Survey of Recent Developments

Stephen Howes and Robin Davies

Bulletin of Indonesian Economic Studies, 2014, vol. 50, issue 2, 157-183

Abstract: Outgoing Indonesian president Susilo Bambang Yudhoyono's second-term record is creditable, measured against the targets he set himself in 2010, but deficient in key areas: economic reform, infrastructure investment, and anti-corruption. Indonesia's 2009-14 parliament has been active in economic policymaking, and will leave as its legacy a raft of protectionist legislation. Both presidential candidates, Joko 'Jokowi' Widodo and Prabowo Subianto, have appealed to nationalism in their campaigns, calling for Indonesia to assert its sovereignty and increase its self-sufficiency, but Jokowi's economic platform is more moderate and economically literate than Prabowo's. The incoming president will inherit an economy that continues to slow. Growth is now not expected to approach 6% until 2015 at the earliest. Having engineered a reduction in the current account deficit, Indonesian policymakers now face the more difficult problem of structural fiscal adjustment. Energy subsidies are the most immediate problem, but fiscal reform more generally will emerge as an overriding and unpleasant imperative for whoever wins the presidential election on 9 July. Unless difficult fiscal policy measures are taken, Indonesia will face major trade-offs between deficit control and investment in social programs and economic infrastructure. The new president will struggle to restrict the deficit to the cap of 3% of GDP: a balanced budget will likely not be feasible for several years. He will need to increase the ratio of revenue to GDP and eliminate fuel subsidies-through a more systematic approach than the infrequent price increases of the past. He will need to choose carefully between competing expenditure priorities, such as infrastructure and defence. The new president would also be well advised to tread cautiously in implementing the legal mandates he will inherit, and to work with parliament to avoid further and unwind current earmarking of public expenditure.

Date: 2014
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DOI: 10.1080/00074918.2014.938403

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Bulletin of Indonesian Economic Studies is currently edited by Firman Witoelar Kartaadipoetra, Arianto Patunru, Robert Sparrow, Sarah Xue Dong and Sean Muir

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