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Newly reelected, President Joko Widodo is now tasked with overseeing Indonesia’s next stage of economic growth. “We are optimistic,” he said in an interview with the Nikkei Asian Review. (Photo by Rie Ishii)
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Jokowi vows to invest in tech skills for an Indonesian 'Golden Age'

Second-term success hinges on company tax breaks and uneasy alliances

JAKARTA -- Indonesian President Joko Widodo appeared at ease as he rode Jakarta's new MRT alongside the Japanese ambassador on June 25, stopping to pose for selfies with passengers.

Riding the MRT has become a signature publicity stunt for "Jokowi," as Widodo is known in Indonesia. The construction of the city's first public metro system, which opened in March, was the pinnacle of the infrastructure drive that characterized Widodo's first term, and this was the sixth time that the president has ridden it with media in attendance.

Widodo, the first Indonesian president to come from outside of the country's political or military elites, was elected in 2014 after a campaign in which he pledged to clean up politics, reform the economy, and to finally address a yawning gap in infrastructure.

During his first four years in office, Widodo oversaw the construction of more than 3,400 km of national roads, 940 km of toll roads, along with new airports and seaports across the archipelago -- no mean feat in a country that has often promised, but failed to deliver such large-scale projects. The MRT project, which allows passengers to bypass the Indonesian capital's relentless traffic, had been dormant for three decades. It was Widodo who finally got it built.

Widodo supporters at a rally in April. After a tense election campaign and a disputed result, his win was confirmed on June 27. (Photo by Kosaku Mimura)

The president's enthusiasm for infrastructure seemed to resonate with the electorate, helping him to victory in presidential elections in April. But the aftermath of the vote was marred by deadly riots in Jakarta, and his opponent, Prabowo Subianto, alleged that there had been widespread malpractice in the race and petitioned the Constitutional Court to overturn the result. That challenge was thrown out on June 27, finally confirming Widodo as the winner.

With the question of his legitimacy settled, Widodo is once again focused on finishing what he started: guiding Indonesia toward realizing its vast, but unfulfilled potential. The country, the world's 16th-largest economy, has for decades been marked as the next great global growth story, and yet has consistently failed to live up to the expectations of investors -- and of its own people.

"We are optimistic," Widodo told the Nikkei Asian Review in a recent interview at the Merdeka Palace in Jakarta. "Our target is to be [in] the world's top 10 [economies] by 2030, and top four by 2045."

"Our target is to be [in] the world's top 10 [economies] by 2030, and top four by 2045"

Indonesian President Joko Widodo
Jakarta traffic passes the in-progress Light Rail Transit system: A massive infrastructure drive marked Jokowi’s first term in office. (Photo by Ken Kobayashi)

The president, in his usual open-collared white shirt, seemed relaxed despite being in the middle of a crowded schedule, after an Association of Southeast Asian Nations summit in Bangkok and before heading to Osaka for a meeting of the Group of 20. Although his second term only officially begins in October, he has already determined what Indonesia needs to do to lay the groundwork for further growth; the next five years, he said, will be crucial.

"We have five matters to be finished," Widodo said, counting on fingers as he laid out the issues one by one. Unsurprisingly, top of his list was "[building] more infrastructure, and fast," but he also pointed to the need to improve the country's human capital, deal with reforms to the business environment, attract foreign direct investment and improve the management of the national budget.

It is the second point on Widodo's agenda -- "developing world-class human resources" -- that could be the most significant, but also one of the most challenging. Improving Indonesia's skills base was one of Widodo's main promises during his election campaign, and something, he said, that he will concentrate on "massively" over the next five years.

Skilling up

Indonesia's lack of high-quality technology skills is acute, persistent, and has defied previous attempts to fix it by throwing money at the problem.

One of the most marked developments in the country's economy over Widodo's first term has been the emergence of its tech sector. The country has produced four "unicorns" -- startups with a valuation of more than $1 billion -- in the form of ride-hailing platform Go-Jek, online travel company Traveloka and internet marketplaces Tokopedia and Bukalapak. Its digital economy was estimated to be worth $27 billion in 2018, the largest in Southeast Asia and three times that of second-place Singapore. But despite these eye-catching successes, there are already signs that the startup scene is hitting the buffers due to a lack of available talent.

Over the past few years, Go-Jek -- the largest of the Indonesian unicorns, with a valuation of more than $10 billion -- has been on an acquisition spree, driven partly by a need to buy up talent. In June, the company bought AirCTO, a Bangalore-based recruitment company that specializes in hiring software developers. It is the fourth such acquisition that Go-Jek has made in India, as the company moves to offshore its research and development arm to make up for the skills gap in its home market.

