This book is a collection of papers addressing key dimensions of the Indonesian economy in the era of President Joko Widodo (Jokowi), particularly the first 3 years of his administration. In October 2014, Jokowi became only the second directly elected president in Indonesia's history, succeeding Susilo Bambang Yudhoyono (SBY; 2004–2014). Jokowi was re-elected in 2019, after the publication of this volume, and started his second term, set to end in 2024. But in early 2020, the COVID-19 pandemic broke out, upturning everyday life and reshaping government policies. This book paints a comprehensive picture of the state of the Indonesian economy just before the coronavirus shock.
The book comprises an editors’ overview (chapter 1) followed by fourteen chapters by twenty-three authors, mostly Indonesians, discussing respectively, developmentalism, macroeconomic management, fiscal decentralization, the financial system, trade policy, the manufacturing sector, the service sector, infrastructure, education, the labor market, poverty reduction, social protection, food policy, and environmental policy. Overall, it offers a multifaceted understanding of Indonesia's current economic position, particularly because most authors compare the country's performance under Jokowi with that under preceding administrations, and with that of peer countries in Asia.
Although the introductory chapter does not provide a clear overview of the Jokowi administration's attributes, the book's subsequent chapters illuminate them by raising common points. The first is developmental interventionism. Warburton views Indonesia's recent economic approach as “new developmentalism,” characterized by industrial activism, the expansion of state-owned enterprises (SOEs), and state-run welfare. The government's activism is seen by Hamilton-Hart, too, in the financial sector, in urging banks to increase lending, reduce interest rates, and expand subsidized loans for small and medium enterprises (SMEs). SOE centrism is also pointed out in infrastructure investment by Ramayandi and Negara in their chapter on macroeconomic management, and by Salim and Negara in their infrastructure chapter; Wihardja, in her food policy chapter, discusses SOE centrism in the production and distribution of essential food and inputs (e.g. seeds and fertilizer). In trade policies Patunru observes greater levels of nationalism and protectionism, and in the manufacturing sector Kuncoro analyzes the re-emergence of industrial policy that uses more non-tariff measures. The authors are concerned that statism is crowding out private investment and that protectionism is hampering business climates and export orientation.
The second attribute is pragmatism. While Indonesia's developmental interventionism was revived in SBY's second term as Warburton indicates, what distinguishes Jokowi's policy from that of SBY is the combination of interventionism and pragmatism. Jokowi is a business-oriented pragmatist focusing on actions more than plans. One of his boldest policies, Salim and Negara argue, was to reallocate part of the budget away from fuel subsidies and toward infrastructure spending. Further evidence, shown by Manning and Pratomo in their chapter on labor policy, was that the Jokowi government, in a step back from SBY's populist approach, introduced a minimum-wage formula to restrain a rise in wages and deregulated foreign expert recruitment to boost investment.
The third attribute of Jokowi's policy relates to the motto “build Indonesia from the periphery.” Jokowi has paid special attention not only to growth but also to equality, especially spatial equality. While Salim and Negara claim that the strategic focus on off-Java infrastructure is still insufficient, Suryahadi and Al Izzati assert that Jokowi's poverty reduction policy is in line with the motto, in the sense that the elasticity of per capita expenditure growth to per capita GDP growth for the poorest 20% is higher in regencies than in municipalities, and higher outside Java than in Java.
The fourth attribute is a lack of interest in environmental issues. As Resosudarmo and Kosadi accurately point out, in his first term Jokowi failed to include environmental issues in his priority programs; he put forest production above environmental challenges, and demolished institutions in charge of climate change initiatives. This was in stark contrast to SBY, who took the lead in emission reduction internationally and domestically. In Jokowi's second term, however, his administration has changed its stance, making a “sustainable environment” one of its top missions and creating a chapter on environmental issues in its 5-year development plan. Yet the outcomes remain to be seen.
