February 27th 2016

S P E C I A L R E P O R T

I N D O N E S I A

Jokowi’s moment

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A list of sources is atEconomist.com/specialreports

An audio interview with the author is atEconomist.com/audiovideo/specialreports

CONTENT S

2 PoliticsLone fighter

3 CorruptionThe Setya show

4 Business and economicsRoll out the welcome mat

6 InfrastructureThe 13,466-island problem

8 Foreign policyLess talk, more action

9 ForestsA world on fire

10 Looking aheadThe country of the future

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CROSSINGTHE QUAYSIDE road in Ambon, the capital ofIndonesia’s re-mote Maluku province, requires care, speed and nerve. The pavement istaken up by a row offood carts, and the road is packed with a motley col-lection of lorries, minivans and cars. Motorbikes flit dangerously amongthe larger vehicles. The shortest path between two points may be astraight line, but the safest is usually a corkscrew dance of leaps, back-tracks and tight squeezes.

On one side of the street lies the Banda Sea, which surrounds thescattered Maluku islands. On the other is a row of low commercial build-ings, selling the sorts of basic household goods available from any streetstall in Indonesia: little packets of coffee, tea, shampoo and Indomie in-stant noodles, SIM cards, cigarettes and fizzy drinks.

But from one doorwaywafts the incongruousscentofChristmas. Ina large concrete-floored warehouse sit waist-high pyramids of cloves,pallets of nutmeg and sacks filled with spices. Merchants weigh theirwares on old-fashioned scales. The only concession to the 21st century istheir smartphones.

Four centuries ago these spices were literally worth their weight ingold. Small wonder that the Netherlands, Britain, Spain and Portugalspent two centuries battling for control of the spice trade. The Dutch pre-vailed, and the Dutch East India Company (VOC)—whose territorieswould become first the Dutch East Indies and then modern Indonesia—prospered mightily thanks to itsmonopolyon the spice trade. Buteventu-ally the bottom fell out of the market as the VOC lost its monopoly.

As spices became less lucrative, Dutch colonists turned to othercommodities. They mined tin and coal, developed oilfields and createdmassive plantations to grow tobacco, cocoa, coffee, rubber, tea, sugar andindigo. After gaining independence in 1945, Indonesia retained a com-modity-based economy.

For its entire modern history, money grew on trees, bubbled up

Jokowi’s moment

Joko Widodo was elected to shake up Indonesia’s politics andmake his country richer. He needs to hurry up, says Jon Fasman

ACKNOWLEDGMENT S

The author would like to acknowl-edge the generous help he receivedfrom many people while preparingthis report. Apart from thosementioned in the text, particularthanks go to Charles Ball, RobertBlake, Eka Kurniawan, Peter Ellis,Goenawan Mohamad, Rabin Hattari,Herlina Hartanto, Lex Hovani, FauziIchsan, Chris Lang, Jacky Manuputty,Ifa Misbach, Rini Soemarno, RizalSukma, Adam Schwarz, MaggieTiojakin, Alissa Wahid and WellianWiranto.

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from beneath the sea and wasdugoutofmines. Today Indonesiais South-East Asia’s biggest country by both population (255m)and size ofthe economy. Itproducesmostofthe world’spalm oil,as well as large shares of its rubber, cocoa, coffee, gold and coal.Commodities make up around 60% of the value of its exports.When the world was buying, Indonesia prospered: its GDP, bothoverall and per person, grew steadily throughout the late 20thcentury (exceptduringthe 1997-98 Asian financial crisis) and wellinto the 21st, thanks largely to a ravenous China.

But in recent years, as China’s appetite has waned and theprice of commodities plummeted, Indonesia has struggled. Be-tween 2010 and 2014 its overall growth rate fell from 6.2% to 5%.As economic growth slowed, it became clear that the countryhad persistently failed to invest enough in infrastructure andeducation. Its political system remained narrow and patronage-ridden. Jakarta, Indonesia’s capital and largest city, boomed andJava grew richer, whereas millions of people in the far-flung eastfelt they lived, in the words of one Ambonese priest, in “forgot-ten Indonesia”. In 2004, with great fanfare, Susilo Bambang Yud-hoyono became Indonesia’s first directly elected president; in2014 he practically slunkout ofoffice.

His successor, Joko Widodo (known universally as Jokowi),is different from any previous Indonesian president. He does nothail from the Jakarta elite and has served neither in the army norin parliament. The eldest son of a poor family from the Javanesecity of Solo, he acquired a reputation for pragmatism and—mostimportant to his popular appeal—clean governance, first asmayor ofSolo and then as governor of Jakarta.

Ordinary Indonesians supported him because he was oneof them and had shown himself willing and able to act on Indo-nesia’s endemic corruption. The local business communitycheered his victory because he was also one of them: before en-tering politics he had been a furniture exporter, and thus under-stood what itwas like to be mummified byIndonesia’snotoriousred tape. Foreign investorswere pleased thathe welcomed them,and hoped he would make Indonesia less protectionist.

Jokowi vowed to return Indonesia to 7% growth and prom-ised a cabinet staffed by technocrats rather than party hacks. He

recognised that the era of commodity-dri-ven growth was over. He said he wantedto attract high-value manufacturing andservices, and realised that would requiremassive infrastructure investment and abetter business climate. In the WorldBank’s Ease of Doing Business index, In-donesia ranks a woeful 109 of189.

Jokowi got off to a strong start, trim-ming his country’s wasteful fuel subsidiesafter just three months in office. Sincethen, however, the enthusiasm that greet-ed his election has begun to curdle. He haspromised far more than he has deliveredso far. Not only has growth failed to pickup, it has continued to slow: preliminaryfigures show that GDP last year increasedby just 4.8%, the lowest rate since 2009.For all the talk about infrastructure invest-ment, too few shovels have hit dirt. Con-fused policy guidance and lost fights withhis party have made him look weak. Hisforeign policy initially appeared prickly:he blew up neighbours’ fishing boats andexecuted foreign drug dealers. Fears ofradicalisation and religious intoleranceare growing. And after seven years of

calm, terrorism returned to Jakarta in January: jihadists struckthe centre of town, killing four civilians. Many wonder whethertheir pre-election confidence in Jokowi was misplaced.

