In politics, repetition is a crucial part of any campaign. But for Indonesian voters, who go to the polls on February 14 to elect a new president, one promise is starting to sound a little too familiar. Candidates hoping to lead the world’s third-largest democracy have pledged for more than two decades now to boost the country’s growth rate to 7%.
Joko Widodo, the outgoing president known as Jokowi, was elected in 2014 on such a promise. This also applied to his predecessor, Susilo Bambang Yudhoyono, who took office in 2004. This time, two of the three contenders are making similar promises. Ganjar Pranowo, former governor of Central Java, has a growth target of 7%. Prabowo Subianto, Indonesia’s defense minister and frontrunner, has suggested that double-digit growth is possible.
So far, two decades of promises have fallen short. Indonesia’s economy grew by about 5% last year, close to the average of the past twenty years. The country’s last growth of 7% occurred in 1996, the year before the Asian financial crisis (see Chart 1). Since Indonesia’s transition to democracy in 1998, promises of higher growth have been far more common than the policies that might encourage such a shift.
The outgoing president has achievements to show off. Ten years ago, the country belonged to the ‘Fragile Five’, a group of emerging market economies vulnerable to high interest rates abroad and a strong dollar. Today, the current account is approximately in balance and foreign debt is modest. After legislative and legal speed bumps, Jokowi’s omnibus law, which eases restrictions on foreign investment and simplifies licensing, finally became law last year. Indonesia’s infrastructure has improved over the past decade, thanks in part to the construction of thousands of kilometers of roads.
But the government’s proudest achievement is its nickel-focused industrial policy. The metal is used in batteries for electric vehicles, and Indonesia has the largest reserves in the world. The export of most raw ore has been banned since 2014, with the aim of forcing companies to process and produce it in Indonesia. BYDFord and Hyundai are among the automakers now investing in the country. Exports of ferronickel, a processed form of the metal, rose from $83 million in 2014 to $5.8 billion in 2022.
While openness to investment from both China and the West and a vast supply of a vital battery metal are proving to be a powerful combination, there are risks to the approach. One is technological. Cullen Hendrix of the Peterson Institute for International Economics, a think tank, notes that lithium iron phosphate batteries, which do not contain nickel, are becoming increasingly popular. Sodium ion batteries, which require neither nickel nor lithium, could outperform both types. Last month JAC Motors, a Chinese automaker backed by Germany’s Volkswagen, delivered the first commercial vehicles powered by sodium ion batteries to customers.
There are also signs that Indonesian policymakers are learning the wrong lessons from their success. Despite clear opportunities in the sunny archipelago, solar energy investments are being stifled by rules that require panels to contain high levels of domestically produced materials. Last year, TikTok, a short video platform, became involved with Tokopedia, an Indonesian e-commerce company. It paid $840 million for a 75% stake in the company after new regulations halted its own e-commerce operations in the country.
Moreover, Indonesian companies are still hampered by local regulations, despite the reforms introduced by the Omnibus Law. Rules requiring imports to be screened at certain entry points equate to a tariff of 22% – more than twice the average in Southeast Asia, according to World Bank research. Non-tariff barriers impose costs equivalent to 60-130% of the cost of computers, electronics and transportation equipment. The election campaign has produced few concrete economic policy proposals, but none of the candidates have expressed any willingness to lift the country’s many trade restrictions.
Indonesia’s industrial policies undermine officials as they try to attract investors who don’t need the country’s resources. Malaysia, Thailand and Vietnam, which impose fewer restrictions on outside investors, are more likely destinations for companies looking for alternatives to Chinese manufacturing. As a result, Indonesia’s electronics exports are not only lower than those of any other major economy in Southeast Asia; they have also grown more slowly (see chart 2). The share of Indonesian exports to America is lower than that of its local competitors.
Although Indonesia is a relatively young country, this tailwind will disappear by the next presidential election in 2029. The country’s dependency ratio – the number of children under 15 and adults over 65 per 100 working-age adults – will start to rise steadily from that year onwards. Without more effective efforts to stimulate the economy, talk of 7% growth will remain an illusion. ■
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