Indonesia: on the cusp of a sustainable economic revival

INDONESIA'S economic growth over the last few years has largely disappointed, underperforming its vast potential. This has been partly due to external factors not of its own making, such as the China slowdown and commodity price slump. But a lack of progress in major structural reforms to improve the domestic investment climate has also contributed significantly. Indonesia has essentially missed a golden opportunity afforded by sustained political stability since the Asian crisis and was unable to fully capitalise on its natural advantages such as its ample room for economic development "catch-up", its young population, its huge domestic market and its abundant natural resources.

Indonesia has arrived at an important crossroads. After a rocky start since taking office in October 2014, the government of President Joko Widodo, popularly known as Jokowi, has chosen to chart a path of a more sustainable economic revival. A key turning point was that President Jokowi reshuffled his cabinet in August, barely a year after taking office, and appointed more pro-growth, reform-minded technocrats despite having limited political capital at that time. As a result, policymakers were starting to better coordinate on supporting a recovery. The central bank has been able to reduce interest rates, thanks in part to lower inflation, and this complemented government efforts to improve the quality of its spending, doing away with inefficient fuel subsidies and finally being able to ramp up infrastructure spending.

Importantly, the approach to implementing reforms is now very different. Instead of going for "big bang" change that has a tendency to disappoint, a series of small policy packages - now totalling 12 since September - indicate a more proactive streamlining of regulations to improve the business climate. It also points to a more root-and-branch, targeted approach, which enhances accountability and policy discipline, and hence raises the likelihood of successful implementation.