The False Promise of Indonesia's Economy | World news

In politics, repetition is an important part of any campaign. But for Indonesian voters who go to the polls on February 14 to elect a new president, one pledge has become less familiar. Candidates leading the world's third-largest democracy have now, for two decades, promised to raise the country's growth rate to 7%.

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Outgoing President Joko Widodo, known as Jokowi, was elected in 2014 on such a promise. So did his predecessor, Susilo Bambang Yudhoyono, who took office in 2004. Former Central Java governor Kanjar Pranovo has a 7% growth target. Prabowo Subianto, Indonesia's defense minister and frontrunner, has suggested that double-digit growth is possible.

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So far, two decades of promises have not been delivered. Indonesia's economy grew by about 5% last year, close to the average rate over the past two decades. The country's last 7% expansion was in 1996, the year before the Asian financial crisis (see Chart 1). Since Indonesia's transition to democracy in 1998, promises of greater growth have been more common than policies promoting such a transition.

The outgoing president has an impressive record. A decade ago the country was one of the „fragile five,” a group of emerging market economies vulnerable to high interest rates abroad and a strong dollar. Today its current account is roughly balanced and its external debts are modest. After legislative and legislative speed bumps, Jokowi's omnibus bill, which eases restrictions on foreign investment and eases licensing, finally became law last year. Indonesia's infrastructure has improved over the past decade, enabling the construction of thousands of kilometers of roads.

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However, the government's proudest achievement is its nickel-based industrial policy. The metal is used in electric vehicle batteries, and Indonesia has the largest deposits in the world. Most raw ore exports have been banned since 2014, with the aim of forcing companies to process and produce in Indonesia. BYD, Ford and Hyundai are among the carmakers 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 China and the West and enormous reserves of a key battery metal are proving to be a powerful combination, there are risks to the approach. One is technical. Cullen Hendricks of the Peterson Institute for International Economics, a think tank, notes that nickel-free lithium-iron phosphate batteries are becoming more popular. Sodium-ion batteries, which do not require nickel or lithium, outperform both types. Last month, Chinese carmaker JAC Motors, backed by Germany's Volkswagen, offered customers the first commercial vehicles powered by sodium-ion batteries.

There are also signs that Indonesian policymakers are learning the wrong lessons from their nickel victory. Despite the obvious opportunities in the sunny archipelago, solar investment is stifled by rules that require panels to contain a large number of locally produced materials. Last year, short-form video platform TikTok was prompted to form a shotgun tie-up with Indonesian e-commerce giant Tokopedia. New Regulations paid $840m for a 75% stake in the company after it shut down its own e-commerce operations in the country.

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Also, Indonesian businesses are stifled by local regulations, despite the reforms introduced by the omnibus law. According to World Bank research, the rules requiring imports to be screened at specific entry points equate to a 22% tariff—more than twice the Southeast Asian average. In fact, non-tariff barriers impose costs equivalent to 60-130% of the cost of computers, electronics and transportation equipment. The election campaign featured some concrete economic policy proposals, but none of the candidates expressed any interest in rolling back many of the country's trade restrictions.

Indonesia's industrial policy undermines the authorities while seeking to attract investors who do not need the country's resources. Malaysia, Thailand and Vietnam, which impose fewer restrictions on foreign investors, are the most obvious destinations for companies looking for alternatives to Chinese manufacturing. As a result, Indonesia's electronics exports are no lower than any other major economy in Southeast Asia; They grew very slowly (see Chart 2). The share of Indonesian exports to the US is lower than that of its local competitors.

Although Indonesia is a relatively young country, this tailwind will disappear during the next presidential election in 2029. The country's dependency ratio — the number of children under 15 and adults over 65 per 100 of working age — will begin to rise steadily from that year. Without effective efforts to boost the economy, the talk of 7% growth will remain illusory.

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