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Growing concerns over Jokowi's 'protectionist' agenda

Despite sluggish GDP growth, Indonesia has been raising non-tariff barriers to trade. Experts argue such 'protectionist' measures are likely to prove counterproductive, reducing the competitiveness of Indonesian firms.

Indonesia's economy has recorded another quarter of weak growth. Gross domestic product rose by 4.67 percent in the second quarter, the slowest pace since 2009, the Central Bureau of Statistics said on Wednesday, August 5.

The latest figures are a blow for President Joko "Jokowi" Widodo who was elected to office last year on pledges to revitalize Southeast Asia's largest economy which has struggled for years with fragile growth and a large current account deficit.

"Lower commodity prices, which have led to a slump in export revenue and a sharp deterioration in Indonesia's terms of trade, will continue to weigh on the economy," Gareth Leather, Asia economist at Capital Economics, said in a statement.

"If, as we expect, there is no improvement in the second half of the year, pressure on the central bank to reduce interest rates will build," he stressed, adding that the UK-based consultancy was lowering the country's growth forecast for this year to 4.7 percent from 5.0 percent previously.

High hopes

Jokowi's election as Indonesian president was met with plenty of optimism, amid hope that with his reputation for clean government and pragmatic approach to policy, the former mayor of Jakarta could be the man to turn around Indonesia's sclerotic economy.

Jokowi came into office last October facing considerable structural impediments to economic growth, including poor infrastructure, cumbersome bureaucratic red tape, deep-seated protectionist sympathies, a falling currency and deteriorating current account balance.

His presidency got off to what economists viewed as a decent start, particularly after he drastically cut fuel subsidies and virtually eliminated them altogether on January 1.

But since then, analysts say progress has been disappointing. While the president's plans to scale up infrastructure investment should have provided some boost to growth, the pace of implementation of government spending has been relatively slow, mainly due to bureaucratic delays.

At the same time, the government's economic policies have been criticized for a lack of convincing structural reforms, especially regarding the country's restrictive labor laws, which economists regard as a key factor holding back the important manufacturing sector, and thereby impeding job creation.

Economic nationalism

Furthermore, foreign investment climate in the country has also deteriorated under Jokowi due to reasons such as the president's penchant for renegotiating bilateral investment treaties with a host of countries, as well as the increasingly stringent local content requirements for foreign companies.

Indonesien Benzin Tankstelle von Pertamina in Jakarta

Jokowi's move to eliminate fuel subsidies was viewed by economists as a positive step for the economy

"Overall foreign investment in Indonesia remains mediocre compared to other states in the region and if anything is only becoming more cumbersome," Gregory Poling, a Southeast Asia expert at the Center for Strategic & International Studies (CSIS), told DW, adding that Jokowi's promises to cut red tape, boost infrastructure spending, and revive the sluggish economy have so far fallen flat, thus disappointing both investors and voters.

The expert also criticized the Jokowi-led government for having fallen into the default position of Indonesian policymakers - economic nationalism.

As an example, the CSIS analyst cited the impending declaration that all mobile phones and telecommunications must have a high degree of local content. Indonesia has no industry capable of meeting those requirements, and is not going to magically build one in the next couple years, the expert pointed out.

"The only possible results are that phone prices skyrocket and foreign phone manufacturers look elsewhere to invest, or the government will backtrack at the last minute."

In a broader context, economist Leather explains that Jokowi's call for the economy to be free of "the domination of certain groups and countries," which most commentators took as a thinly-veiled swipe at multinationals, will do little to help Indonesia attract badly-needed foreign investment and is likely to be counter-productive in the long-run.

According to the analyst, the most high-profile case of protectionism to date was the decision in July to hike import duties on a range of consumer goods by between 5 percent and 30 percent. "While the measures may provide a short-term boost to local industry, they will reduce competition in the domestic market and do little to address Indonesia's underlying problems," Leather told DW.

A 'counterproductive' shift

A similar view is shared by Professor Arianto Patunru, a trade expert at the Australian National University, and Dr Sjamsu Rahardja, a senior economist for the World Bank Trade & Competitiveness Global Practice. In a recent analysis published by the Sydney-based Lowy Institute, the experts highlight what they consider to be a "counterproductive" protectionist shift in Indonesia.

"The economy is now facing declining investment, diminished job creation, and a fiscal shortfall, owing to lower prices of natural resources commodities and lower demand from China for Indonesia's exports. But the policies the government is pursuing in response to these are heavily protectionist in nature. This time, bad times are resulting in bad policy," wrote the experts.

They point out that most of the policies reflective of this shift are non-tariff measures, as tariffs are already very low. The introduction of a more restrictive cap on certain sectors, the ban on raw mineral exports, and the provision of greater authority for ministers to issue intervention and monitoring policies are just a few examples mentioned by the economists.

"This trend began during the tenure of former president Yudhoyono but is continuing under President Jokowi," they said. "These protectionist measures are likely to prove counterproductive, raising prices for Indonesian consumers and reducing the competitiveness of Indonesian firms."

Broad support

So why does the government keep pursuing such policies? Analysts argue that the trend towards protectionism enjoys broad political backing in Jakarta, and is therefore likely to continue under President Jokowi.

"Protectionist rhetoric not only gets votes, but also too many non-technocratic policymakers in Indonesia genuinely believe that imports are universally bad, foreign investors at best a necessary evil, and new domestic industries can be created by fiat," said CSIS expert Poling.

Jakartas Containerhafen Tanjung Priok

Lower commodity demand from countries like China has led to a slump in Indonesia's export revenue

But some fear such policies might ultimately turn out to be a double-edged sword.

"Jokowi's main problem is that he is not leader of his own party, the PDI-P, a political faction with traditionally nationalist leanings. Unless there is a sudden change in direction, his presidency could fall victim to the special interest groups and protectionist pressure from within his own party. If this happens, Indonesia will struggle to fulfill its undoubted vast potential," underlined Capital Economics analyst Leather.

Where does this lead the Indonesian economy then? Over the medium term, observers expect the country to continue on a growth path of around 4.5-5 percent.

"The size of its market ensures that investors see doing business in Indonesia as necessary, but the difficult and uncertain investment climate means that neighboring states like Vietnam, Thailand, the Philippines, and Malaysia remain considerably more attractive," noted Asia expert Poling.

In the meantime, the hurdles to economic productivity, particularly the huge infrastructure gaps, tight monetary policy, and cumbersome restrictions on investment and trade, remain. "But instead of seeking bold solutions to twenty-first century problems, Indonesian policymakers are defaulting to protectionist policies pulled from a 1970s playbook," said Poling.