Tue, 07 Jul 2015

A purview of many international studies regarding Indonesia politics and economy is dominated by foreign organzations, consulting companies and NGOs. Simply too many chefs tend to spoil the soup. The amount of studies and reports on Indonesia is enormously redundant at times, filled with “shoulds, coulds and woulds, and can lead to paralysis by analysis, not action.

To consider a few recent major ones: WEF (World Economic Forum Competitiveness Report, [Indonesian section]), World Bank (Indonesia Economic Quarterly and Indonesia Development Policy Review), IMF (Indonesia-Selected Issues), OECD (Economic Surveys-Indonesia 2015 Overview), UNDP (many dealing with Indonesia social and health issues), ILO (Review of Policies for Youth Employment of Indonesia), The Economist (Investing in Indonesia’s new era), McKinsey (The Archipelago Economy: Unleashing Indonesia’s Potential) .

Some discuss different things, such as poverty alleviation, energy exports, or agricultural potential, but all mention the stifling effect of Indonesia’s overwhelming bureaucracy on innovation, foreign investment, decentralization (or centralization) necessity, wealth disparity and jobs creation. These are entrenched impediments toward building Indonesian economic capacity and development.

Yet, perhaps a most telling story in all these studies is the lack of any robust sub-national data or sub-national direction (from the provinces, regencies and villages). That is, Indonesia sub-nationally is actually a dual economy, whereby that data is not clearly separated from the rest of rich, progressive Jakarta/Java.

This is problematic as improving Indonesia at the national level is very well understood, and agreed upon, yet, individualized provincial, city and town competitiveness may be said to be lacking or at various speeds. For example, Balikpapan, due to its nexus for oil and mining is well ahead of most of Indonesia economically via wealth, yet its road and infrastructure overall are lacking. Conversely, autonomous Aceh is the recipient of vast amounts of “aid” and NGO activity but its development in Indonesia is lacking.

All the studies do acknowledge that national rules and regulations and a lack of harmonization of them with the national government (i.e. Jakarta) is hindering overall economic and political progress.

The economy of mega-city Jakarta has a significant distortion effect on all of Indonesia. All wealth flows to Jakarta, jobs in Jakarta pay much higher (> 2:1) than anywhere else in Indonesia. Infrastructure is better in Jakarta, on par with many developed countries even, and quality of life is also higher.

Economic activity and competitiveness in Jakarta outpaces the second place finisher of East Java (with dynamic and entrepreneurial Surabaya/Malang), East Kalimantan (a nexus of Indonesia’s oil and mining activity) and West Java (receiving the economic spillover from Jakarta). Any study to form a baseline of most of Indonesia must separate out Jakarta, and perhaps also any Java/Bali results in the aggregate. If this is not done, a skewed picture of Indonesian development to the upside results.

This phenomena is not in Indonesia only, Thailand has mega-city Bangkok, South Korea has Seoul, Malaysia, has KL. In short, Jakarta represents a developed country inside Indonesia. Therefore any “base-line” and “economic dynamic planning” is difficult due to this dichotomy. However, a true baseline that separates Indonesia in and among its provinces exclusive of not only Jakarta, but also Java, should be considered. Indonesia then might even be considered “three-speed”- Jakarta/Java (and if including Bali) vs. other Indonesian areas.

Of course all this development and economic opportunity in Greater Jakarta and Java has downsides. It increases pressure on road usage and electrification. It contributes to housing bubbles and property prices, making them unaffordable to most, pushing out urban sprawl and creating longer gridlocks. It increases air and water pollution from cars, increased sewage, and waste disposal. It also increases the physical weight on the land in Jakarta which, by way of some of Jakarta now being below sea level, adds to flooding and drainage problems, possibly being exacerbated with building of islands in Jakarta Bay with ongoing land reclamation projects, some licensed in 1985, to increase Jakarta’s size.

With the above said, spatial sectoring (beyond Jakarta and possibly all Java respectively) in Indonesia requires some attention. Spatial sectoring is increasing the wealth, competitiveness, and living standards in areas that are further askance. Spreading out the wealth and development. It requires policies (and mindset shifts, outside of old thinking) to identify these areas and business friendly enablers and opportunities that will encourage investment in these areas.

The main “alignment” issues then to get to more effective spatial sectoring are policy issues of harmonization of local and subnational laws with Jakarta, and then implementation of that harmonization.

However, mere implementation alone does not allow any evaluation. A feedback mechanism must be created to see if these policies actually did what they were intended to do. If not the policies need to be reviewed and changed to focus on the issues as hand.

The centerpieces of President Joko Widodo’s ambitious agenda effectively are capacity builiding programs towards economic development (maritime highway, infrastructure upgrading, and greater electrification). For subnational governments to develop this capacity more effectively in Indonesia, three areas need consideration: one-stop services or integrated business licensing at the Investment Coordinating Board in Jakarta, E-technology to enhance Indonesia’s information competitiveness, and finally business incubators must be encouraged regionally in places like Jayapura, Manado, and Banjamarsin, dynamic so-called SMART cities.

Lastly, incubators promote risk taking and create start ups and small businesses, (SMEs) which are the biggest employers and economic drivers in Indonesias informal economy. Incubators promote the cluster concept of economic development. The ideal then is to contribute to sustainable regional economic growth and investment programs that will go hand in hand with political upbraiding.

Otherwise, these more distant areas risk falling further behind if they are not brought up to speed. Not suprisingly, there are still old school economists like Boston University professor Gustav Papanek who are encouraging Indonesia to go the other direction: back to labor intensive manufacturing and low skilled industrialization, an embrace of unskilled labor.

We are now in a knowledge economy, and countries are rewarded with their expertise in new ideas and new ways of thinking. Innovation rules the day, not race to the bottom industry in a world saturated with overcapacity of low margin products.

Overcapacity right now is hurting much of developing Asia. The risks of inaction right now for Indonesia are many, a falling currency affects living standards, youth unemployment affects advancement, slowing exports hurt national GDP, and too much bureacracy (whether centralized or decentralized) stifles innovation.

The future of Indonesia’s big picture development lies at the subnational level, not just Jakarta or Java. Just writing about what is happening in Jakarta, or from a Java standpoints does not change things in remote areas. __________________________

The writer is capability advisor at School of Government and Public Policy, Jakarta.