Difficult economic circumstances have historically led Indonesian leaders to enact economic reforms, leading some to argue that bad times have resulted in good policy. But as Indonesian growth has slowed over the past year, the government has departed from this pattern, and is instead ratcheting up protectionist measures in the form of a variety of non-tariff barriers. These measures are likely to drive up prices for Indonesian consumers at a time when their purchasing power is declining, and undermine the competitiveness and productivity of Indonesian firms. A strong rupiah, anti-foreign sentiment, increased Chinese competition in the global supply chain, and the populist preferences of new Indonesian President Jokowi have all combined to push Indonesia toward protectionism. Despite the negative consequences for Indonesian consumers and firms, these measures are likely to continue under the Jokowi Administration. Indonesia’s recent decision to cut the quota for live cattle imports from Australia has been seen by some as yet another example of how the relationship between Australia and Indonesia is ebbing ever lower. The truth is, however, the decision has less to do with how Indonesia sees Australia than it does with the changing character of trade policy in Indonesia. Indonesia’s attitude to trade and investment in recent years has been characterised as “sitting on the fence.”[1] On the one hand, the country is an active member in the G20, APEC, and ASEAN. Such participation has in the past encouraged domestic policy reforms that ensured Indonesia benefited from greater economic integration with other countries. Since taking office in October 2014, President Joko Widodo’s government has taken advantage of the 2014 APEC summit in Beijing and the 2015 Asian–African Commemorative Conference in Jakarta to pitch Indonesian investment opportunities to the global investment community. On the other hand, there is a growing trend towards protectionism. Most of the policies reflective of this trend are non-tariff measures, as tariffs are already very low. The introduction of a more restrictive cap on certain sectors, the ban on raw mineral exports, and the provision of greater authority for ministers to issue intervention and monitoring policies are just a few examples. This trend began during the tenure of former president Yudhoyono but is continuing under President Joko Widodo (Jokowi). Economists have often characterised economic reform in Indonesia as a pattern that follows ‘Sadli’s Law’, where bad times lead to good policies.[2] Certainly it has been like that in the past. Plunging oil revenue in the 1980s pushed the government to implement broad-based economic reforms that boosted industrial development in Indonesia. In the late 1990s, Indonesia introduced another package of economic reforms as part of an IMF program to make its way out of the Asian financial crisis. But it is not clear that such a pattern will repeat itself in the near future. The economy is now facing declining investment, diminished job creation, and a fiscal shortfall, owing to lower prices of natural resources commodities and lower demand from China for Indonesia’s exports. But the policies the government is pursuing in response to these are heavily protectionist in nature. This time, bad times are resulting in bad policy. This Analysis will outline Indonesia’s drift towards more protectionist economic policy and explore some of the key reasons it is occurring.
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