Global Asia Forum, 23 October 2024
After a long wait since winning the election in February, Prabowo Subianto was finally sworn in as the 8th President of the Republic of Indonesia on Oct. 20. While the number eight is considered lucky by some Indonesians, Prabowo inherits a challenging situation, spanning political, social, and economic issues.
He can expect no “honeymoon” period. He and his team must work exceptionally hard to ensure that his ambitious campaign promises are fulfilled. On his first day in office, Prabowo announced the formation of his very large cabinet, and on the second day, he led his first cabinet meeting.
Prabowo has named his team the “Merah-Putih Cabinet,” after the colors red and white of the Indonesian flag, and it consists of 48 ministers and 8 ministerial-level posts. If we include the many vice ministers, the cabinet totals a whopping 111 members, a significant expansion from Widodo’s 34 and one of the largest ever. Despite Prabowo’s argument that a large nation needs a big cabinet, some analysts have dubbed it the “Obese Cabinet,” raising serious public concerns about how many political favors are being paid back with cabinet seats.
The cabinet does, however, retain 18 members of the previous cabinet of former President Joko “Jokowi” Widodo, some of them distinctly underwhelming but also including highly respected Finance Minister Sri Mulyani Indrawati and Coordinating Economy Minister Airlangga Hartarto.
Ambitious promises
Prabowo won 96.2 million votes, representing 58.6 percent of the electorate in the 2024 election. His success was largely attributed to his many campaign promises, which resonated with the public, and the tacit help of Widodo, whose son, Gibran Rakabuming Raka, a political neophyte, is Prabowo’s vice president.
Prabowo’s economic vision includes the goal of 8 percent GDP growth by the end of his five-year term in order to boost Indonesia into high-income status by its 2045 centennial. The figure is far higher than the roughly 5 percent growth under Widodo, who promised 7 percent when he took office. Prabowo also aims to improve fiscal sustainability by increasing the government’s revenue-to-GDP ratio to 23 percent, up from the disappointing 12.36 percent in 2023.
He has committed to continuing the development of Indonesia’s new capital, Ibu Kota Nusantara (IKN), the flagship project of Widodo. In the mining sector, Prabowo has made down-stream mineral processing, also introduced by Widodo, one of his top priorities. Additionally, his very ambitious Free Lunch Program for all Indonesian children, could cost the state $32 billion annually.
Prabowo has also promised food and energy self-sufficiency after being a net importer of both for years. In his inaugural speech as President, he said Indonesia could achieve food self-sufficiency within the next 4-5 years.
Challenging economic reality
Despite the optimism, Indonesia’s economic reality is more discouraging. A significant gap exists between data and on-the-ground conditions, largely due to issues with definitions and measurements. Prabowo inherits a tough economic landscape, making it difficult to realize his promises. He will face at least three major challenges.
First, weak and unsustainable fiscal conditions. Widodo relied on debt to finance populist programs and costly infrastructure projects, resulting in public debt more than tripling to Rp 8,461 trillion by the end of his term. High interest rates and short-term debt complicate matters further. In 2025, 16.6 percent of government revenue will be needed for interest payments, with 43.3 percent going toward both interest and principal repayments. Given Prabowo’s promises on subsidies and social programs, debt will continue to be a key funding source, perpetuating fiscal unsustainability.
Second, deindustrialization. Manufacturing’s contribution to GDP has steadily declined, from 21.1 percent in 2014 to just 18.7 percent in 2023, with the trend accelerating recently. This has resulted in a decrease in high-quality formal jobs, leaving over 60 percent of Indonesians reliant on low-paid informal work. Historically, industrialization has been the path to high-income status, but this trend may make Indonesia’s journey longer and more difficult.
Third, economic inefficiency. Despite Widodo’s focus on infrastructure and regulatory reforms, Indonesia’s economy remains inefficient. Logistic costs in 2023 accounted for 24 percent of GDP, much higher than neighbors like Vietnam (16.7 percent), Thailand (15 percent), Malaysia (13 percent), and Singapore (8.5 percent). Additionally, Indonesia’s Incremental Capital Output Ratio (ICOR) reached 6.51 in 2023, up from 4.4 in 2014, making it less competitive than neighboring countries. Without significant improvements, Indonesian businesses will struggle to grow domestically and compete regionally.
The cabinet: Big is beautiful or awful?
To steer the nation, Prabowo will need the support of a high-caliber, and experienced cabinet. Unfortunately, the formation of his cabinet has raised doubts.
With 48 ministries, Prabowo’s cabinet is among the largest in the world. However, size does not always equate to success. Statistics show that countries with effective governments and successful economic development tend to have smaller cabinets. Prabowo’s bloated cabinet will require a larger budget and will face challenges with coordination – especially given Indonesia’s fiscal constraints. Moreover, at least 15 ministries will be restructured, a process that could take 2-3 years, potentially impacting government performance at a time when quick wins are critical.
The cabinet also reflects Widodo’s strong influence. Eighteen out of 34 Jokowi cabinet members, or 52.4 percent, are included in Prabowo’s new cabinet. Additionally, Jokowi’s son serves as Vice President, a maneuver that required a questionable court decision and raised fears that Widodo is building a political dynasty.
