@MichaelSchuman
Hope
that economic reform in the two sprawling democracies will be jump-started when
new administrations are in power might be misplaced
Rarely
has the mere announcement of a candidacy been met by such investor relief. On
the day, earlier this month, when Joko Widodo was nominated for President of
Indonesia by a major political party, the stock market surged and the currency
strengthened. The country had been battered in recent months by nervous
investors, but the mere hope that Jokowi, as he is commonly called in
Indonesia, will triumph in July’s presidential election gave hope to the
business community that much needed reform would progress in the world’s fourth
most populous nation.
The
situation is similar in India. After years of lackluster reform, the business
community is abuzz that the opposition Bharatiya Janata Party (BJP) will likely
win general elections starting in April and install the controversial Narendra
Modi as Prime Minister. The hope in the world’s second most populous nation is
that Modi, a proven economic reformer, will tackle the problems that have
caused the economy to stumble.
But is
the hope justified? Both Asian giants are badly in need of a jolt of new
reforms, and perhaps fresh leadership will spur the effort forward. Yet even if
Jokowi and Modi manage to win their elections, there is no guarantee of
progress. Both could get entangled in political conflicts that could thwart any
attempts at rapid change.
That could be a problem.
India and Indonesia are two of the “fragile five” — the emerging economies
deemed most vulnerable to the U.S. Federal Reserve’s tapering of its unorthodox
stimulus program — and beginning in the summer of 2013, both countries’
currencies have experienced periods of dramatic decline as investors fled.
India is probably in
worse shape than before. A do-nothing, Congress-led administration allowed
political disagreements to stymie the promarket reform that sparked India’s
rapid growth. As a result, the GDP growth rate has shrunk to half what it was
just a few years ago. Most desperately, the country needs to cut red tape to
prevent the overbearing bureaucracy from smothering investment projects.
The story is similar in
Indonesia. After a burst of reform early in his presidency, Susilo Bambang
Yudhoyono’s effort got strangled in politics within his coalition. Much like
India, Indonesia needs to clear up confusing regulation and improve
infrastructure to boost investment and growth.
Can Modi and Jokowi
deliver? Jokowi, as the governor of the capital, Jakarta, is known as a man of
the people, taking regular jaunts onto the streets to talk with voters and
instituting improvements to welfare programs. But running a city — even one as
large and unwieldy as Jakarta — and governing the nation are two very different
things. As President, Jokowi would have to push reforms through parliament, the
members of which will be elected in April. Whatever happens, Indonesia’s
parliament will likely be a messy place filled with contending political
movements. Also, on national policies, Jokowi has said little, so we just don’t
know much about what his policy platform will be.
“We believe that his
overall policy bias is likely to be market-friendly, supporting investor
confidence,” was the best economists at Barclays could say about him in a
recent report.
Modi has a more developed
track record. As chief minister of the state of Gujarat, he is credited with
engineering an economic “miracle” there with probusiness reforms like
streamlining bureaucracy and improving infrastructure. (For more, see my
colleague Krista Mahr’s analysis of Modi’s record.)
Yet achieving similar results at a national level will be much harder. It is
likely that even if the BJP garners the most parliamentary seats in the
election, the party may still have to govern in a coalition, raising the possibility
that squabbles between its members will block reform as they have done in the
current Congress-led government. Nor is it clear that the BJP is any more
proreform than Congress, especially when it comes to politically sensitive
issues. According to a recent report by Capital Economics, no BJP-governed
state — including Modi’s — approved a controversial Congress reform opening up
the retail market to multibrand stores. “The BJP’s recent record suggests that
it is less committed to progrowth reform than many assume,” the research firm
noted.
So in the end, whatever
the intentions of Jokowi and Modi, they could get trapped in the same political
problems that consumed their predecessors. What it will take to press reform in
these two big democracies is some serious political will. We’ll have to wait
and see if these two men have it.
