Widodo Inherits Legacy of Foreign-Investment Hurdles

October 27, 2014 at 13:41

JAKARTA, Indonesia—Joko Widodo is the first entrepreneur to become president of Indonesia, and his supporters hope his history of pragmatism and disdain for red tape will help him modernize the country’s economy.

But standing in the way of change is a system of entrenched interests, corruption and growing economic nationalism that has limited growth, discouraged foreign investment and left Southeast Asia’s largest economy in the bottom half of World Bank rankingsfor ease of doing business.

Mr. Widodo, a former furniture exporter, has yet to lay out specific economic plans.

“To be honest,” one of his close advisers said, speaking of his economic policies, “none of us know.”

However, there are clues that beneath his action-oriented surface he supports a conventional Indonesian government view of the world that shuns imports, favors state-owned enterprises and restricts foreign activity.

“The prevailing wind in Indonesia is blowing in the direction of reduced foreign involvement in the economy,” said Frederic Neumann, co-head of Asian economic research at HSBC. “There is a risk that President Widodo follows the more restrictive trend set by his predecessor.”

Indonesian politicians have long suggested that foreigners get too good a deal. In recent years, Indonesia has introduced new limits on foreign investment, including declaring oil-and-gas services off limits, restricting foreign employment, forcing many foreign miners to reduce stakes in their companies, and introducing new requirements for local product sourcing. Mining came to a near-standstill this year when the government banned the export of minerals that hadn’t been fully refined in an attempt to force investment in refineries.

Foreign investment has slowed over the past year and while it remains at record levels for Indonesia, it remains proportionally far less than in neighboring developing countries such as Thailand, Malaysia and Vietnam, and even less than in similar large developing countries with their own nationalist history, such as Brazil.

Mr. Widodo needs more foreign investment to fund infrastructure that is breaking at the seams and to plug gaps in the country’s accounts—all the more important with economic growth near its lowest level in four years.

But Mr. Widodo hasn’t publicly made that argument, or any case against the economic thinking that dogs the near-trillion-dollar economy. His infrastructure plans so far target developing more deep-sea ports around the country to spread the benefits of growth to poorer regions.

On balance, said Doug Ramage, Jakarta-based analyst for BowerGroupAsia, the president’s “pragmatism shines through,” and his stated intent to simplify a complex system of regulations and clean up the bureaucracy would help local and foreign businesses alike. But “he has not yet pushed back strongly against the economic nationalism that will hold Indonesia back.”

Companies such as Samsung Electronics Co. and Hon Hai Precision Industry Co. Ltd., or Foxconn, have repeatedly passed on Indonesiaas a site of major manufacturing, citing difficulties in negotiating land acquisition and tax holidays, among other issues. And at a time when companies are exiting China because of higher labor costs, Vietnam, which in proportional terms attracts more than the double Indonesia’s FDI, is emerging as the regional winner.

Mr. Widodo has repeated common refrains that the nation of 250 million people needs higher growth, better infrastructure and added value across sectors. “Investors usually complain about four things,” he said Monday after his inauguration. “Fuel subsidies, infrastructure, bureaucratic reform and electricity. That’s it.”

During presidential debates, Mr. Widodo said he would honor the sanctity of contracts, key for the foreign energy and extractive companies that have spent tens of billions of dollars for decades developing Indonesia’s natural resources such as oil, gas and mineral deposits. He said that upon expiration, he would consider letting state-owned companies take them over.

Mr. Widodo has repeatedly told businesspeople that Indonesia isn’t ready to compete internationally. In a debate, he said that once a Southeast Asian regional free-trade pact takes force next year, the government could still introduce measures to make things “a little difficult” for foreign investors.

Mr. Widodo has suggested that the country imports too much and that he would push efforts to develop local car and defense industries, dreams that go back at least to the former authoritarian ruler Suharto, who was deposed in 1998.

He argues that Indonesia needs to become self-sufficient in agriculture, though such policies introduced by previous leaders have led to price spikes and corruption-inducing quotas on beef and other foodstuffs to protect the development of local agriculture.

Agricultural self-sufficiency, OCBC economist Wellian Wiranto said, “can potentially be read as another area of resource nationalism.”

Mr. Widodo has said he intends to appoint nonpartisan professionals in key ministries and has stated he will cut billions of dollars in fuel subsidies that leave little budget left to fund infrastructure development.

“Our sense is that this administration realizes the immediate and long-term challenges it faces to keep the economy growing,” said Andrew White, managing director of the American Chamber of Commerce in Indonesia.

Corrections & Amplifications

A graphic accompanying this article was removed because it incorrectly stated that foreign direct investment into China totaled 13.3% of GDP in 2013. FDI was 1.3% of GDP according to UNCTAD data.

Source: https://online.wsj.com/articles/widodo-inherits-legacy-of-foreign-investment-hurdles-1413981827