Like all countries, Indonesia is shaped by foreign and domestic forces, though these forces are intimately linked. Externally, Indonesia's future will be shaped first by East Asia's economic structure, which is changing as rising costs and government policy in China push industry up the value-added ladder and drive out low-end manufacturers. With its large, literate working-age population and easy access to key international sea lanes, Indonesia is uniquely positioned to benefit from the manufacturing flight from China.
These developments take place alongside important changes in the East Asian security environment — namely, a growing competition among Japan, China and Association of Southeast Asian Nations members for control over the South and East China seas. The more investment Indonesia can attract into its value-added industry and its associated infrastructure, the better suited it will be to take on a leadership role within ASEAN as maritime tensions escalate.
But to take advantage of these changes, Indonesia will first have to resolve some of its domestic issues. The most obvious of these issues is Indonesia's heavy government subsidy regime for consumer goods, particularly for fuel, which has consistently hampered government finances and hobbled Jakarta's ambitious infrastructure development plans. Reducing those subsidies will be politically difficult, especially in a political system as corrupt as Indonesia's.
However, meeting Indonesia's infrastructure needs will require more than expanded government spending. It will also require encouraging foreign investors to sink money into its value-added industry rather than its raw materials industry, on which the country has long relied. In doing so, Jakarta will have to reconcile its own interests with the interests of its investors, for whom infrastructure development is often not an immediately sound business prospect. (Investors are also hesitant to invest in manufacturing outside parts of Java until infrastructure on other islands is improved.)
Indonesia's mineral export ban exemplifies how geopolitical necessities — bringing foreign investment to its value-added industry — do not always overlap with economic propriety. Whoever wins the presidential election will have to encourage and sustain quality foreign investment, bolster domestic use of Indonesian resources, build the state's capacity to effectively carry out large infrastructure projects, fight corruption and roll back unsustainable subsidies. All of these objectives will need to be met before Indonesia can achieve its national imperatives.
The Long-Term Effects Matter More
The winner of the election will not take office until Oct. 9. This means that in the next three months the most tangible consequence of the election will be its impact on investor confidence in and international market sentiment toward Indonesia. A win for Jokowi, who is seen abroad as a pragmatic, uncorrupt and competent manager, would likely lead to increased short-term capital inflows in the third quarter, which could, in turn, strengthen the Indonesian rupiah. It would also help offset the effect of any further increases in the price of oil against the cost of hefty government fuel subsidies and the central government's budget deficit.
A win for Subianto could have the opposite effect, given his campaign's more nationalist tenor, especially with regard to natural resources, which account for approximately 20 percent of Indonesia's exports by value and a sizable portion of the country's foreign direct investment inflows. However, anecdotal evidence suggests that many foreign investors, noting Subianto's gains in recent electoral polls, have softened their earlier warnings on the dangers of his presidency, indicating that the immediate impact of a Subianto win on market sentiment may be more subdued than previously anticipated. Swings in market sentiment, capital inflows and the value of the rupiah are to be expected, though potential electoral unrest in outlying islands could aggravate them. But barring a complete security breakdown in one of Indonesia's larger or more economically significant islands, such as Sumatra or East Kalimantan, any swings in market sentiment will be relatively mild.
In the next 6 to 8 months, the impact of the election will be even less pronounced. The next president will spend most of his first six months in office consolidating his Cabinet, shoring up his and his associates' influence within his governing coalition and defining his administration's policy agenda. In the meantime, his primary task will be to maintain a basic level of economic and social stability throughout the country. This will likely preclude significant attempts to reform the government's subsidy program, and in particular to decisively dial back costly but popular fuel subsidies. It will also lower the potential for a significant easing of the January 2014 ban on exports of raw metal ores, especially in the event of a Subianto victory.
Throughout Subianto's campaign — and throughout Jokowi's, to a lesser extent — the need to expand domestic control over and consumption of domestic natural resources, by government fiat if necessary, has been a key policy theme. Both candidates will be cautious to renege on that theme unless significant progress is made on encouraging or compelling foreign mining firms to invest in building smelters and other infrastructure to support value-added industry. More likely, over the next year Indonesia's new government will employ populist measures to boost its domestic support while gradually creating targeted incentives to encourage foreign investment. Such measures could include well-publicized anti-corruption campaigns or increased government spending on infrastructure, especially in areas where the mineral export ban and slowing global demand for other resources have driven up unemployment.
The election results will be most pronounced over the next 5-10 years. Subianto's campaign revolves around the vaguely defined but persuasive claim that Indonesia needs a strong leader. To this end, he has framed himself and his future presidency as a composite of Sukarno-era romantic nationalism, especially with regard to natural resources, and Suharto-era authoritarian control, actively channeling the one through his speeches and rallies while calling for a return to the social and economic stability provided by the other.
But where Suharto used authoritarian control and political centralization to create a relatively straightforward and secure operating environment for foreign investors, Subianto is more likely to increase domestic control over Indonesian resources. Notably, Subianto is personally and institutionally tied to powerful Indonesian industrial, energy and mining interests. This will almost certainly influence his administration's approach to commercial legislation and regulatory reform.
Just how a Jokowi presidency would govern is harder to say, largely because he is unlike any other national-level leader in modern Indonesian history. He hails neither from one of the country's major political-commercial dynasties nor from the military. He is a mild-mannered furniture salesman-turned-mayor from a medium-sized city in Central Java. And while he is known, and generally beloved, for his apparent freedom from corruption, and for his practical accomplishments as mayor of Surakarta and then as governor of Jakarta, it is unclear whether a Jokowi presidency could reproduce these achievements on the much larger and more complicated stage of national politics. The key question for a Jokowi presidency is whether the president himself, given his near-total lack of an independent power base of his own (aside from popular support in Java), would be able to manage and push beyond the intricacies of Indonesia's coalition-based political system and highly fragmented decision-making process to implement significant fiscal, regulatory and economic reform.
As candidates, the differences between Subianto and Jokowi are substantial. As presidents, they may be less so. The gulf between what they want to do and what they actually can do is wide. Several factors may hinder them, including Indonesia's fractured political landscape, the diversity of its constituencies, the structural economic pressures surrounding economic reform, the investment opportunities opened by the shift of low-end manufacturing away from coastal China, the world's need for Indonesia's natural resources and Indonesia's need for foreign investment. These factors are just as likely to blunt the edge of Subianto's centralizing and nationalist tendencies as they are to hamper Jokowi's efforts to improve government transparency, fight corruption and improve state capacity.