Politically, the cabinet has an unprecedented number of political parties. For the first time, the chairmen of eight political parties hold cabinet positions. Indonesia, a presidential democracy, now operates more like a parliamentary system, with cabinet meetings effectively serving as legislative sessions. This could weaken the role of the House of Representatives (DPR) in policymaking and erode democracy.
The economic team
The economic cabinet consists of 14 ministers, 8 of whom (57 percent) served under Widodo. Seven are incumbents: Airlangga (Coordinating Minister for Economy), Sri Mulyani (Minister of Finance), Agus Gumiwang (Minister of Industry), Bahlil Lahadalia (Minister of Energy and Mineral Resources), Andi Arman Sulaiman (Minister of Agriculture), Erick Thohir (Minister of State-Owned Enterprises), and Rosan Roeslani (Minister of Investment).
This dominance of incumbents has both pros and cons. On the one hand, they can hit the ground running. On the other hand, they may be less likely to introduce innovative policies due to bureaucratic inertia. In addition, not all members are of the quality of Sri Mulyani, others have political baggage.
The appointment of Luhut Panjaitan, the investment czar and most powerful member of the Widodo inner circle, as Chairman of the National Economic Council, further strengthens the perception that Prabowo’s cabinet is essentially Widodo’s third term. Luhut’s seniority, strong character, and close ties to both Prabowo and Widodo, will make him highly influential, leading some analysts to refer to him as “Prime Minister” Luhut.
Expectations and limitations
Given the economic challenges, political dynamics, cabinet formation and economic team, it is possible to predict with some confidence what may unfold in the next five years.
We should not expect Indonesia’s economy to grow by 8 percent in the near future. The last time Indonesia experienced GDP growth beyond 8 percent was in 1995, when the country was seen as the next Asian Tiger. Back then, the manufacturing sector thrived, economic efficiency was high and high-quality investments poured in. Unfortunately, those conditions no longer exist. Rather than focusing solely on the quantity of growth, Prabowo should prioritize quality. A 6 percent GDP growth rate would be a significant achievement if it promotes economic equality, strengthens industry, and maintains environmental sustainability.
Significant economic reforms are also unlikely over the next five years, as continuity appears to be a major theme of the new administration. However, we can expect Prabowo’s government to emphasize better planning, a more technocratic approach and improved coordination across ministries.
China is poised to be the clear winner in Indonesia during Prabowo’s term, while the US and EU will likely be the biggest losers. Several major projects are expected to take shape, including a 2.9 million-hectare food estate in Papua, the Jakarta-Surabaya high-speed rail, a giant sea wall in Java to combat rising sea levels, nickel and mining downstream initiatives, public bus electrification, and the new capital, which is already behind schedule and has generated little investor interest.
China is heavily involved in all of these major projects, outmatching the combined participation of the US, EU, Japan, and South Korea. The US and EU should prioritize Indonesia on their economic agendas by strengthening trade and investment ties. A quick win would be expediting the EU-Indonesia Comprehensive Economic Partnership Agreement (CEPA) and a potential Indonesia-US Free Trade Agreement (FTA), fostering more robust economic collaboration. Otherwise, the West risks losing Indonesia as a key partner.
It is also unrealistic to expect Indonesia to achieve food self-sufficiency within the next 4–5 years due to the country’s complex agricultural challenges. Furthermore, the Papua food estate will not yield immediate results, and many experts predict that such efforts are likely to face significant obstacles and may ultimately fail.
Closing
Indonesia is at a crossroads. The next fifteen years are a critical period that will determine the nation’s future – whether it becomes a developed country as government slogans promise by 2045 or remains trapped in the middle-income bracket. Indonesia must fully capitalize on this era before its current demographic bonus ends in 2040.
Prabowo, a controversial former army general under Suharto and once accused of human rights abuses, has been actively seeking the presidency for 20 years and finally has his chance to lead Indonesia for the next five years, possibly even ten. It is a crucial time. Success is not optional for Prabowo and failure could result in Indonesia being permanently stuck in the middle-income trap.
But Prabowo is a seasoned operator and he will be closely watched to see when – and if – he parts ways with Widodo and forges his own direction. In light of the cabinet formation and other events since Prabowo’s inauguration, it is clear that much improvement is needed. The structure and operation of the cabinet must be continually refined to respond to the increasingly dynamic global and domestic challenges.
Criticism from various groups should be viewed as constructive feedback, and should be taken seriously when it is deemed helpful and realistic. The interests of the people must always come first. It’s not just the 96.2 million citizens who voted for you – 287 million Indonesians have entrusted their future and dreams to you.
Good luck, President Prabowo. Wishing you success! (*)
Note
1. It needs 6.5 units of investment to increase economic output (GDP) by 1 unit
Wijayanto Samirin is a senior economist at Paramadina University, and former Economic Advisor to Vice President Jusuf Kalla, 2014-2019. He is the founder of the Paramadina Public Policy Institute.
This article is firstly published on Global Asia Forum.
