Indonesian President Joko Widodo has reshuffled his cabinet for a second time. 'Tempo' magazine described the appointment of Sri Mulyani Indrawati to her former position as finance minister as 'the return of the prodigal daughter'. The comparison is not entirely accurate: Sri Mulyani hadn't done anything wrong when she left in 2010 (more below) and she hasn't sought forgiveness on her return. But her return is being treated as a big event, worthy of slaughtering the fatted calf, so that part of the parable does ring true.
From 2005 until 2010, Sri Mulyani was a successful finance minister under former President Susilo Bambang Yudhoyono. She has a reputation for being smart, honest, a straight-shooter, and decisive: she got things done. Some would add that she is 'strongly opinionated'. She made good progress in the viper-pit of raising tax revenue. She resigned in 2010 to take up what is essentially the number two position at the World Bank and her reputation was enhanced by her subsequent time in Washington.
Thus it is understandable that hopes have been raised. But it also says something about economic performance under President Widodo, that the arrival of a new minister is seen as having the potential to make so much difference.
Indonesia has been growing at a respectable rate (around 5% annually) considering the global slowdown, but Jokowi was aiming for 7% and the shortfall makes a big difference in a country like Indonesia. The lost opportunities are on public display. Bickering ministers lost the chance to get the big Masela LNG project going while global markets were favourable. The vital expansion of electricity infrastructure is falling behind schedule. Infrastructure investment (a Jokowi priority) is still dragging, with big projects such as the Jakarta-Bandung high-speed train running into implementation difficulties. Questions are being asked about the tender-process for a big petroleum refinery in Tuban, East Java. A controversial tax amnesty is mired in administrative confusion.
President Widodo needs someone like Sri Mulyani to drive his reform agenda, and has been trying to lure her back since he became president. She may be able to fulfill his high hopes. Much will depend on the working relationships the new finance minister forges with both Widodo and Darmin Nasution, the economic coordinating minister. Getting along with the parliament is also important in the new democratic Indonesia.
Some commentators in Jakarta question Sri Mulyani's ability to work miracles or even adapt well to the compromise-laden world of Indonesian politics. They recall the series of battles that led to her departure in 2010. She certainly made bitter enemies in parliament at that time, notably with then-kingpin Aburizal Bakrie, who led the powerful Golkar opposition. Her clashes with Bakrie were many. She pressured him to pay compensation for the 2006 Lapindo mud-slide, held up his attempt to take a large shareholding in Newmont's Nusa Tenggara copper/gold mine, was unhelpful when Bakrie's coal companies needed support during the 2008 global crisis, and pursued him over numerous tax issues.
The more lingering stain from that period was Sri Mulyani's decision to rescue Bank Century in 2008.[fold]
This was a well-executed official take-over of a failing mid-sized bank, whose collapse would most likely have set off a depositor-run on a dozen or so banks that seemed to be in similar straitened circumstances during the global crisis. The bank rescue meant Indonesia avoided its own version of the Lehman crisis. As a result, Indonesia sailed through the global crisis with only a small dent in GDP growth; one of the few countries to do so.
But when powerful Indonesian politicians are out to get you, they can cause painful mischief. Sri Mulyani and others associated with the Century rescue were put through the parliamentary wringer, with the KPK (Corruption Eradication Committee) joining the action. All this got too much. Lacking the president's support in her tussle with Bakrie, she left to take up the plumb position in Washington.
Bakrie's wealth and power are now much-diminished and parliamentary allegiances have shifted. Sri Mulyani may find President Widodo, a civilian former-businessman, to be a more compatible boss than SBY, an ex-general who would have been used to subordinates following orders and must have found her forthright style disconcerting.
Fixing Indonesia's tax system is still a herculean task, and it is on her success here that she will be judged. She is off to a quick start, arranging a $13 billion downward revision to earlier unachievable tax revenue targets. But the substance – actually getting the revenue – is still in the future.
After the starring role played by technical economists in Indonesia's economic success during the Soeharto years, the successors to the 'Berkeley mafia' have seen their influence weakened in the post-1998 democracy-era. Sri Mulyani's return substantially enhances the macro-economic capacity of the cabinet. It should mean that the cabinet makes fewer macro-economic mistakes – and avoiding macro-mistakes is enough in itself to produce good growth outcomes. Structural issues are important too, but most of these are outside her domain.
How should we assess the 'power of one' to bring about reform? Raghuram Rajan demonstrated in his relatively short tenure as India's central bank governor that one person can make a big difference; jolting the overall decision-making climate in the right direction. But he ran into the same sort of entrenched parliamentary opposition that brought Sri Mulyani's earlier tenure as finance minister to an end.
The bible doesn't tell us what happened to the prodigal son after he returned home. Let's hope there is much more to come in the narrative of Sri Mulyani's return.
Photo courtesy of Fickr user World Bank