‘Dangerous’ inequality spurs Widodo drive for Indonesia shakeup

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Indonesian President Joko Widodo Indonesian President Joko Widodo

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A “dangerous” level of inequality threatens the world’s fourth most-populous nation, said Indonesian President Joko Widodo, who took power in October after beating a former army general who questioned the country’s democracy.
“Economic growth is very important for my administration, for my people but it’s more important to narrow the gap,” Widodo, known as Jokowi, said Monday in an interview at the presidential palace in Jakarta. “When we invite investors they must give benefit to my people. Also to my country.”
Jokowi, less than four months into a five-year term, said a key initiative will be to expand tax receipts, boosting them to 16 percent of the economy from less than 12 percent now. The leader, 53, underlined his confidence in boosting growth to 7 percent and described a policy program centered around holding government officials to account for impeding investment.
The president has championed a two-pronged strategy of populism aligned with support for business to lift growth and pull millions out of poverty in Southeast Asia’s biggest economy. Arrayed against the ex-furniture businessman are entrenched corruption that has held back infrastructure projects and a splintered political system that leaves him without a parliamentary majority.
“Investors’ expectation toward Jokowi is high, so it needs to be maintained,” Haryanto Budiman, senior country officer for Indonesia at JPMorgan Chase & Co., said in an interview in Jakarta last week. The president needs to attract foreign direct investment in manufacturing and dissuade parliament from passing laws that inhibit investors, he said.
Investor optimism
Record buying by global funds sent the Bloomberg Indonesia Local Sovereign Index of government bonds up the most in more than a year last month, amid optimism Jokowi’s fiscal reforms will improve the nation’s credit quality. The benchmark Jakarta Composite Index of stocks has climbed more than 4 percent since Jokowi’s Oct. 20 inauguration, outperforming markets in Malaysia, Thailand and Vietnam.
With a swelling consumer base thanks to a similar dynamic of urbanization and working-population growth that helped propel China’s advance in recent decades, Indonesia has attracted investment from global powerhouses including Toyota Motor Corp. and Unilever Plc. To attract investors, Jokowi said he will improve mapping to stop land disputes and fire officials who don’t deliver.
Even so, shortcomings in infrastructure have restrained growth, keeping rates far below the 10 percent average that China clocked in the past thirty years -- and even less than the Communist country’s reduced target of about 7.5 percent in 2014. The World Bank and International Monetary Fund project an expansion of less than 6 percent this year for Indonesia.
One goal
Jokowi has recognized the challenge, taking steps to remove fuel subsidies that took up a rising part of the government’s budget in the past decade, and phasing out a benefit that stretches back to at least the 1960s. Instead, he’s channeling funds into the roads, ports and railways Indonesia needs.
There’s only one goal, and that’s “prosperity,” he said, sitting at a desk at Istana Merdeka -- or Freedom Palace -- in front of a bust of India independence leader Mahatma Gandhi. He said the country’s Gini coefficient ratio was about 0.43, and “for me it’s dangerous.”
“When we can deliver our program, for example like the health card and then the education card and then cash transfer to the poor,” then Indonesia can decrease the gap, he said.
While total investment rose more than 14 percent last quarter from a year before and reached 463.1 trillion rupiah ($36.5 billion) in 2014, the nation with the world’s largest Muslim population will need more than $430 billion over five years to build transport links and other infrastructure, according to government estimates.
Bureaucratic bottlenecks
The economic dividends from Jokowi’s changes may take a while. The economy probably grew 5.1 percent in 2014, a five-year low, according to official estimates.
To improve growth, the president will have to show he can do on a national level what he did as Jakarta Governor until last year -- cut bureaucratic bottlenecks.
Jokowi will keep a close watch on government projects, aided by 6,000 auditors, to ensure infrastructure plans progress, he said. Government officials and ministers who don’t deliver will be replaced, he said.
“The most important thing now is how efficiently the budget is used,” said Vaninder Singh, an economist at Royal Bank of Scotland Group Plc in Singapore. “Jokowi will be focused on governance and the main worry is that it could hinder the procurement process and slow spending,” as it did in the Philippines because of President Benigno Aquino’s anti-graft campaign, he said.
Freeing land
The administration has promised to ease land acquisition to spur infrastructure projects, including buying land and establishing a land bank managed by different ministries. Jokowi also began a national one-stop service to coordinate the approval of business permits from more than a dozen agencies. Regional authorities who don’t set up a similar service in their cities or provinces this year will have their funding cut, he said.
The president said he ordered a state-owned plantation company to release land for a port and industrial zone project that has been stalled for eight years. He’ll also create a single map to be used by all provinces to prevent overlapping land concessions.
The efforts will show investors that there is “a better investment climate in Indonesia,” Jokowi said. When infrastructure projects start “foreign direct investment will come to Indonesia,” he said.
Boosting tax
Manufacturing and industry are the focus of efforts to woo foreign direct investment, the president said. While he is prepared to give tax holidays or incentives, revenue officers will have to boost collection from taxpayers, he said, without specifying what policy changes he proposes to raise the take.
“We will increase the number of the taxpayers,” Jokowi said. “We have now around 20 million taxpayers but only 4 million paying the tax. So that means we have around 16 million” not paying, he said.
He will also have to overcome distractions like the controversy surrounding his nominee for national police chief, Budi Gunawan, who was named a suspect by the anti-graft agency. Jokowi said he will decide this week on how to deal with the matter.
Jokowi became president after a campaign pledging zero tolerance of corruption. The onetime head of a furniture business with no political experience came from outside Indonesia’s elite, gaining ever greater popularity since bursting onto the scene in 2005 to run for mayor in his hometown of Solo in central Java.
“We must increase our exports volume and we must reform our bureaucracy. We must invite FDI,” the president said. “My work is for five years so there’s still a lot that hasn’t been done.”

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