The Jakarta Post's senior editor Manggi Habir met recently with Faisal Basri and Yuri Sato, two senior economists who were key architects of the Indonesian Chambers of Commerce and Industry's (Kadin) recently launched 2010-2014 economic road map.
This road map has now attracted prominence with the appointment of Kadin chairman M.S. Hidayat as industry minister. It also provides insight into the government's economic thinking and direction on industrial policy.
Question: Both of you were involved in the formulation of previous Kadin road maps, so you can provide an interesting perspective on how this road map is different to previous ones. Could you explain what these differences are?
Faisal: One big difference is the increased participation and contribution of Kadin members.
There has been considerable discussion and information provided by industry participants to back up many of the recommendations. In addition, there has been active dialogue between the government and Kadin, which Hidayat has been able to foster. I have never seen the government more cooperative with Kadin.
Even before Hidayat was formally announced as minister of industry, he invited senior bureaucrats from the ministry as well as senior officials from Mari Pangestu's Trade Ministry to Kadin for discussions. Interestingly, most of those invited came and there was an active exchange of ideas.
Maybe they knew Hidayat would soon be their boss.
Yuri: I was involved in past Kadin plans through the participation of JGC and Jetro. At the time, JGC and Jetro were integral in providing the background information for the manufacturing sector's portion of the plan. But this year, Kadin has done it themselves. Kadin's initiatives and capacity are much stronger than in previous years.
I also think Kadin's role is becoming more important and strategic. With a more democratic environment, the business community realizes they need an effective vehicle to represent their interests. In the past, business people were able to go directly to Soeharto.
Now they need to influence a much broader audience. The foreign chambers of commerce used to go directly to Soeharto and now they also feel the need to work more closely with Kadin.
I see Kadin as playing an increasingly larger partnership role with the government. In the past Kadin played a passive role, waiting for a top-down directive from the government and normally following the directive. Now Kadin is more proactive in finding its own voice and trying to influence the government. The relationship is maturing and becoming more balanced.
In the past, Kadin was seen as being protectionist and opposing foreign investment. How different is it this time? And how does this relate to Kadin's call for an active industrial policy?
Faisal: I think Kadin is now looking at protection more reasonably. In other countries when there are anti-dumping charges, temporary tariffs are often imposed before investigations are completed.
I think we need to do the same. The emphasis is more on reciprocity or equal treatment.
Yuri: What we mean by active industrial policy is more "smart" government intervention. I also would like to draw attention to the worrying trend of "de-industrialization", where industrial growth falls below economic growth levels for a prolonged period. This trend has to be reversed.
With high commodity prices for Indonesia's natural resources, the natural short-term tendency is to export these commodities with minimal value added. Industrial policy should address this by providing more value-added activities, so that more economic activity can be done domestically.
I would also argue that these value-added activities should have a technological component, so that Indonesia can actively acquire, control and further develop these new technologies itself.
The Kadin road map begins with a vision of creating a maritime nation that can integrate the domestic economy. It then discusses six broad areas of focus, which are infrastructure, food security, energy, industry services, transportation and small and medium enterprises (SMEs). Could you explain how differently infrastructure would be addressed this time around, given so little was done in SBY's previous term?
Faisal: Let me address the maritime vision first as some people tend to think about Kadin trying to promote the fisheries sector, which it is not. In fact, we think there is overfishing.
What is meant by "maritime" is improvements to our sea transport and seaport infrastructure that would reduce transport costs and speed up inter-island trade flow, so that we would see a convergence in the prices of products from different parts of the country and thus facilitate the integration of the national economy.
We need to clean up our customs office and make them more efficient so off-loading cargo from ships can be done efficiently. Complaints of custom delays and poor port facilities, forcing ships to dock for several days, which is costly, are too common.
Why are oranges from Sumatra transported by trucks by land, rather than by sea? This is because of quarantine requirements at the seaports, where the release costs money. We seriously need to make the ports more efficient, so that local food produce can compete with food imports in domestic markets.
On infrastructure, it is sad to see that after five years, the length of toll roads built comes to only 46 kilometers. So land clearance is the number one problem that should be addressed. Everyone agrees on the necessity of drawing up a land acquisition or clearance act.
If land is identified for public use, there should be an acceptable mechanism to help settle land acquisition disputes. The government would form and appoint an independent appraisal team to assess the land value for compensation. So negotiations would be based on appraised valuations, with a limit of two or three negotiations.
Yuri: On SMEs, we need to differentiate between larger SMEs and the very small, or micro, and more numerous SMEs. We need to raise the number of larger SMEs, while reducing the more numerous micro-SMEs.
Government policy for these two SME segments should be different. The policy for the larger SMEs should be market-driven and encourage linkages with industry, while for the micro-SMEs the policy should be more social-driven and help them move up the scale to become larger SMEs.
So what are the sectors that are being prioritized and what are the plans for these sectors?
Faisal: There are 10 sectors grouped under three clusters. The first cluster targets economic growth. These are food and beverage, textiles, garments and footwear, electronics and electronic components and transport and automotive components. The second cluster targets the depth of our industries.
These are telecommunication and IT, basic metals and machinery, and petrochemicals. The final cluster targets the export sector. These are agriculture, livestock and forestry value-added products, and maritime and sea product industries
What do you think is still missing from the Kadin road map?
Faisal: Kadin's banking focus is currently retail and not corporate. A change of focus is needed to make financing in the economy more balanced. We need a specialized financial institution, which focuses on funding industry and can provide long-term financing.
Yuri: Long-term financing for industry is missing. After Soeharto, all financing has become more retail and short-term.
With bank reforms, banks have a better understanding of risk management and are becoming more prudent in providing long-term financing.
Another missing factor is how to attract foreign investment, which is needed if we are to achieve a growth target of 7 percent. We need to use foreign investment in a smart way, like China has done.
But Indonesia has to decide which area it wants to promote and specialize in. China is the world's factory. Thailand is Asia's Detroit. India has its IT services. What does Indonesia want to be known as?
Now that Hidayat is the new industry minister, what would be his priorities? What are his strong points?
Yuri: Hidayat bridges the gap between government and business well. He has cultivated good links with the government. He is also open-minded and balances well between nationalist and liberal sentiments within Kadin. He will work well with Mari from the Trade Ministry.
Faisal: Hidayat would have to start by harmonizing tariffs. Second, he would have to tackle the high cost of electricity for industry. Third would be to address the issue of human resources.
Finally he would have to focus on financing. Industrial development cannot grow without appropriate financing. Bank loans to industry in the 1980s was 40 percent of total loans, now it is in the teens.
I don't expect any significant policy change, but implementation should improve in the second term. If we can just do that, there is hope.