This special report will argue that it was not. But in office Jo-kowi has struggled to find the sense ofpurpose that drove him asa candidate. His often diffident leadership style has caused need-less confusion; economic liberalisation has been slow; and hehas shown less appetite than expected for taking on vested inter-ests. He promised votershe would change the sytem. The follow-ingarticles will explain what he must do to fulfill that promise.7

CAMPAIGN POSTERS AND rallies reveal much aboutwhat a politician wants voters to thinkofhim. During Indo-

nesia’s 2014 presidential campaign, two conservative candi-dates, Prabowo Subianto and Hatta Rajasa, wore buttoned-upwhite shirts and black songkok caps in many of their posters, re-calling Sukarno, Indonesia’s strongly nationalist first president,who always wore a songkok in public. Mr Prabowo also wantedto project toughness; military themes figured heavily in his slo-gansand posters. Asa general in Indonesia’s special forcesunderSuharto, the first elected president, he was accused of multiplehuman-rights violations, including the kidnapping, torture and“disappearance” ofdemocracy activists.

By contrast, Jokowi usually appeared at rallies and on post-ers wearing a checked shirt, the garb of an ordinary Indonesian.His image, his background and, often, his words implicitly reject-

Politics

Lone fighter

Jokowi’s independence is a double-edged sword

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ed traditional Indonesian politics. He promised to appoint atechnocratic cabinet and oversee a “mental revolution” thatwould drive corruption from politics. As a first step he wouldstrengthen the KPK, Indonesia’s anti-graft body. One short, sim-ple slogan encapsulated his appeal: jujur, bersih, sederhana (hon-est, clean, humble).

Some of Jokowi’s supporters are now disappointed. Asthey see it, the candidate who promised to change the systemhas—in the words of Marcus Mietzner at Australian NationalUniversity—“entered into arrangements with elite actors that re-semble those made by his predecessor”. He has cut too manycompromises and failed to confront Indonesia’s vested interests.But others insist that the president is simply picking his battles,and large-scale change inevitably takes time.

Both claims have some truth to them. Jokowi came into of-

fice already hobbled. First, the party he represents, the Indone-sian Democratic Party of Struggle (PDI-P), holds just 105 of 560parliamentary seats (see chart, next page), forcing him into anawkward coalition with smaller parties, all of which demandconcessions in return. Second, unlike almost every other post-Suharto president, he does not head his party. Though he hadbeen widely expected to channel his immense popular supportinto forminghisown party, he instead accepted the PDI-P’snomi-nation less than four months before the election. The party’sboss is Megawati Sukarnoputri, herself a former president anddaughter ofSukarno. Both she and his running mate, Jusuf Kalla,are prime examples of the sort of elite Jakarta politicians Jokowiwas widely expected to take on, not accommodate.

Accordingto MrMietzner, MsMegawati “expected absolutereverence” from Jokowi. In her speech at the 2015 party congress

FOR SEVERAL WEEKS last December, In-donesians were glued to their televisions andsmartphones to follow a series of ethicshearings convened by the House of Repre-sentatives, the larger of Indonesia’s twolegislative bodies. Setya Novanto, the col-ourful House speaker, faced allegations ofcorruption. What happened subsequentlyshows the progress Jokowi has made in hisfight for cleaner government. It also showshow much remains to be done.

That Indonesia has a longstandingcorruption problem is all but undisputed. Inthe Corruption Perception Index publishedby Transparency International (TI), Indonesiaranked 88th out of 168 countries last year(see chart). According to TI’s Global Corrup-tion Barometer, 86% of Indonesians thoughtthat their political parties and their judiciarywere corrupt.

The European Union has chastisedIndonesia for its “widespread political cor-ruption”, “corrupt judiciary” and “extensivebribery”. Donors providing money for politi-cal campaigns expect their generosity to berewarded. Indonesians also complain aboutthe innumerable “expediting fees” bu-reaucrats demand for service, and foreignbusinesses worry that Indonesia’s courtsystem may not serve them well.

Other presidents before Jokowi havetried to crack down. The KPK, or anti-graftagency, was set up under Ms Megawati, in2002. It is widely respected, though manycomplain that it is chronically underfundedand understaffed and brings too few cases.Mr Yudhoyono proclaimed a “zero tolerance”policy towards graft at the start of his presi-dency in 2004 and made some progress, butwas beset by scandals within his own party.

Jokowi was the first president to take

office with a strong anti-corruption record,having earned a reputation for clean go-vernance when he was running Solo andJakarta. As governor of Jakarta he postedregional budgets in public places to improvetransparency. He also made it easier for sometaxes to be paid online, which meant feweropportunities for dishonest bureaucrats.Since he became president, he has overseen apush for online procurement, which he claimshas saved his country billions of dollars.

Mr Setya is the consummate politicalinsider. He has served as a member of parlia-ment for Golkar, the party of Suharto, for 17years. Last June he requested a privatemeeting with Maroef Sjamsoeddin, untilrecently the head of Freeport Indonesia, alocal division of Freeport McMoran, an Ameri-can mining firm. Freeportwants to invest $17 billionin its Grasberg facility inPapua, the world’s largestgold and third-largestcopper mine, but only if itsmining licence, due toexpire in 2021, is extendeduntil 2041. Jokowi hasrefused to open negotia-tions on an extensionbefore 2019.

Mr Maroef secretlyrecorded a meeting with MrSetya at which MuhammadRiza Chalid, an oil trader,was also reportedly pre-sent. Mr Setya allegedlyoffered Mr Maroef a deal: inreturn for a 20% stake inFreeport Indonesia, hewould persuade Jokowi toextend the licence, claim-

The Setya show

The roots of corruption go deep and wide

ing that the stake was not for him but forJokowi and Mr Kalla, his vice-president. MrRiza and Mr Setya allegedly boasted that theyhad bought off Darmawan Prasodjo, anassistant to the president’s chief of staff.

