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Friday
Dec102010

Indonesia's Infrastructure Problem

As the Indonesian economy continues to demonstrate overall growth, will it become a victim of its own success? Edward Carpenter discusses.


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Jakarta Traffic. Image: Edward H. CarpenterINDONESIA IS a country facing a unique set of opportunities and challenges. On the one hand, it was one of the best performing economies through the global economic crisis of 2008-2009, posting positive growth and actually reducing its public debt-to-GDP ratio. It’s currently on track to join the BRIC nations, but will need to show sustained economic growth of more than five percent annually to achieve this goal. And it looks like this will probably happen by 2015: the IMF expects growth to continue at about six percent through 2011, and increase to seven to eight percent in future years.


Others are even more optimistic. Chairul Tanjung, chairman of Indonesia’s National Economic Forum, forecasts that the sprawling archipelago will become the world’s fifth largest economy in 2030. That would require a 10 percent annual growth rate, which some analysts, including Aris Ananta of Singapore’s Institute of South Asian Studies, find unrealistic. “With the exception of 1987,” he writes, “Indonesia never attained a growth rate of more than 9 percent.” 


A milestone that Indonesia is likely to achieve this year is a US$3000 per capita income. That’s the threshold cited for the economic progress of other developing Asian economies such as China and South Korea – assumed to presage increased consumption of durable goods like refrigerators, televisions and air conditioners, along with automobiles, real estate, luxury goods, and tourism. But the per capita income metric, which is derived from a country’s GDP divided by number of inhabitants, can be a deceptive. One factor it masks is the disparate distribution of wealth in an economy – a relatively small number of very rich people compensate for a similarly high number of the very poor. A better indicator would be median actual income, but these numbers aren’t readily available from the Indonesian government’s Centre for Statistics. 


In several measures of the equality of wealth distribution, Indonesia ranks above many other countries including the United States, China, and Russia, so the fact that per capita GDP doesn’t consider this economic variable is less important here than in other developing countries. On the other hand, another factor masked by the use of average per capita income as a metric for economic progress is the effect of rising prices. Consider the case of Indonesia’s growth in the five years between 2004 and 2009, when the average per capita income jumped by US$1517, more than doubling from the 2004 baseline of US$1179 to US$2696 in 2009. Prices on consumer goods, however, also rose considerably during that period. Rice, for example, was more than twice as expensive in 2009 than it was in 2004. Adjusted for the rise in prices, the actual increase in average purchasing power was only US$194 – a significantly less impressive figure than that of the per capita income that Economic Minister Hatta Rajasa likes to tout as signs of progress.


However it’s measured, Indonesia’s economy is demonstrating overall growth. It will likely continue to do so, but it is very much in danger of becoming a victim of its own success. This is due in large part to the lack of workable infrastructure, which does not satisfactorily address the current economy and will retard future economic growth.  Jakarta alone is estimated to lose US$1.43 billion per year as a result of traffic congestion, according to a report released by the Presidential Work Unit for Development Monitoring and Control. Anoop Singh, the IMF’s Director for Asia & Pacific Investment, has stated “Public investment has been low by international standards. Roads and ports in particular need improvement.” He’s right. The trans-Sumatra highway which links the port at Bakauheni with the factories and plantations along the length of the narrow, mountainous island is reduced for long stretches to a narrow two lanes, pitted and cratered in many places so as to resemble a bombed-out runway. A continuous stream of giant, heavily laden trucks, passenger buses and swarms of overladen scooters labour to navigate the tortuous road.


Within the confines of large cities like Jakarta, it’s even worse. The roads, while better maintained, can’t handle the volume of cars, mini-buses, and the ubiquitous scooters (over five million of them) that carry workers in from the surrounding countryside. A lack of workable public transportation and often inefficient routing methods can transform a straight five km drive along a major road, into a twisting 30 minute route on a good day 90 minutes if it’s raining (as it does nearly every afternoon from October through May). Leave the roads and take to the air, and the problems continue. The international airport was designed to handle 22 million passengers per year;. That number has already grown to 30 million and is expected to increase by 15 percent annually.


The Indonesian government desperately needs to take a page from China’s development manual, In 2002, the Chinese government, anticipating a similar rise of China’s per capita income to US$3000 in 2020, began building thousands of kilometres of new roads, modernizing mass transport systems, and building high speed rail lines and new airports. China hit the US$3000 per capita mark ahead of schedule in 2009, but the country was already prepared to handle the  infrastructure burden of a swelling middle class and its increased demand for personal transportation, energy, and consumer goods. China’s demand for cars rose from one million to 13 million, but the infrastructure needed to accommodate it was already in place - ensuring that increased vehicle traffic contributed to rather than reduced national efficiency. Compare this to the situation in Indonesia, where despite the documented multi-billion dollar losses in productivity that result from current traffic congestion, the government is predicting that annual domestic vehicle use will increase by almost 30 percent in the next five years.


The infrastructure problems in Jakarta, particularly, have become so severe that proposals are being considered to move the seat of government to a new location, likely in Kalimantan. Indonesian lawmakers tout such a move as a way to cure the capital’s congestion. Experts who have studied the effects of capital relocation projects in numerous other countries believe such a plan would have little effect, since Jakarta would remain the nation’s commercial hub. 


Rather than spend money on moving the government, the government must spend money to ensure that everything else moves more efficiently. That means revamping the existing TransJakarta bus system, improving the condition and quantity of passenger rail service throughout Indonesia, laying a trans-Sumatran rail line, completing the stalled Mass Rapid Transit (MRT) project, expanding and upgrading Soekarno-Hatta International Airport, and repairing and expanding highways throughout the large islands of Java, Sumatra, and Kalimantan. 


This type of construction won’t be cheap, but it will boost the economy in the short term by providing jobs, and in the long term by enhancing productivity. 


Improving broadband access outside of major cities is another important infrastructure improvement which the government communications giant TELKOMSEL can undertake (along with its commercial rival INDOSAT) to make it possible for more people to telecommute. Existing and planned business ventures should receive incentives to locate outside Jakarta, and to implement at least partial telecommuting for any employees who work in offices within the city.


Curiously enough, the funding to jump-start such improvement initiatives looks like it will come from China itself, whose representatives signed a US$6.6 billion agreement for investments in roads, bridges, canals, and other infrastructure development. The timing of this agreement, coming just one day before the visit of US President Barack Obama was hardly coincidental. It proved that despite the fact that the former local boy could still charm the Indonesian people with recitations of fond childhood memories, the United States, Indonesia’s fifth largest trading partner in terms of total imports and exports, could only offer them warm words. China, poised to topple Japan as Indonesia’s number one trading partner, is able to offer cold, hard cash instead.


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Major Edward H. Carpenter is a US Marine Corps Foreign Area Officer, based in Jakarta. The opinions in this article are his own, and do not reflect the official position of the Marine Corps or the US government.

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