Indonesia has had some tough breaks recently. The archipelago of 17,000 islands has weathered two major disasters – an earthquake and a tsunami that killed thousands – in the past six months, while the country has been hard hit by investors’ withdrawal from emerging markets.
However, Bambang Brodjonegoro, the country’s minister for national development planning and its former finance minister, is looking ahead. “We are now planning for the next five years, that will be used by the next government – whoever is elected in April 2019,” he says.
The top objective is to see Indonesia “graduate from a lower-middle-income country, which is what we are now, to a higher-middle-income country. So that could happen in the 2020s,” he says. The Indonesian government currently defines the poverty line as monthly per capita income of $26.60.
Inequality persists
While relative poverty in Indonesia has been falling steadily for the past decade, inequality is on the rise. Forecasts from the World Bank expect poverty in the country to continue to decline, albeit at a slower rate. The same goes for economic growth rates: September estimates raised Indonesia’s growth for 2018 to 5.3% on the back of stronger consumption – still robust gross domestic product (GDP) expansion but slower than in recent years.
The country faces challenges, both internal and external. Elections in April 2019 could see current president Joko Widodo win another term, but he faces stiff challenges from his right flank on religious and economic issues. Investors, for their part, have been holding back as they await results. “Of course foreign direct investment [FDI] is a little slow, but at the same time, if you look at household consumption there was an increase every election year. In terms of growth there is compensation: FDI may decrease but consumption will compensate,” says Mr Brodjonegoro.
Structural issues may be the greater impediment, he believes, saying: “I think the slowing down is more ‘wait and see’ as a result of some [investors] feeling that the licensing process takes too long in terms of getting their permits. [It] takes longer than expected so they might delay their investment realisation.”
Human perspective
Despite the political noise, the administration is setting ambitious goals. Mr Brodjonegoro says: “Our priority is still reducing inequality. The way to reduce inequality is not just from the infrastructure point of view; for the [final] two years [of this term] we will try to reduce inequality from the human development perspective.” Infrastructure investment has been a major focus during the first three years of the current administration.
The government has embarked on a substantial programme of infrastructure investment after years of neglect, leaning heavily on the private sector for support. That will continue, according to the minister, but whereas in “the first three years our focus has been on infrastructure specifically for connectivity and basic services, in the final two years our focus will be on education, especially on vocational education as well as improving access to basic services”.
This fits in with a drive to transform Indonesia’s economy and move it up the value chain. “In the national agenda, the number one [priority] would be to promote the economic transformation from a natural resource-based economy to a value-added processing economy,” says Mr Brodjonegoro.
The recent turmoil in emerging markets has made these efforts all the more urgent; the rupiah fell to its lowest value in more than 20 years in September, marking Indonesia out as one of the economies investors see as most vulnerable to shifts in the global economy. “Our currency is now under pressure. We are talking about a five-year plan to improve the deficit on our current account. We need to target, for example, export promotion, what kinds of products or commodities we will prioritise, as well as what should we do with import substitution,” says Mr Brodjonegoro.
The infrastructure drive itself could prove a catalyst for industrialisation. Steel is one example. “We have to admit that too many imports leaves our economy vulnerable. So whenever we have the capacity [and] we have the priority of building infrastructure, why don’t we try to start building our own capacity in making the components? For any infrastructure, steel is needed. We need to increase the capacity of our own domestic steel manufacturers,” says Mr Brodjonegoro.
As a country of islands spread out over thousands of kilometres of the Indian Ocean, infrastructure is essential to economic progress. The government is working towards reducing regional disparity. “Indonesia is still dominated by Java Island,” says Mr Brodjonegoro, noting it contributes about 60% of GDP while Sumatra account for 20%. “The rest of Indonesia has a larger area with a smaller population. So we need to ensure that the infrastructure and the connectivity that has been built thus far should be directed to develop the industrial estates outside Java and to create new sources of economic growth,” he adds.
Geographical constraints
Making some projects commercially viable is challenging given the country’s unique geography. “We live with the fact that Indonesia is an archipelagic country – one of the largest archipelagic countries in the world – so to deal with that we cannot only rely on land transportation. The priority has to be for sea transportation or air transportation,” says Mr Brodjonegoro.
“For sea transportation, I think we need to continue the maritime-orientated development that has been set up during the first five years of this government. Of course, not only building the new seaports or expanding existing sea ports, but also to creating more traffic between the hub and the feeders.”
This links into plans to tackle regional disparities in economic opportunity. “We need to disperse the economic activity because if we try to improve the traffic on both sides – the origin and destination – you need to have comparable economic activity so that there will natural traffic, rather than traffic that is subsidised by the government,” says Mr Brodjonegoro. Maritime links are key for moving goods around the country. However “for people, air transportation will be more efficient”, he adds.
Getting all of this done involves evaluating what kinds of partnerships are best suited to each project, and how to judiciously deploy government resources. “If you want to simply build a new sea port in Java or expand existing sea ports, you can go to a state-owned enterprise or the private sector. You don’t have to go to the government budget,” says Mr Brodjonegoro, adding that his ministry is willing to help facilitate “the things that might be attractive with a sweetener – such as government guarantee or public-private partnership scheme – [that] then allows the private sector to be involved”.
Financial priorities
However, there are cases where the government must step in to bear the financial burden. “The government, through our agency, will do its best for the areas that might not be appealing to the private sector. We know there are many isolated islands that still need connectivity and that is the main job of the government.”
The current account deficit is another area of concern. Increasing tourist traffic is one solution. “We are talking about the promotion of tourism. This current government has made tourism one of the priority sectors. We need a greater contribution from tourism... We need to also build integrated tourist destinations in order to attract more tourists to Indonesia,” says Mr Brodjonegoro.
This is all part of a larger vision. The government is putting its muscle behind its commitment to the Sustainable Development Goals, signed by more than 190 countries under UN auspices in 2015. “The global commitment we are talking about is the Sustainable Development Goals, which fortunately has been mainstreamed [in] our development plans, both for five years and the annual plan. We are trying to promote lower carbon development for the next five years,” says Mr Brodjonegoro.
As Indonesia emerges from its two recent natural disasters, greater planning and preparedness will also be important to prevent future seismic events from taking such a devastating toll. “We need to go nationwide by creating planning for the areas that are high risk. [I’m] talking not only about zoning but also building codes. We need to explore disaster insurance and disaster risk financing,” says Mr Brodjonegoro. “The other thing we need to take into account [is] prevention – for example, creating an emergency system as in Japan [where] they have a siren system and early warnings for tsunamis. I think that needs to be set up for the Indonesian people.”
Over all of these plans, however, looms the uncertainty of the US-China trade war and the ripple effect it could have on economies around the globe.
“I think the trade war would be good if we had the ability to export products to the US, as long as the US doesn’t extend the tariff to Indonesia,” says Mr Brodjonegoro. The downsides, however, are all too clear. “Let’s say that China sees a slowdown in growth, then it will have a negative impact on us as one of our [main] export destinations is China – especially for our natural resource products,” he adds.
Bambang Brodjonegor is Indonesia's minister for national development planning.