Jokowi, Mr Kalla and Mr Darmawanhave all denied involvement in the plot,which came to light when Sudirman Said,Jokowi’s energy minister, delivered therecording to the House ethics council. Whenquizzed by the council, Mr Setya claimed hewas “joking”. Questioned by the attorney-general, he denied asking for shares in Jo-kowi’s and Mr Kalla’s names. On December16th he suddenly resigned the speakership.

Jokowi and Messrs Kalla and Darmawanare widely believed to be blameless. After all,it was Jokowi’s own energy minister who blew

the whistle. And even Jo-kowi’s detractors have neversuggested that he himself iscorrupt—only that he hasbeen too accommodating tovested interests. In someways, his reputation hasbeen enhanced by the affair.For the first time a case oflarge-scale corruption hasbeen adjudicated in public.Many talk of Indonesia’s“Watergate moment”.

Even so, Mr Setya hasfiled a police report againstMessrs Sudirman and Ma-roef for defamation andillegal recording. And notonly does he retain his seatin parliament, he is consid-ered a frontrunner in Gol-kar’s forthcoming leader-ship election.

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she said that the “president and vice-president naturally enforcea political party’s policy line”. The president was not even invit-ed to speak. Since then, says Mr Mietzner, the two leaders have“settled into an uncomfortable and awkwardly polite truce”.

Jokowi’s supporters were also disappointed by his initialcabinet, which included more party appointees than many ex-pected. In subsequent reshuffles some of these were swappedfor technocrats. Many in the business community were especial-ly happy to see the back of the trade minister, Rachmat Gobel,whose penchant for protectionism led some foreign business-men to dub him “the minister of no trade”. He was replaced byTom Lembong, a 44-year-old former investment bankerwho pre-viously ran a private-equity fund that invested in Indonesia.

I say I say I sayThe reformists and the traditionalists in Jokowi’s cabinet

have often clashed, both with each other and with him. Last Au-gust, for instance, the home ministry said it was about to issue aregulation requiring foreign journalists to seek permission fromlocal governments before doing any reporting. A day later Jo-kowi revoked the plan. The government also considered andthen backed away from imposing road-toll taxes, requiring for-eigners working in Indonesia to pass a language test and ban-ning some popular ride-sharing apps. These flip-flops illustratethe central problem with Jokowi’s administration to date: thepresident has the right ideas, but his ministries do not know howto implement them or feel they can ignore orders from the top.

One reason for that may be Jokowi’s style: he is a poor ora-tor and has proved reluctant to engage in the public arena. He ishappiest when solving practical problems. That is an admirablequality in a mayor, but a president set on reforming Indonesia’simmense and powerful administration needs to be more strate-gic and has to rally his countrymen behind him.

As far as Jokowi is concerned, “bureaucracy must serve thebusiness community and investors…we have to simplify it,[and] change the mindset of the bureaucrat.” The appointmentof business-friendly ministers such as Mr Lembong signals thepresident’s serious intentions: the question is whether he canput them into effect.

In one crucial way he has already changed his country’spolitics for the better, blazing a path to the presidency from out-side the Jakarta elite that others could follow. His much-praisedsuccessor as governor of Jakarta, Basuki Tjahaja Purnama,known as Ahok, is the first Chinese Christian to run Indonesia’sbiggest city. The mayor of Surabaya has made her city virtuallylitter-free. The regent ofremote Banyuwangi in east Java has builtmuch-needed roads. These jobs now look like viable launchpads for a national political career.

“Jokowi’s heart is in the right place,” says Andreas Harsono,head of Human Rights Watch in Indonesia. “But he is putting hispolitical capital on the economy.” Taking on vested political in-terests will have to wait. For now, he will concentrate on improv-ing the country’s infrastructure and business climate. 7

AS YOU������

or more likely, sit and stew in traffic) in anyof Indonesia’s big cities, you may see dozens of cyclists in

green helmets and jackets zoomingpast yourcarwindows. Theyare clad in the uniform of Go-Jek, an Indonesian e-commercefirm. Itsname isa playon ojek, the Indonesian word for the coun-try’s omnipresent motorcycle taxis. Its app, launched in January,lets users call a driver for a ride or a delivery. Since then the com-pany has seen, in the words of its young founder, Nadiem Mak-arim, “crazy growth”.

Indonesia is in the midst of an e-commerce startup boom,and no wonder. It is the world’s fourth-largest mobile-phonemarket, with more SIM cards in use than there are people. Two-fifths of its 255m population—halfofwhom are under 30—have asmartphone. But the very success of this boom hints at a broaderfailure. The e-commerce sector is vibrant in large part becausethe government has not yet worked out how to regulate it. Indo-nesia’s attitude towards business has in general been hostile. Itslabour laws are rigid. To start a business takes an average of 47days, compared with four in Malaysia and 2.5 in Singapore.

During the long global boom in commodities, firms wereobliged to tolerate such red tape, but that no longer holds. Indo-nesia exports crude oil, natural gas, palm oil, rubber, gold and tin,and is especially rich in coal. Its main commodity exports tripledin value between 2000 and 2010, says Rodrigo Chaves, theWorld Bank’s country director for Indonesia. As exportsboomed, so did the economy. But the value of commodity ex-ports has fallen by more than half from their peak. BambangBrodjonegoro, Indonesia’s finance minister, laments that coal—

Business and economics

Roll out the welcomemat

To secure the growth it needs, Indonesia must resistits protectionist urges

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which accounts for 11% of exports—now fetches just $50 pertonne, against $150 in 2011.

