Analysis | G20 Osaka: with US vs China on centre stage, an opportunity for Indonesia’s Widodo

While Vietnam has benefited from the trade war between the economic superpowers, Indonesia has been hurt
In Osaka, a newly emboldened Widodo has an opportunity to push his economic agenda

G20

Siwage Dharma Negara

Published: 11:15am, 29 Jun 2019

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The decision by Indonesia’s Constitutional Court this week to uphold the result of April’s presidential race comes at a perfect time for President Joko “Jokowi” Widodo.

Its rejection of claims by losing candidate Prabowo Subianto that the vote was marred by “structured, systematic and massive” electoral fraud sends both a message that Indonesia remains committed to democracy and the rule of law and a positive signal to markets after a long and sometimes-controversial election process.

It also boosts Widodo’s legitimacy as leader of the world’s 15th-largest economy just as he meets other global leaders in Osaka for the G20 summit this weekend.

The meeting offers an opportunity for Widodo to pursue opportunities in trade, investment and infrastructure development, in line with the country’s aim of growing from being the 15th-largest economy in the world to the seventh by next year – in line with a 2012 McKinsey projection.

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To meet this goal, the country must grow faster, which means attracting more international investment – not an easy task amid an unpredictable global economy and rising protectionism.

Indeed, it’s this unpredictability that is likely to dominate proceedings at the two-day summit, large parts of which are likely to be consumed by the trade dispute between the United States and China that threatens global growth.

Still, while most eyes are on the clash of the titans, Indonesia has the opportunity to position itself as a representative of developing economies and particularly the Association of Southeast Asian Nations (Asean).

Indonesian President Joko Widodo. Photo: AFP

An emboldened Widodo – who recently played a large role in getting Asean to accept the concept of the Indo-Pacific – could play a key part in pushing for regional economic cooperation, such as participation in the Regional Comprehensive Economic Partnership (RCEP). Doing so would be no mean feat as it would require getting group members to agree on various contentious issues such as rules of origin, movement of people and intellectual property rights. But the opportunity is there for Widodo to take; note that Indonesia has been appointed Asean coordinator for negotiating the RCEP. The G20 summit, whether through plenary sessions or bilateral meetings on its sidelines, offers Widodo opportunities to seal deals with potential economic partners and also to promote his ambition to accelerate the development of Indonesia’s digital economy.

The summit offers a strategic opportunity to attract much needed foreign investment to Indonesia. According to the Investment Coordinating Board, BKPM, last year foreign investment inflows declined by almost 9 per cent year-on-year due to global economic disruptions and the uncertainty over the elections. Moreover, in line with the rising trade tensions between the US and China, which have affected Chinese growth, Beijing’s investments in Indonesia fell 29 per cent to US$2.4 billion last year. That development has triggered a sense of alarm among policymakers that Indonesia might have lost its attractiveness and competitiveness to foreign investors. Vietnam, for instance, is widely seen as having benefited from the trade tensions between China and the US, so what is it that’s making Indonesia less attractive to investors?

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There are many factors driving investors away. One of the main reasons is that Indonesia has been reluctant to open up its economy. Concern about protecting local industries and SMEs, local jobs, and national security are often cited as the rationale for a number of trade barriers. Unlike Vietnam, Indonesia is not keen on joining major multilateral trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. And even when it comes to RCEP, some domestic players – for example, business associations and technical ministries – remain unconvinced of the benefits.

Then there is the fact that Indonesia’s trade and industrial policies are driven by pragmatism, so it tends to pick bilateral trade and investment deals that are beneficial for its domestic economy, such as China’s Belt and Road Initiative, which is seen as supporting Widodo’s economic agenda of promoting infrastructure development, revitalising domestic industry and improving connectivity.

This pragmatism may constrain Indonesia’s ambition to be a significant player on the regional and international stage.

The G20 Osaka Summit takes place this weekend. Photo: AFP

Having said that, Indonesia also has its own internal challenges. Unlike Vietnam, it has a democratic system and a decentralised governance that mean it can be challenging for the president to execute his policies. He needs to balance the interests of various actors, make concessions and compromise on his policy agenda. Often stability and consensus are perceived as more important than genuine reform on such issues as energy subsidies and labour reform. The policymaking process is often plagued by rent-seeking deals and conflicts, either between the government and business, the government and society, or between the central and local governments.

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Bottom-up policymaking may be less efficient but it is critically important for ensuring political stability in a very diverse society. Ignoring the public comes with a cost few leaders can afford to pay.

For his second term, Widodo has promised to continue his agenda of developing infrastructure and human capital, revitalising and diversifying the industrial base, and pursuing more equal regional development. It is a similar manifesto to his 2014 nine-point development programme (Nawacita). But whether he can be even bolder in pushing the critical reforms needed to improve the business environment in the country remains to be seen.

Widodo himself has said he is unburdened as this is his last term and he will go all out to ensure the economy grows faster.

For this to work, he must show stronger leadership and political commitment in pushing for difficult reforms. He needs to reform the labour market, bureaucracy and state institutions, and resist protectionism in the trade of goods and services, and strengthen environmental laws. In short, Widodo has much work ahead of him – and it starts in Osaka this weekend. ■

Siwage Dharma Negara is a senior fellow at the ISEAS – Yusof Ishak Institute

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