The main value of this book lies in the new findings it offers on the basis of conscientious analysis. For example, first, in the sectoral analysis, the most protected sector in terms of trade policy is food, whereas the least protected is machinery, according to Patunru. In the manufacturing industry, as Kuncoro shows, food processing is increasingly dominant in value-added share and growth, and in export share and growth, though the reintroduction of non-tariff measures hampers its export orientation. These analyses suggest that Indonesia has an inherent advantage in the food sector and underline the significance of optimal policy. Second, Indonesia's service sector, as Anas and Wikapuspita reveal through international comparison, remains less developed and less productive than that of its peers, except in construction and social services. Jokowi's policy is heading in a more open direction, but it has not improved productivity, indicating the need for further utilization of foreign investment and workers in such key areas as logistics, modern business, and higher education.
Third, with regard to policy evaluation, Gonschorek and Schulze, in their analysis of the intergovernmental fiscal transfer system, examine local governments’ incentives. They point out that incentive design in the transfer system is still weak, and that the increased scale of transfers discourages local governments from collecting their own revenue. Jokowi's new 25% requirement for local infrastructure spending can fail to give local governments incentives for pro-growth investment, as it reduces their discretion. Fourth, in the evaluation of education policy, Kurniawati, Suryadarma, Bima, and Yusrina find that the increased budget allocation for education has led only to slow knowledge improvement and a small return on investment, because it has focused on improving teaching skills. The study suggests implementing policies tied to student learning outcomes, and using digital technology to incentivize teachers to teach better.
Fifth, in evaluating effects of wage policy, Manning and Pratomo show that minimum-wage growth is lower in high-wage and urban areas and higher in low-wage and rural areas, hence the spatial wage gap is narrowing under Jokowi. Real average wages, however, have increased more rapidly for regular workers than for self-employed and casual workers. Sixth, in analyzing policy effects on poverty and inequality, Suryahadi and Al Izzati find that, while economic growth under Jokowi is pro-rural, it is more pro-middle class and less pro-poor than it was in the preceding decade, indicating that the urban poor should be paid more attention. This point is even more pertinent now, given the economic impacts of the coronavirus shock. Seventh, in evaluating the policy against illegal fishing, to which the first-term Jokowi government showed strong commitment despite its overall indifference to environmental issues, Resosudarmo and Kosadi conclude that there is no clear evidence that the government's actions reduced illegal fishing or contributed to the long-term development of Indonesia's fishing industry.
The book brings many valuable insights, as discussed above, yet it leaves some questions unanswered. The first question is why unemployment has declined under Jokowi, even in a period of slower growth (5%), and to what extent policies have contributed to this. The generally accepted view is that Indonesia needs 6% growth to absorb its more than 2 million new entrants into the labor market each year. The assumption was that the elasticity of job growth to GDP growth was 0.4, but it has fallen to 0.3 since the end of the commodity boom. The logical consequence should be an increase in the size of the unabsorbed workforce, but the opposite is true. The explanation given by Manning and Pratomo – that it is due to an increase in the number of casual workers and a rise in employment paying below the minimum wage – seems insufficient.
The second question is why poverty has declined during a period of slower growth, and to what extent policies have contributed to it. Under Jokowi, Hill and Negara see slower growth, smaller reductions in poverty, and elevated levels of inequality, but in reality, poverty rates and Gini coefficients fell steadily throughout Jokowi's first term. The finding of Suryahadi and Al Izzati that the economy under Jokowi shows less pro-poor growth looks inconsistent with the decreasing trend of poverty.
The third question is whether or not Indonesia's industrial structure has changed since the period of Dutch disease ended with the commodity boom, in line with the Jokowi government's drive for higher levels of value-adding industrialization. The expansion of the cacao processing industry, as Wihardja describes, is such a change, but the reasons for a sharp drop in upstream cacao bean production are left unexplored. The fourth question is why the functions of Indonesia's financial sector have stayed so low that bank credit or broad money to GDP ratios (financial deepening indicators) are still only 30–40%, having not recovered to the level they were before the 1997–1998 Asian financial crisis, and far below to the levels of more than 100% in most Asian peer countries.
The book pays less attention than it should to digitalization, an area about which Jokowi is enthusiastic. It relates to policies for growth – e.g. ICT infrastructure, innovation, patent, and R&D spending, and also for equality, including online services for education, healthcare, microfinance, and SME business. Another aspect that some chapters should take more account of is that Indonesia's demographic bonus will end in about a decade and the effect this is having on leaders’ policy making. Despite these points, this book is essential for anyone interested in the Indonesian economy.