In the decade to 2014 GDP grew by an annual average of6%,but the commodity bust has slowed the economy. Last year itgrew by just 4.8%, the slowest rate since 2009. This year is unlike-ly to be much better: the 2016 budget sets a GDP growth target of5.3%. Butcompared with manyothercommodityexporters Indo-nesia is getting offlightly.

The value of the rupiah, Indonesia’s currency, against thedollar has fallen by a hefty 30% since mid-2013, but has been sta-ble recently, and other emerging-market currencies have falleneven more steeply over that period. Despite the weak exchangerate, inflation has mostly remained within the central bank’s tar-get range of3-5%. The main impact ofthe rupiah’s fall has been tocurb imports, helping limit Indonesia’s current-account deficit toaround 2% ofGDP last year in the face ofweaker export earnings.A prudent fiscal policy during the boom years has allowed for amodest fiscal expansion to offset the effects of weak exports andinvestment. Public debt is just 26% ofGDP.

The trouble is that GDP growth ofaround 5% is far below the 8% which theWorld Bank says Indonesia requires tocreate jobsfor the 2.5m people enteringtheworkforce each year. Indonesia must re-form its economy to capitalise on the divi-dend from a young and growing work-force. As Mr Chaves cautions, “no countrybecame rich after it became old.”

Indonesia will never function asseamlessly as Singapore; it is too big, di-verse and fractious. But the size of its do-mestic market gives it an advantage oversmaller countries in attracting foreign in-vestment. Encouragingly, it has a track re-cord of liberalising its policies in troubledtimes. When its “command socialism” col-lapsed in the 1960s, it opened resource sec-tors to foreign investment; when oil pricesfell in the 1980s, it developed its capital

markets and relaxed restrictions on foreign ownership; and afterthe Asian financial crisis of 1997-98 it abolished many importcontrols and tariffs.

To his credit, Jokowi realises that Indonesia cannot lift itslong-term growth rate if the economy remains reliant on extrac-tive industries; it needs a broader range of manufacturing andservice industries. If new enterprise is to flourish, Indonesiamust support local entrepreneurship and woo, rather than mere-ly tolerate, foreign business.

Last April the president told an audience at a World Eco-nomic Forum conference in Jakarta that investing in Indonesiawould bring “incredible profits”. On his maiden trip to Washing-ton, DC, last October he brought along an entourage of entrepre-neurs and businesspeople, and said he was interested in joiningthe Trans-Pacific Partnership—a free-trade agreement that wouldcommit his country to significant economic liberalisation.

Tom Lembong, who tookover as trade minister last August,has promised a more liberal approach to economic policy: a reg-ulator’s job, he says, is to “ensure order and get out of the way”,and protection “is for children, the elderly and the vulnerable…not for adults, and certainly not for companies”. Such pro-nouncements mark a welcome shift. Hans�riens, who runs aconsultancy focusing on South-East Asian businesses, says Indo-nesian policymakers “have generallyviewed foreign investmentas a zero-sum game—if the foreigners have it, something is wrongand we have to take it back—instead of thinking, as Singaporedoes, about how we can thrive together. As a result, many inves-tors have given Indonesia a miss, despite its size.”

Jokowi has done his bit to improve the business climate. Atthe beginning of last year he launched a one-stop service for li-censing businesses, which cuts out the need to spend days dash-ing from one ministry to another. And since last September hehasunveiled a seriesofmeasures to help business, including eas-ing some onerous regulations, cutting industrial energy tariffs,streamlining licensing procedures for firms on industrial estatesand providing tax incentives to invest in special economic zones.Mr Bambang says that under Jokowi the average number of daysneeded to open a power plant has declined from 900 to 200(“still short of international standards”, he concedes). The gov-ernment recently revised its “negative investment list” of sectorsin which foreign ownership is banned or restricted, fully open-ing up the rubber, film and restaurant sectors, among others.

The government’s spending plans have become more am-bitious. Soon after taking office, Jokowi’s administration beganrolling out programmes to provide poor Indonesians with gov-

Go-Jek, anIndonesiane-commercefirmofferingrides anddeliveries,has seen“crazygrowth”

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AS THE LOGISTICS manager walks from his firm’s officetrailer to the dockside at Tanjung Priok, Jakarta’s port, he

rails against inefficiency. The port’s equipment is outdated, theworkers are slow and practices slipshod. Shipping companieswant to make a quick buck while stopping their competitorsfrom doing the same, leading to permanent gridlock.

A few small victories have been won. Shippers at other ter-minals must slip stevedores and crane operators a few thousandrupiah to get their containers off the ship and onto lorries, butnot here. He has trained his workers to “do it now, not five min-utes from now”, so they are on track to hit their target of moving28 containers per crane-hour. But he cannot control what hap-pens outside his terminal. Stevedoring associations, shippingcompanies and greedy bureaucrats profit from the inefficiencyof Indonesia’s ports, block reforms and fiercely guard their owninterests, he claims (hence his wish to remain anonymous).

Too few roads, berths and systems; too many ships, carsand grasping hands, leading to high costs and lost time: that is In-donesia’s infrastructure problem in a nutshell. Jokowi has stakedhis presidency on solving it, reasoning that improved infrastruc-ture will help bring foreign investment and good jobs to Indone-sia as well as helping residents of the poor, far-flung east get theirproducts out.

His ambition has been widely cheered. In the short term in-frastructure spending puts people to work and boosts demandfor raw materials; in the longer term his plans offer the chance tomake up for decades of neglect and underinvestment. In themid-1990s Indonesia invested around 8% of its GDP in infrastruc-ture every year. After the Asian financial crisis that share fell toaround 3%, then started rising again slowly. But in 2014, at 6.4%, itwas still below the steady 7% which China, Thailand an��iet-nam had been maintaining.

That underinvestment has sent Indonesia’s logistics costssoaring. Between 2004 and 2011 they averaged 27% of GDP, com-pared with 2���ietnam, 20% in Thailand, 13% in Malaysia and8% in Singapore. Logistics bottlenecks force companies either tostock up on supplies, driving up inventory costs, or suffer largeprice fluctuations, particularly at times ofheavy travel.