Go-Jek, Indonesia’s ride-hailing “decacorn,” has been on an acquisition spree, driven partly by a need buy up talent. (Photo by Ken Kobayashi)

According to consultancy A.T. Kearney, Indonesia produces only 278 engineers per 1 million people each year, far behind regional peers such as Malaysia or Thailand, which produce well over a thousand. Indonesia scores below the average on the Organization for Economic Cooperation and Development's Pisa tests, which measure literacy, mathematics and scientific knowledge, and lags behind its regional rivals Philippines, Thailand, Malaysia, Vietnam and Singapore.

Previous administrations -- and the current one -- have tried to address this gap by pouring money into education. Twenty percent of the budget is currently allocated to education, but analysts say that this has had little impact, and the Pisa scores show that more than half of Indonesia's school leavers are "functionally illiterate," according to the World Bank.

On the campaign trail this time around, Widodo promised that he would revamp a national program, Kartu Indonesia Pintar, which gives financial support to low-income families to pay for school fees up to high school level. Launched shortly after Widodo took office in 2014, the government has disbursed 35.7 trillion rupiah ($2.52 billion) to 27.9 million students. Widodo said that he is now looking to extend the program to allow university students to receive allowances.

Speaking to Nikkei, Widodo said that he will at least partly turn to the private sector in order to bridge the skills gap. Before the end of the month, the government will release details of a new "super deductible tax" that will incentivize companies to set up research and development and vocational training facilities in Indonesia.

Employees at e-commerce company Tokopedia, one of Indonesia’s four “unicorns” (Photo by Kosaku Mimura)

Back in May, Industry Minister Airlangga Hartarto told Nikkei that the tax break will be applicable to both local and foreign companies doing research and development in Indonesia, and will be set as high as 200%. That means for every $100 million a company invests, it will receive a tax allowance of $200 million. The tax allowance will also apply to vocational training schools and polytechnics built by private companies, in a bid to drive professional training.

Improving the skills base in Indonesia would also help the country to attract more foreign investment, something that the country needs to offset its persistent current-account deficit. The government is currently pursuing trade agreements that would draw investment into the manufacturing and service sectors.

"The country's labor quality is still below the international standard," said David Sumual, chief economist at Bank Central Asia. "These potential new ventures, especially in the manufacturing and service sectors, need qualified human resources."

Tricky business

Despite its dependence on FDI to balance its budget, and the scale of its economy, Indonesia punches below its weight compared with its regional peers. TS Lombard analysis shows Indonesia's average net FDI to gross domestic product from 2013 to 2017 stood at 2.1%, lower than both Malaysia and Vietnam. FDI in 2018 dropped 8.7% to $29.3 billion, owing partly to preelection caution and fears over the potential impacts of the U.S.-China trade war, but also to bureaucratic entanglements and restrictions on foreign ownership in many sectors.

Overcoming Indonesia's bureaucracy and protectionist instincts in order to create jobs and spur innovation has been a major element of Widodo's pitch to his political base, which is drawn mainly from lower income voters and urban youth. As a former businessman, he has been vocal about the need to pull down barriers for entrepreneurs and international investors. Among his signature policies during the first term was the introduction of an online, one-stop submission scheme for business registration. The country's ranking in the World Bank Doing Business survey improved in every year of Widodo's presidency, save for a single-place slip last year. When he took over, Indonesia was ranked 114th; now it is 73rd.

However, those reform efforts have at times fallen victim to political expedience, in particular in the run-up to the April presidential elections, when Widodo looked to shore up support by pandering to the short-term interests of voters and special interest groups.

Widodo and opponent Subianto launch their 2019 campaigns. Now in his second and final term, the president could have a freer hand in driving through controversial measures.   © Reuters

The most prominent example of Widodo's backtracking came in November last year, when the government announced three key policies under the tagline "Economic Policy Package XVI." Among the reforms proposed was a relaxation of the negative investment list -- a list of sectors where access to foreign investors is limited by share ownership rules. That would have fully or partially opened up previously protected sectors, ranging from internet cafes and fabric printers to telecommunications providers and offshore oil and gas drilling, to foreign investment.

However, the policy attracted criticism from domestic business organizations, while Widodo's political opposition called the revised negative investment list "very dangerous" as it would allow foreign investors to run or fully control businesses they were previously kept out of, to the detriment of local small and midsize enterprises. Widodo backed down and withdrew the reforms.

