Poor infrastructure, protectionism threaten Indonesia's growth

Poor infrastructure, protectionism threaten Indonesia's growth
Roads in central Jakarta are chronically jammed, attesting to the country's need to develop infrastructure quickly to keep its economy growing.

JAKARTA - Indonesia's poor infrastructure is casting a dark shadow over the economic future of this fast-growing Southeast Asian country.

The development of Indonesia's infrastructure has failed to match the pace of its economic growth in recent years, resulting in problems such as chronic traffic jams.

A wide range of companies operating in the country are struggling to overcome obstacles posed by the lack of well-developed and efficient industrial infrastructure.

Stuck in traffic

Toyota Motor's manufacturing operations at its Jakarta plant are constantly beset by traffic congestion. It takes two and a half hours to cover roughly 50km of road from the plant to the nearest port, according to a plant senior executive. The time required for travel could increase to nine hours in five years, the executive said, referring to the possibility that continued inadequate infrastructure could cause serious operational disruptions.

New car sales in Indonesia have tripled in the past decade. The number of cars in the capital is increasing by about 10% every year. But overall road capacity has remained near unchanged, according to a transport official. The average speed driven in central Jakarta is less than 10kph due to chronic road congestion.

Indonesia was ranked 53rd in a survey of distribution efficiency of countries by the World Bank. By comparison, Thailand ranked 35th and Malaysia 25th. Indonesia's economy has grown steadily in the past decade under the administration of outgoing President Susilo Bambang Yudhoyono. The country's gross domestic product has surged 80% during the period.

But the infrastructure needed for the economy to function, especially road networks, have not been improved to match the pace of growth.

President-elect Joko Widodo has pledged to accelerate administrative and budgetary efforts to expand and upgrade facilities like roads, ports and airports. Whether Indonesia will be able to build up necessary infrastructure fast enough depends on the new administration's commitment to budgetary and policy reforms.

It is vital, for instance, to make substantial cuts in a wide range of state subsidies, including those for fuel, which eat up 20% of government spending. Government infrastructure projects have also been plagued by corruption related to permits and licenses.

Widodo will have to show strong leadership to prevent vested interests from blocking the reforms needed for the country's renewed economic growth. One big worry about the new administration's economic policy is the incoming president's apparent inclination toward protectionism, which could keep the economy from further opening to foreign investment and competition.

Domestic preferences

During a presidential debate held in mid-June in Jakarta, Widodo voiced protectionist views when discussing the planned economic union of Association of Southeast Asian Nations members at the end of 2015. He said Indonesia undoubtedly needs to maintain certain barriers to foreign businesses seeking to enter the market and promised to give preference to domestic companies in government approval and authorization of business.

The new administration is expected to maintain the controversial ban on exports of unprocessed mineral ore introduced by its predecessor. The president-elect's protectionist policy agenda reflects concerns about the international competitiveness of Indonesian industry.

Data that support such concerns abound.

The ministry in charge of the nation's industrial policy recently released a report on Indonesian exports involving some 4,000 product categories. The report said 69% of Indonesia's products are not competitive in Asean markets. A senior official at the ministry says the cost efficiency of many Indonesian industries is low because of their heavy dependence on imported materials and fuels.

Mineral and oil resources currently account for half of the country's exports in terms of value. The ratio has been rising steadily from around 30% in 2002. Indonesia's economy has become increasingly dependent on its natural resources as internationally competitive manufacturing industries have failed to emerge.

Which path?

Indonesia has been running both fiscal and current-account deficits since 2012. If the country keeps stimulating domestic demand with subsidies while failing to promote exports, its economy will remain dependent on foreign capital for growth. The situation inevitably creates the risk that the country's currency will become a target of foreign-exchange speculators.

About half of Indonesia's 250 million population, the largest among Asean countries, are aged under 30. That means the country will continue to enjoy the demographic bonus, or the economic benefits of having a large proportion of working-age people, until around 2030. For the first time, Indonesia topped the list of countries cited by Japanese manufacturers as the most promising investment destinations in a survey by Japan Bank for International Cooperation conducted in 2013.

But the country could squander the demographic window of opportunity unless it takes effective steps to deal with the raft of structural and policy challenges confronting its economy. It is clear what the Indonesian government should do to stoke economic growth. It needs to develop the country's industrial infrastructure while taking measures to ease regulations and attract foreign capital.

The question is whether the Widodo administration has the political will to push through the painful reforms necessary to achieve these policy goals.

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