In Tanjung Priok in May last year it took an average of 6.4days for containers to leave the port after being unloaded. Im-proved systems have brought the time down to just over fourdays, says Jokowi, but according to the World Bank that is stillaround four timesas longas in Singapore—and this is Indonesia’sbusiest and most advanced port. Many of the country’s 1,700other ports are not even containerised. Such backlogs drive upthe cost of basic goods. And once lorries move the goods out ofport, they are in the twisted, narrow streets of Jakarta, which hassome ofthe world’sworst traffic. In all, the World Bank estimatesthat underinvestment in infrastructure cost Indonesia at leastone percentage point ofGDP growth annually from 2004 to 2014.

Jokowi plans to increase infrastructure spending through-out his first term, peaking at around 7.7% of GDP by 2017. Indone-sia intends to build 24 new seaports and 15 new airports by 2019.Its energy demand could triple by 2030 as it urbanises and its

Infrastructure

The 13,466-islandproblem

After decades of underinvestment, infrastructurespending is picking up at last

ernment-funded health care, free schooling for 12 years and ter-tiary education for students accepted into university, as well as ascheme to provide each of Indonesia’s15.5m poorest householdswith a cash transfer of200,000 rupiah ($14.37) a month.

Jokowi says his administration’s health-care programmenow covers 88m people, but it already faces a huge shortfall. Thegovernment has wisely used savings from cutting fuel subsidiesto fund extra capital spending. But the budget deficit still wid-ened to 2.8% of GDP, perilously close to the legal limit of 3%. Ifpublic spending is to increase further, the government will needto raise more revenue.

That will not be easy. Most workers and employers pay lit-tle or no tax. Mr Bambang estimates that only 27m of Indonesia’s255m people are registered taxpayers, and in 2014 just 900,000 ofthem paid what they owed. Much of the fault lies with Indone-sia’s Byzantine tax system. The country’s tax inspectors arepoorly paid, which makes them easier to bribe. Last year Indone-sia collected just 82% of its targeted tax revenue, leaving it with atax-to-GDP ratio ofaround 10%, compared with around 13-15% forits ASEAN neighbours and near 40% in western Europe.

Government officials claim that they want to broaden thetaxpayer base, but big companies say that they are beingsqueezed harderby the taxman because they are an easier target.A steady stream of new protectionist rules suggests that otherbusiness-bashing instincts still hold sway. A law requiring thatby 2017, 30% ofall parts for smartphones and tablets sold in Indo-nesia must be locally made took effect last summer. Last Augustlimits on cattle imports sent beef prices soaring. Revisions to thenegative investment list eased restrictions on 30 sectors butboosted them in 19 others. Indonesia’s bureaucracy, complainsone foreign businessman, remains “oriented towards controlrather than facilitation”.

Where there has been reform, it has not always been wellimplemented. The one-stop shop for licensing might save a bit oftime, but many business folk say that the rules are confusing. Li-cences are still cumbersome and onerous. Shell, for instance, hasaround 80 service stations in Indonesia, mostly around Jakarta,for which it needs around 1,500 permits—for safety, water, fireprotection, site use and so forth—that must be renewed annually.That takes dozens ofpeople to manage.

Investors often complain that the welcome message fromthe president has not reached his ministries or local govern-ments, or has arrived too late to prevent confusing about-turns.Go-Jek got a fright in December when the transport ministry de-clared that “services that demand payment using a private vehi-cle are not legal.” A day later Jokowi publicly chastised his tran-

sport minister and rescindedthe ban. Other sectors haveseen similar flip-flops, givingthe impression of a chaotic ad-ministration with no clear poli-cy direction.

et this has already begunto change following severalcabinet reshuffles, and may im-prove further as the govern-ment settles in. And in one im-portant regard, Indonesia hastaken a giant step forward.Whereas past governmentsfailed to invest adequately ininfrastructure, particularly out-side Java, Jokowi has made thebiggest push ofhis young presi-dency in this field. 7

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middle class expands, so over the next five years it wants to add35GW ofpower, doubling total installed capacity in a decade.

It also has plans for 65 dams, 16 of which are already underconstruction. In March last year work started on the Keureutodam, designed to boost agricultural productivity in Aceh. LastSeptember fields were flooded for the massive Jatigede dam inWest Java, after 20 years of delays. Once complete, the dam willirrigate 90,000 hectares of rice paddy, giving farmers two har-vests a year instead ofone.

Last April, also after many delays, construction began onthe Trans-Sumatra toll road, a $23.1billion highway that will con-nect Aceh and Lampung, on the northern and southern tips ofIndonesia’s largest island. The Trans-Java toll road, running fromeast to west across Indonesia’s most populous island, is sched-uled for completion in 2017, but some sections are already fin-ished and have cut travel times dramatically. Driving from Jakar-ta to the town of Subang in west Java, for instance, used to takearound six hours, but on the new highway connecting Jakartaand Cikampek it takes less than two.

It has not been a straightforward job. This particular sectionof the Trans-Java toll road runs through five regencies, each ofwhich had its own team working on the project. That called for afurther team to co-ordinate all the others. It took nine years tobuild 73 kilometres ofhighway.

Jokowi complains that local governments are sitting on tril-lions of rupiah in unused infrastructure money from the centralgovernment, which can neitherspend the moneyon theirbehalfnor tell them what to do with it. All he can do, he says, is cajoleand hector them.

Ocean viewHis biggest bet, though, is on maritime infrastructure. In his

inaugural speech he laid out his ambitions: “We have turned ourbackon the seas, oceans, straits and bays for too long…[They] arethe future of our civilisation…We have to work as hard as possi-ble to turn Indonesia into a maritime nation once again.”

