Date posted: 9/05/2019 10 min read

What a Joko Widodo victory in Indonesia means for Australian business

Indonesia’s President Joko Widodo looks set for a second term. How could his ambitious economic targets impact Australia?

In Brief

  • Indonesia’s President Joko Widodo (Jokowi) looks on track to win a second term in office after the 17 April 2019 elections.
  • Widodo wants to turn Indonesia into an upper middle-income country by 2025.
  • His re-election follows the recent conclusion of the new bilateral free trade agreement between Indonesia and Australia.

By Penny Burtt and Donald Greenlees

Indonesia held the world’s biggest single-day elections on 17 April 2019. More than 150 million Indonesians went to the polls – about 80% of the nation’s 192 million eligible voters.
For the first time, Indonesians voted simultaneously for their next presidential, national and regional parliaments. More than 800,000 polling booths were established across Indonesia’s thousands of islands.

While the official results are not due until 22 May, unofficial polls place current Indonesian president Joko Widodo – ‘Jokowi’ – ahead of his challenger, Prabowo Subianto.
So what can we expect from a second Jokowi term, and what are the key developments for international business to note?

“Indonesia still has an uncompetitive labour force when compared with most of South-East Asia.”

Campaign at a glance

Joko WidodoJoko Widodo. Photo credit: The Government of the Republic of Indonesia;

Joko Widodo was first elected president in 2014. His political trajectory saw him go from furniture maker to well-regarded mayor of the Central Java city of Solo, then governor of Jakarta, and finally, the presidency.

He was seen as a ‘man of the people’. He joined buffet lunch queues and flew economy class. He continued to frequent his favourite restaurants in his hometown Solo, which were simple places.
In his first term as president, Jokowi focused on stability, security and prosperity, and improving the physical welfare and livelihood of everyday Indonesians.

He went into the 2019 election as the clear favourite, bolstered by a substantial coalition of political parties that put him comfortably ahead of his opponent, Prabowo Subianto, a retired general and son-in-law of the Indonesia’s late dictator Suharto.

But while infrastructure, corruption and the economy were all on voters' minds, a backdrop of rising religious intolerance overshadowed much of the campaign.

The issue of Indonesia’s national identity – and whether it is taking an increasingly Islamist path – became a source of fractures and debate.

Jokowi sought a running mate with strong Islamic credentials, and chose as his deputy an elderly cleric, Ma’ruf Amin, who has espoused a range of conservative interpretations of Islam.
Likewise, Prabowo and his businessman running mate Sandiaga Uno openly courted the orthodox Islamic vote, especially in the closing days of the campaign.

Why Indonesia’s millennial voters are so important

Winning the hearts and minds of younger Indonesians has been a focus of the major parties. About 40% of Indonesia’s voters (some 80 million citizens) are aged under 35, according to the Elections Commission.

These millennial voters form a large labour force, which is considerably better educated than the generation before it. They are interested in finding alternative ways of doing things and have embraced social media and the digital economy.

Yet despite significant progress in the quality of education, Indonesia still has an uncompetitive labour force when compared with most of South-East Asia. A UNICEF study found that 55% of 15-year-old students in Indonesia are ‘low achievers’ in reading, which in practice can translate into a large proportion of the workforce being unable to read a factory manual, for instance. In Vietnam, this ‘functional illiteracy’ rate is just 12%.

Another challenge is unemployment. While Indonesia’s unemployment rate is about 6%, according to OECD figures, a bigger issue is underemployment, which may be as high as 35% and reflects serious structural problems for the economy.

Joko Widodo’s plan for more jobs in Indonesia

Indonesia’s ability to create new industries, new markets and new jobs for its young labour force will require both strong social cohesion and the continued opening of the economy.
New sources of investment and trade will be necessary to meet Widodo’s ambitious growth targets. His economic master plan promises to turn Indonesia into an upper middle-income country by 2025.

The president will have a number of drivers of growth at his disposal. In addition to the young and mobile labour force, the International Monetary Fund lists Indonesia’s evolving digital economy as key among its social and economic assets.

But to take advantage of these growth opportunities, Indonesia will need to reduce disincentives caused by excessive and contradictory regulation, particularly at the municipal level. It needs to relax restrictions on markets to encourage trade and investment, wind back a bloated public sector, continue to build infrastructure and invest heavily in the quality of education and skills.
Economic nationalism is still very present and state-owned enterprises have been encouraged to grow under Widodo. According to the IMF, their assets now account for about 50% of GDP, while their return on capital has been falling.

The task of reform may be immense, but there are positive signs. Under Jokowi, Indonesia has made substantial progress in moving up in the rankings in the World Bank’s Ease of Doing Business index, from 106 in 2016 to 73 in 2018.

What an Indonesia free trade agreement means for Australian business

Indonesia is the largest economy in South-East Asia, with the region’s most rapidly expanding middle class. For international businesses, this means thinking innovatively about the best ways to work in and with Indonesia.

The newly signed Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), could provide one such pathway, offering a significant boost to the total two-way trade relationship currently worth A$16.8 billion in 2017-18, according to Australia's Department of Foreign Affairs and Trade.

While it may face challenges in being ratified by Indonesia’s parliament, if it comes into force, the IA-CEPA will enable 99% of Australia’s goods exported to Indonesia to enter duty free or under significantly improved arrangements by 2020.

It will also help ease some of the regulatory burdens for Australian financial services providers, for example by promoting greater transparency around the application procedures in Indonesia.

The agreement also seeks to boost access to modern banking and financial services, with both countries committing to consider financial institutions setting up new services in each nation.

Other service providers could also benefit, including those in education, mining services, ICT, tourism, health and aged care, and legal sectors. In addition, the agreement has new e-commerce outcomes to facilitate trade in the digital age.

“If it comes into force, the IA-CEPA will enable 99% of Australia’s goods exported to Indonesia to enter duty free…”

Yet the agreement’s long-term success will depend on strengthening and diversifying Australia’s investment presence in Indonesia, and in bolstering Australian business’s practical understanding of the operating environment.

To translate these opportunities into success, many Australian organisations will need to develop a deeper understanding of Indonesia’s diverse marketplace and business culture. They will also need to follow the political landscape closely.

Penny Burtt is the Group CEO of Asialink, Australia’s leading centre for the promotion of public understanding of Asia. Donald Greenlees is senior adviser to Asialink.

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