From The Economist print edition
THE Suharto clan infected Indonesian business like a pandemic virus. Its direct business interests included power generation, toll roads, electronics, plastics, timber, paper, an airline, a taxi company, construction, fishery, food processing, broadcasting, banking, telecommunications, newspapers, plantations, property, shipping, cars and mining.
Besides its own investments, the family, and the mostly ethnic-Chinese tycoons through whom it acted, also played a vital agency function in awarding big foreign contracts. The system had its defenders. Even a senior World Bank official noted that although a toll road built by a Suharto family enterprise might cost 20% more than it should, at least it got built. As corrupt systems go, it was relatively effective - rather like China’s. But few outside the charmed Suharto circle mourn its collapse. The meltdown brought both a big increase in foreign ownership of Indonesian firms and a huge improvement in openness and management standards.
Some of the old groups survive. One, the Bakrie conglomerate, accounts for about a quarter of the trading on the Jakarta Stock Exchange. It came close to extinction both in the late-1990s crisis and in 2008. Its patriarch, Aburizal Bakrie, successfully straddled the Suharto and Yudhoyono regimes. But Bakrie is no longer typical. Its heavy weight on the exchange mainly reflects the thinness of the stockmarket, with a capitalisation at the end of last year equivalent to just 20% of the country’s GDP, against 65% in Malaysia.
However, even a reformed Indonesia remains a hard place to do business, both for local entrepreneurs and, especially, for foreign investors. Fauzi Ichsan, an economist with Standard Chartered Bank in Jakarta, lists six main obstacles: legal uncertainty; the confusion brought by regional autonomy; tax problems; dealing with the customs agency; inflexible labour laws; and infrastructure. He says the ranking of these problems by his bank’s clients has shifted. The top concerns used to be the law and decentralisation. Now the second-biggest worry is the labour market. Top of the list, however, is infrastructure.
Indonesia’s roads, air- and seaports are inadequate. Electricity generation lags demand. Only 18% of the population have piped water and only 2.5% are connected to a sewerage system. Total investment in infrastructure, including that by the private sector, was estimated at just 3.9% of GDP in 2007, compared with about 10% in China and Vietnam.
Traffic gridlock looms in the big cities, especially Jakarta, where the number of motor vehicles has tripled to 9.5m in the past eight years but road space is growing at less than 1% a year. Construction of a mass rapid-transit railway is due to start in 2011, but with the number of passengers expected to reach just 400,000 a day by 2020 it will hardly ease the congestion.
A crash programme of power generation is not keeping up with demand, which has been growing by more than 6% a year for the past decade. PLN, the state power company, has been trying to encourage private-sector investment, but subsidised electricity acts as a disincentive. Tariffs have not increased since 2003. During the oil-price boom of 2008 they did not even cover the cost of the fuel burned in Indonesia’s power stations.
Export industries are hampered by a lack of ports. Shipping costs are between 50% and 80% higher than elsewhere in the region. An estimated $20 billion needs to be invested over the next five years, but efforts to draw up - let alone implement - a master plan for port development have foundered on the decentralised structure of government. Every district wants its own port, and some projects make sense only as tokens of national pride. For example, plans to develop Batam, an island designated as a special industrial zone, as a container terminal to rival nearby Singapore seem a waste of money. The whole point of choosing Batam for development was its proximity to Singapore.
Besides the competing interests of provincial and district governments, infrastructure development also has to contend with the difficulties of land acquisition. In the Suharto years land was often grabbed; now Indonesia has to make its grand plans within the constraints of a democracy.
Foreigners’ Desultory Interest
In this respect, it is now less like an East Asian tiger than it is like India, another country that struggles to build the infrastructure it needs in the muddle and frustration of a democratic society. Also like India, until recently at least, it has failed to attract foreign direct investment in anything like the volume that has poured into China - or indeed, as a percentage of GDP, other countries in South-East Asia (see chart 4). FDI in Indonesia has averaged a mere 0.5% of GDP in recent years, and that includes a few very large items, such as BP’s $5 billion natural-gas project in Papua.
Indonesia has not managed to draw investment in the sort of labour-intensive manufacturing for export that fuelled China’s boom. This is to squander a great comparative advantage: a labour force that is young, literate and cheaper than anywhere else in the region.
It does not help that Indonesia is suspicious of foreign investors. It posts a protectionist “negative list” of industries where FDI is capped, including pharmaceuticals, health care and construction. And it is constantly embroiled in disputes with foreign firms. In March, for example, an international arbitration panel ordered Newmont Mining, of America, and Sumitomo, of Japan, to sell some of their shares in a big copper-and-gold mine on Sumbawa island. And in June it banned imports of some models of BlackBerry smartphones, made by Canada’s Research In Motion.