That makes sense: Indonesia, after all, is the world’s biggestarchipelago, with 13,466 islands spanning some 5,000 kilo-metres. It has the world’s second-longest coastline after Canada,an exclusive economic zone of 200 nautical miles and around93,000 square kilometres of inland waters. Yet with all those re-sources it exports just $4.2 billion-worth of fish annually, com-pared with $5.7 billion for Vietnam and $7.2 billion for Thailand,both ofwhich have smaller coastlines and less territorial water.

Indonesia claims that this is partly because other countries’

vessels are plundering its territorial wa-ters. Last year the government estimatedthat90% ofthe boats in Indonesian waterswere fishing illegally, costing the countryaround $20 billion annually in lost rev-enue. Shortly after being sworn in as fish-eries minister, Susi Pudjiastuti—a tattooed,chain-smoking divorcee who founded alarge charter airline and had never beforeheld political office—seized and blew up(having first removed the crews) around40 vessels from neighbouring countriesfound fishing in itswaterswithout permis-sion. Since then dozens more have beensunk. This has proved popular with Indo-nesians and, according to Ms Susi’s minis-try, effective, causing a marked decline inthe number ofvessels fishing illegally.

Apart from repelling outsiders, Indo-nesia also hopes to wringmore value from

its waters. The government has banned bottom trawling, sellingundersized crustaceans and fishing in tuna breeding grounds tokeep itsfisheries sustainable. It also plans to build salt-harvestingand seaweed-processing facilities, as well as cold-storage units tokeep catches fresh longer. These investments will help furtheranother of Jokowi’s goals: spreading prosperity eastwards, to In-donesia’s most far-flung islands.

Most of Indonesia’s people, wealth and economic activityare concentrated on densely populated Java; the rest of the coun-try, above all the islands past Bali, just east of Java, has felt ne-glected. GDP per person per year in Jakarta is roughly 41.2m rupi-ah ($2,890); in Papua, Indonesia’s easternmost province, it is12.3m, and in Maluku just 2.8m. The hope is that better infrastruc-ture will help bring down the cost ofbasic goods in the east, gen-erate better jobs—particularly in processing local raw materials—and make it cheaper to get goods out.

Many Indonesia-watchers turned sceptical in the first halfof 2015 after lots of projects had been announced, tendered, andcontracts handed out, but little money had been disbursed. Butin the second half of last year infrastucture spending picked up.Under Jokowi’s master plan, 30% of infrastructure spending willneed to come from the private sector; PwC, a consulting firm,thinks that the private sector’s share may need to rise to as muchas 50%. In the current fiscal year the World Bank has approved$800m in infrastructure loans to Indonesia, with another $950mpending. The Asian Development Bank has committed itself tolending $2 billion. In December Japan’s development agencylent Indonesia around $535m for two power stations.

But ground-breaking has so far been painfully slow, andeven if Jokowi can get all the funding he wants, it still may proveinadequate. McKinsey, another consulting firm, estimates thatIndonesia will have to spend at least $600 billion over the nextdecade to meet its infrastructure needs. And much ofIndonesia’sbureaucracy has stubbornly resisted Jokowi’s calls for speed,transparency and efficiency. Land-acquisition laws are tortuous,and everything takes an inordinate amount of time.

Planningfor the Jakarta-Cikampeksection ofthe Trans-Javahighway, for instance, began in 1997; the concession was signedin 2006; land acquisition began in 2009; construction did beginin 2013; and even nowthe highwayoperatorand numerous land-owners are still fighting each other in court. An amended lawpassed last year streamlines the acquisition process and opens itup to foreigners, but any improvement will start from a low base.As with everything else, the question is not so much what Jo-kowi wants to do as what he will be able to do, and how soon. 7

The Economist February 27th 2016 7

INDONESIA

2

A wealth of coastline

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8 The Economist February 27th 2016

SPECIAL REPOR TINDONESIA

IN 2009 SUSILO BAMBANG YUDHOYONO, in his secondinaugural speech as president, boasted that Indonesia

could “exercise its foreign policy freely in all directions, having amillion friends and zero enemies.” Its foreign-policy goals, hesaid, were “advancing multilateralism through the United Na-tions and creating harmony among countries”. That may havebeen a little glowing. Mr Yudhoyono did take a more active rolein climate-change talks and within the Association ofSouth-EastAsian Nations (ASEAN), and he founded the Bali Democracy Fo-rum, an annual talking-shop for Asian democracies. Yet heseemed to favourmultilateralism notasa meansoffurthering In-donesia’s interests but as an end in itself, and as a way to avoidmaking difficult decisions.

His successor has adopted a markedly different stance. Jo-kowi’s inaugural speech laid out a vision of an “independentand active foreign policy dedicated to thenational interest”, an implicit rebuke to hispredecessor. And after returning from hisfirst foreign trip as president, to an Asia-Pacific Economic Co-operation (APEC)summit, Jokowi asked: “What’s the pointofhaving many friends but we get only the disadvantages?”

Some saw this remark as evidence of Jokowi’s lack of so-phistication: Jokowi had no previous foreign-policy experienceand the subject played no part in his presidential campaign,though his foreign minister, Retno Marsudi, has been in the dip-lomatic service for her entire career. People close to Jokowi sayhe has little patience for formal summits with their protocols,glad-handing and anodyne statements, preferring focused, prac-tical one-on-one meetings with other leaders.

The world got a taste of Indonesia’s new assertiveness lessthan three months after Jokowi took office when he approvedthe executions of five foreign drug traffickers, despite pleas fromtheir governments. Seven months later Indonesia executed an-other seven foreign traffickers, including two Australians (mem-bers of the infamous Bali Nine trafficking ring). Mr�udhoyono,who had introduced a partial moratorium on executions, was

criticised at home at the time; many felt he was giving in to for-eign pressure. Jokowi’s decision to execute the two Australiansenjoyed widespread public support in Indonesia. Abroad themove triggered diplomatic protests, but seems to have done littledamage to Indonesia’s international relations.