Now that he is no longer constrained by the pressures of electoral politics -- Indonesia's constitution limits presidents to two terms -- Widodo will have a freer hand in driving through measures that could otherwise have been gifts for his opponents.

"[I] always listen to businessmen friends for designing policies"

Indonesian President Joko Widodo

In his interview with Nikkei, Widodo said he "always [listens] to businessmen friends for designing policies," adding that these reforms and policies "would hopefully make investors more enthusiastic" about putting money into Indonesia. The president promised to cut the country's corporate tax rate from 25% to 20% "next year, or 2021 latest."

Widodo also vowed, for the first time in public, to "revise" the country's labor law. The law is notorious for making it extremely hard for companies to fire employees, even if they are underperforming, and requires companies to pay exorbitant severance packages, often discouraging them from hiring in the first place. As a result, 79% of Indonesia's total nonagricultural employment is classified as informal, according to the World Bank.

Reform at a cost

Even with his victory secured, Widodo will have to lean on former opponents in order to get things done. The April presidential election laid bare the divisions between the two candidates' political bases -- Widodo's working class backers and Subianto's more religiously motivated constituents. Supporters of Subianto, a former army general, angered by the official election result, took to the streets of Jakarta in late May. The demonstration outside of the Election Supervisory Body, or Bawaslu, quickly turned ugly; this was the first time since Indonesia's democratization in 1998 that the city's streets had seen violent protests. Nine people were reportedly killed.

The divisions that drove the violence will linger, and trying to push through unpopular policies, such as labor reforms, adds to the risk that the disputes will flare up again.

To bring the country together, and to build a working administration, Widodo will need to reach across the political divide. That need to find consensus, however, could also hinder his attempts to reform the economy.

April's elections were followed by violent riots, the first since Indonesia’s democratization in 1998.    © AP

After the vote, Widodo met with leading figures from parties who supported Subianto, including Agus Yudhoyono, son of former president and Democratic Party chairperson Susilo Bambang Yudhoyono, as well as Zulkifli Hasan, chairperson of the National Mandate Party. The president has also indicated he is willing to work with the Gerindra Party, of which Subianto is the chairperson. When asked by a local media outlet whether he will allow the party to join the ruling coalition, the president said he was "open to anyone who wants to work together to develop and build the nation together." One senior member of the ruling coalition said that Widodo is preparing ministerial positions for Gerindra politicians.

Political analysts warn that attempts to build too broad a political coalition could limit Widodo's ability to get his reforms off the ground. "The reconciliation plan is merely for [political] stability," said Yunarto Wijaya, political consultant at pollster Charta Politika. "The government coalition will be too big and [have] too many aspirations to be accommodated. ... This will potentially lead to a conflict of vision."

The need to accommodate differing political interests "could put the bigger goal of national development at risk," he added. Those other parties could also pull in different directions as they look toward the 2024 presidential and parliamentary elections.

"Remember that in the president's second term, supporting parties might no longer devotedly support Widodo because they have interests for 2024," Wijaya said. "They need to be populist, while on the other side Jokowi will have nothing to lose in 2024."

University students in Jakarta. Jokowi’s need to accommodate wide political interests “could put the bigger goal of national development at risk,” said Yunarto Wijayah of polling company Charta Politika. (Photo by Ken Kobayashi)

Widodo will need to be decisive if he is to avoid the fate of former President Yudhoyono, or SBY as he is commonly known, who was widely ridiculed by political commentators of being a peragu, or a doubter, who worried too much about avoiding political controversy and failed to take decisive policy decisions.

The current president does have some breathing room, however. The Constitutional Court's decision to uphold his victory in April's election, which has shut down all avenues for Subianto's camp to dispute the poll any further, may give him some of the legitimacy and political capital that he needs to begin the task. But the roots of Indonesia's challenges are deep, and five years may be too short a time for true reform to take hold.

"Every president has visions of reform, but what do we end up with?" said Siti Zuhro, political analyst at the Indonesian Institute of Sciences. "Unless it is a radical reform ... it will take time, more than the five years of another Widodo presidency."

Widodo himself seems confident he can deliver. When asked, during the photo shoot following the interview, to strike a pose that best epitomizes Indonesia going forward, the president crossed his arms. As he did, the president said "Indonesia emas" -- "Indonesia's golden age."

Nikkei staff writers Bobby Nugroho and Ismi Damayanti in Jakarta contributed to this report.

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