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Opinion: Indonesia's incoming premier, Joko Widodo, is a breath of fresh air, writes Ben Bland. can he blow away the corruption that has hindered socioeconomic progress for years?

It's an incredible story. From humble beginnings in a riverside shack, a former furniture salesman has become president-elect of the world's third-biggest democracy.

The election of Joko Widodo, the reformist governor of Jakarta, as Indonesia's next head of state has unleashed a wave of optimism - notwithstanding a court challenge to the July poll result from the losing candidate, Prabowo Subianto, which is widely expected to fail.

Indonesians are pleased to have an effective and down-to-earth leader who comes from outside the nation's tightly knit and corruption-ridden elite. Foreign investors, who have been buying Indonesian government bonds in record numbers, hope that he can solve seemingly intractable problems such as the nation's profound lack of infrastructure. But, when outgoing President Yudhoyono steps down this month after reaching the two-term limit, Widodo will need to move fast to prevent such hopes from being dashed.

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The 53-year-old master of micromanagement will inherit a troubled economy. GDP growth is at a five-year low, direct investors are upset by rising protectionism and the state coffers are bare. Many business owners blame Yudhoyono for complacent inactivity as Indonesia became a major economic power in his second term. High Chinese demand for materials such as palm oil, coal and rubber had turbocharged Indonesia's economy, hiding deep structural ills such as a shrinking manufacturing sector and inadequate health and education systems. Annual GDP growth peaked at 6.5 per cent in 2011 before dropping to 6.2 per cent in 2012 and 5.8 per cent in 2013 as commodity prices declined because of a reduction in demand from China. Growth fell to 5.2 per cent in the first half of 2014 as the government cut spending so that it could afford an overgenerous fuel-subsidy programme.

The economy also suffered because of a new ban on exports of unprocessed minerals, intended to encourage a downstream metal refining industry. The World Bank has warned that this protectionist move will damage Indonesia's reputation with investors and add to the current account deficit, which it predicts will hit 2.9 per cent of GDP this year, increasing Indonesia's dependence on overseas finance.

Foreign mining giants including Rusal and Freeport-McMoRan have pledged to build billion-dollar processing facilities in Indonesia, but others are suing the government. Ever the pragmatist, Widodo has said that he will seek compromises with these firms while upholding the ban. He faces a similar impasse in the crucial oil and gas sector, where international companies have been deterred from investing by a slew of protectionist policies. At the same time, demand for fuel has been rising fast because of the government subsidy: petrol sells for Rp6,500 ($0.55) a litre here, compared with well over $1 in China.

The problem, as is so often the case in Indonesia, comes down to the vested interests of the elite, who promote these market distortions and benefit from them. During his election campaign, Widodo promised to take on the "oil mafia" and others whose actions have held back the economy. But he also spoke of the need to protect Indonesian businesses from global competition, albeit with less vigour than his fiery rival, Subianto.

As the hype surrounding Widodo's remarkable rise subsides, he has much to prove and little margin for error.
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Publication:Financial Management (UK)
Geographic Code:9INDO
Date:Oct 1, 2014
Words:543
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