Ms Retno, the foreign minister, says Jokowi is pursuing a“more concrete” foreign policy, and outlines four priorities. Thefirst is to safeguard Indonesia’s territorial integrity. That couldlead to confrontation: forexample, Indonesia has at least ten out-standing land-border disputes with Malaysia.

More pressingly, China’s claims in the South China Seaoverlap with waters claimed by Indonesia around the Natuna is-lands, offthe northern coast ofBorneo, which are rich in natural-gas deposits. Ms Retno insists the islands “belong to Indonesia.Done. If there is a competing claim, come talk to us.” She says In-donesia wants to develop the regional gasfields. China recog-nises Indonesian sovereignty over the Natunas themselves butclaims the waters around them. Last September the Indonesiandefence minister announced plans to upgrade the Natunas’ portand runway to accommodate warships and fighter jets.

A second foreign-policy priority is to protect Indonesiansabroad, including thousands of women working as domesticsand men as manual labourers in Malaysia and the Gulf States.Third, Ms Retno makes it clear that its ambassadors are expectedto promote Indonesian exports and inward investment.

The last item on Ms Retno’s list is “international involve-

ment”. That was Mr Yudhoyono’s top priority, but the currentgovernment prefers to concentrate on specific instances—nota-bly counter-terrorism, and the risk posed by Islamic State (IS) tothe world’smostpopulousMuslim country. Indonesia is roughly88% Muslim, mainly Sunni but with some Shias and Ahmadis;the other five officially recognised Indonesian religious groupsare Catholics, Protestants, Hindus, Buddhists and Confucians(see chart). By tradition, Indonesianspractise a syncretic, tolerantform of Islam, and the country respects religious differences.

Some complain that this is starting to change. Shias and Ah-madis say they are increasingly being targeted and harassed. MsRetno insists that Indonesia’s two biggest civil Muslim groups,Nahdlatul Ulama and Muhammadiyah, offer “a counterscript toeliminate terrorism [and] sell the virtuesoftolerance and moder-ation”. Even so, terroristshave recentlystruck: on January 14th anIS-inspired attackon Western and police targets in central Jakartakilled eight and wounded at least 23.

Sidney Jones, an expert on South-East Asian security whoheads the Institute for Policy Analysis of Conflict, a think-tank,estimates that 250 Indonesian men are currently fighting with ISin Syria. Some 2,000 Indonesians have publicly proclaimed alle-giance to the organisation. Jemaah Islamiyah, a militant Islamistterrorist group active in South-East Asia, bombed several West-ern targets in Indonesia between 2001 and 2009, but in recentyears its sporadic attacks have focused on the police and thearmed forces.

Given the size of Indonesia’s population, the number ofpeople involved in terrorism is tiny. For all the country’s flaws, itremains a largely stable, open, tolerant society without a seeth-ing reservoir of frustrated, underemployed young men open toradicalisation. If Jokowi’s foreign policy can keep it that way, itmay do more to ensure peace at home and in the region than anynumber ofwell-meaning summits. 7

Foreign policy

Less talk, more action

Indonesia’s stance towards the rest of the world hasbecome more assertive

Jokowi asked: “What’s the point of having many friendsbut we get only the disadvantages?”

The Economist February 27th 2016 9

INDONESIA

IT WAS ONE of the most important trips ofhis young presi-dency. Last October Jokowi and a bevy of advisers and

businesspeople went to Washington, DC, to meet BarackObama. They were due to go on to Silicon Valley to show off In-donesia’s burgeoning startups. But as his team flew west, Jokowiflew east, summoned home by a crisis: Kalimantan and Sumatrawere blanketed by the haze ofhundreds of thousands offires.

Such fires rage every year, but in 2015 a dry spell caused bythe El Niño weather pattern made them especially severe.Smoke settled over Singapore for months and even reachedCambodi���ietnam and the Philippines. At least 2m hectares offorest were burned. Dozens of people were killed and hundredsofthousandssickened. Formuch oflastOctobergreenhouse gas-es released by those fires exceeded the emissions of the entireAmerican economy. The lossesoverfive monthsoffiresamount-ed to around 2% of the country’s GDP.

Last year was worse than usual, but only in degree, not inkind. Between 2001 and 2014 the country lost 18.5m hectares oftree cover—an area more than twice the size ofIreland. In 2014 In-donesia overtookBrazil to become the world’sbiggestdeforester.

One of the reasons for those forest fires is economic. Thecountryproduceswell overhalfthe world’spalm oil, a commod-ityused in cookingand cosmetics, asa food additive and asa bio-fuel. It accounts for around 4.5% of Indonesia’s GDP, and de-mand is still rising. To meet it, Indonesian farmersset fires to clearforest and make way for new plantations. Often these forestsgrow on peatlands, which store carbon from decayed organicmatter; in tropical regions these hold up to ten timesas much car-bon as surface soil. Draining peatlands releases all of that car-bon. The peat also becomes a fuel, so it is not just felled trees thatare burning but the ground itself.

But politics also plays a part. The government’s response tolastautumn’shaze wasno better than ithad been under Jokowi’spredecessors. The presidentdeclared a moratorium on peatland-development licences and called for peat forests to be restored,even as his agriculture minister pointed out that burned peat-

land can be used for corn and soyabean planting. Neither set ofcomments made any discernible difference on the ground in Su-matra and Kalimantan. To cap it all, Jusuf Kalla, the vice-presi-dent, came up with a creative response to Singapore’s com-plaints about the air pollution: “For 11 months our neighboursenjoyed nice air from Indonesia and theynever thanked us.” For-tunately for Indonesia (and the planet) the rainy season put anend to the mayhem in late October.

Why it won’t stopYet the reasons for the fires have not gone away. Slash-and-

burn land preparation is cheap. Indonesia’s land-use laws arecomplex and have been inconsistently interpreted and applied.There is no agreed map showing all plantations and (often com-peting) claims of ownership. Responsibility for developing andapprovingplans for forest use is spread amongat least three min-istries, along with the national parliament, as well as provincialgovernors and district heads, local parliaments and forestry offi-cials. These groups rarely co-ordinate their plans, and their inter-ests often clash. The president and national ministers may un-derstand the benefits of conservation, but local officials havelittle interest in curbing their revenues for a nebulous goal suchas “sustainability”.

