs   June 27, 2014

A Bucket of Challenges Awaits Presidential Victor in Indonesia

Murray Hiebert (@MurrayHiebert1)
Senior Fellow and Deputy Director, Sumitro Chair for Southeast Asia Studies, CSIS

With less than two weeks before the July 9 presidential elections in Indonesia, polls suggest that the two candidates, former Special Forces general Prabowo Subianto and former Jakarta governor Joko “Jokowi” Widodo, are now in a statistical dead heat. But regardless of which candidate prevails, the new president will face a daunting set of challenges when he takes office in October.

Some of his biggest tests will be in regard to the economy, in which growth has slowed during the previous nine quarters. Highly respected finance minister Chatib Basri told Bloomberg recently that Indonesia’s economy remains “fragile” as a continuing current-account deficit has turned the rupiah into Southeast Asia’s poorest performer this year, while the rising cost of fuel subsidies has increased the 2014 budget shortfall and forced cuts in state spending.

Both candidates have promised to increase spending to boost the country’s woefully weak and overextended infrastructure, but they will face enormous pressure not to cut fuel subsidies to pay for it. Prabowo says he will keep fuel prices at their current levels but introduce procedures to guarantee that the subsidies are used only by the poor. Under his plan, car owners would be required to report their incomes when they register their cars. In contrast, Jokowi would cut subsidies and raise prices slowly over four to five years, which would save the government $30 billion.

Jokowi says he would build 1,250 miles of roads, 10 new airports, and 10 new ports using the money saved by reducing the fuel subsidies. Prabowo tells voters he would invest $60 billion a year to build infrastructure, including 1,875 miles of roads and similar lengths of railroads over five years. He would find the money by revamping the country’s tax collection architecture. Current government officials estimate that upgrading Indonesia’s roads and building needed power plants would cost about $150 billion over five years.

The space for foreign investors has shrunk during the decade under President Susilo Bambang Yudhoyono as the negative list excluding foreigners has grown. Many of these restrictions were aimed at protecting an inefficient domestic manufacturing sector. Foreign investment totals only 2.2 percent of gross domestic product, considerably lower than in many comparable economies. A few months ago, Jakarta announced that it will suspend most of Indonesia’s bilateral investment treaties with other countries, raising concerns among investors.

The role of foreign companies in the extractive industries will present another challenge for the new president. Mounting resource nationalism in recent years has resulted in new regulations limiting foreign investment in mining and oil and gas extraction. Both candidates say they will keep the mineral ore export ban that was imposed early this year to force mining companies to process raw materials in Indonesia before exporting them. Regardless of who wins, the new chief executive will come under pressure to nationalize or at least renegotiate the country’s extractive industry contracts.

In the election campaign, the candidates have taken quite different stands on this issue. “Our economy is dominated by foreign companies and the added value of our resources flows overseas,” Prabowo said during the candidates’ third debate on June 22. “We have to save our wealth.” He has repeatedly said he is prepared to renegotiate existing oil and gas and mining contracts.

In the second debate, Prabowo asked whether Jokowi would support renegotiating contracts. The former governor responded that signed contracts should be honored and not be renegotiated midway into their contract period. “We have to honor contracts we have already signed as part of our efforts to build trust [with] the investment community,” Jokowi said. But if a contract has expired, he said Indonesia should “recalculate” it. Jokowi has said he would introduce a more flexible regime governing the oil and gas sector to attract more investment to boost domestic production.

In a meeting with Indonesian business executives, Prabowo called for establishing an “Indonesia, Inc.” system under which the government would provide increased support and protection for the private sector. Among other things, he advocated the creation of an Indonesian car. In a reflection of foreign business attitudes toward the two candidates, 68 percent of 70 investors recently interviewed by Deutsche Bank said they will buy Indonesian stocks if Jokowi wins, while 43 percent will sell if Prabowo is the victor.

The low quality of human resources due to poor education holds Indonesia’s economy back, but neither candidate has spelled out a detailed plan for overhauling the country’s education system.

Indonesia has achieved remarkable political stability since the political turmoil of 1998 that launched the country down the road to democracy. But the need to streamline government services, boost efficiency, cut red tape, knock down bureaucratic roadblocks, and reduce corruption are outstanding tasks facing the presidential victor. Indonesia ranked 114th out of 177 countries on Transparency International’s 2013 Corruption Perceptions Index.

Prabowo says he will boost salaries and simplify the bureaucracy to eliminate corruption. Jokowi pledges to tackle government efficiency by introducing online systems for government procurement and permits and licenses. “I’m a businessman, so I know the issues on the ground,” he said in a recent meeting with the Indonesia Chamber of Commerce. “Regulations . . . that retard investment must be cut, cut, and cut.”

If Prabowo wins, he will lead a coalition that controls just over half of the Indonesian parliament, while Jokowi’s coalition controls only 37 percent. But Prabowo’s grouping includes a wide range of disparate members, including the most hardline Islamic parties, which could make his coalition more difficult to control. One particular challenge for Prabowo would be maintaining Indonesia’s commitment to religious pluralism because every party in his coalition has at one time or another supported the implementation of shari’a law.

The new president will face the difficult task of tackling the religious intolerance and violence that has marred the previous administration, which did little to halt attacks and discrimination against religious minorities, including Ahmadis, Shi’ites, and Christians. There are indications that a Prabowo administration in particular might be no more able or willing to tackle these issues than was Yudhoyono’s.

If Jokowi wins, he will face the challenge of adapting his on-the-ground personal style of governance, which made him wildly popular as mayor of Surakarta and then governor of Jakarta, to leading a complex archipelago with the world’s fourth largest population and Southeast Asia’s largest economy. Dealing with business tycoons, a fractious parliament, and entrenched politicians at a national level will be tougher than taking on local officials and power brokers.

Courtesy: This post originally appeared on the Center for Strategic and International Studies, Washington D.C. cogitASIA blog

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