Directives from the top often go unheeded at the bottom,thanks to corruption and lack of political will. Back in 2010 Nor-way pledged $1 billion in conditional aid to Mr�udhoyono tohelp Indonesia stop deforestation, but the conditions were notmet and not much has been paid out.

Civil-society groups have had some success. At least 188 In-donesian palm-oil companies have made some sort of sustaina-bility pledge, including five large multinational firms that in 2014signed the Indonesian Palm Oil Pledge (IPOP), which commitsthem to avoiding deforestation and planting oil palms on peat-land. Together those five firms account for 80% of Indonesia’spalm-oil exports.

All the same, deforestation continues. Perversely, it mayeven have increased temporarily, as companies cleared as muchland as they could before the agreement took effect. Besides,opaque supply chains allow companies to buy palm oil fromsuppliers not bound by IPOP.

Glenn Hurowitz at the Centre for International Policy saysthat when big palm-oil companies are shown evidence of defor-esting, they respond. But that kind ofmonitoring is done only onan ad-hocbasis. It isno substitute forclearer land-use laws, betterlocal governance and more enforcement on the ground. And forthose things to materialise, Jokowi will need to give a strong leadand make sure others follow. 7

Forests

A world on fire

Until politicians call a halt, Indonesia’s forests willkeep burning

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10 The Economist February 27th 2016

SPECIAL REPOR TINDONESIA

NINETEEN YEARS AGO the Asian financial crisis left Indo-nesia in dire straits. Between July1997 and January1998 the

rupiah lost 80% of its value against the dollar. Shares plunged,bankswere nationalised, inflation and unemploymentsoared. Itseemed like a disaster, but in retrospect many Indonesians see itas a blessing. In the wake of the crisis, Indonesia introduced ahost ofoverdue reforms.

Today there is no crisis, but the country is being held backby a set of interrelated problems that prevent it from doing aswell as it might, above all low commodity prices, slow globaltrade and limp demand from China. Fortunately, Indonesia is ina better position than many other commodity exporters toweather the storm. The World Bank expects its growth to beabove 5% both this year and next.

Rising wages in China are offering Indonesia the chance topick up some labour-intensive manufacturing for export. But In-donesia’s neighbours also want that business, so Indonesia willhave to compete on policy and merit. To prosper in this new en-vironment, it must act faster and more boldly to seize the oppor-tunities on offer.

Jokowi, to his credit, understands this: “Now is the era ofcompetition,” he says. “Good quality, on-time delivery and com-petitive prices are all important.” Asked which country’s devel-opment models he most admires, he mentions Singapore, theUAE an��ietnam.

But Indonesia is a different sort of place: huge, diverse andincreasinglyunwieldy. ResidentsofJakarta send outmore tweetsthan those of any other city on earth, yet around one-fifth of thepopulation does not even have access to electricity. In her book“Indonesia Etc”, Elizabeth Pisani writes: “Indonesia’s diversity isnot just geographic and cultural; different groups are essentiallyliving at different points in human history, all at the same time.”

Travelling from Jakarta to theMaluku islands can seem likegoing back in time.

Indonesians have enthusi-astically embraced democracy;in each five-year cycle they votein a dizzying array of separatepresidential, parliamentary andlocal elections. When Suhartoresigned, Indonesia had 26 prov-inces and around 300 regenciesand cities; it now has 34 and 514,respectively, and each regencyor city has its own parliament orcity council.

Jokowi’s supporters pointto the admirable progress he hasmade in his short time in office:ending fuel subsidies, making iteasier and quicker for privatebuyers to acquire land, openingsectors previously closed to for-eign investors and, perhapsmost important, setting an ex-ample of graft-free leadershipfor others to follow. Infrastruc-ture spending has recently accel-erated and the outlook forgrowth is positive.

But not everyone is con-vinced. Mr�udhoyono, thedoubters say, also showed greatpromise at the beginning of his decade in office, but it ended indisappointment. They point to the gap between targets and re-sults so far in infrastructure, tax collection and growth rates. “In-donesia is the country of the future,” says one disillusioned for-eign businessman, “and it always will be.” That is too cynical.Still, the crucial question isnot so much what Jokowi wants to dobut what he can deliver. Two main scenarios are emerging.

Way to goIn the first, infrastructure investment continues to acceler-

ate. By 2019 Indonesia has highways spanning Java and Sumatraand ports dotted across the east. Messrs Lembong and Bambangpress on with deregulation and Jokowi holds out against protec-tionist measures from parliament, keeps control of his more re-calcitrant ministries and maintains his onslaught against corrup-tion. Manufacturing once again becomes the biggest contributorto Indonesia’s GDP. He returns Indonesia to 7% growth, and ap-preciative voters re-elect him in 2019, endorsing economic liber-alism for the first time in the country’s history.

In a second scenario, things on all these fronts go much lesswell. Jokowi is unable to push through his reforms and by 2019growth isbelow5%. He loses the election to a candidate favouredby the old guard and Indonesia is back to business as usual—ex-cept that nobody even calls it the country of the future any more.

In real life the outcome will no doubt fall somewhere in themiddle. Jokowi has made a career of defying expectations, andhe is playing a long game. But raising growth to 7% through ex-port-led manufacturing will be a challenge. Geography puts In-donesia at a logistical disadvantage, and other South-East Asiancountries such as Vietnam and Thailand do better on deregula-tion and infrastructure. By the time of the next election, Indone-sia’s demographic dividend will have a scant decade to run. Jo-kowi has much to do, and little time to get it done.7

Looking ahead

The country of thefuture

It will take ruthless determination, as well as luck, torealise Indonesia’s potential

Technology and politics March 26thBusiness in Africa April 16th International banking May 7thMigration May 14th

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