Analysis: Indonesia: Thinking big

The Jakarta Post, Josh Franken, Oxford Business Group, Mon, 06/13/2011

Indonesia’s newly published economic master plan sets out ambitious targets to become one of the world’s biggest economies over the next 15 years. The plan unveiled by President Susilo Bambang Yudhoyono (SBY) also put the spotlight on the need for heavy investments in infrastructure coupled with improvement in the investment climate.

On May 27, President Yudhoyono unveiled the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), which will carry the country through to 2025. It aims to make Indonesia, the 17th largest economy in the world last year, one of the world’s 10 biggest economies by 2025, taking GDP to $4.5 trillion and increasing the per capita income from $3000 now to $15,000.

To achieve this, the master plan seeks to raise average annual growth to 8-9 percent between 2015 and 2025, from around 6 percent now. The MP3EI also sets the target of bringing inflation down from 6 percent now to 3 percent by the middle of the next decade.

The plan outlines Rp 4000 trillion ($468.5 billion) in investments to be made over the next 14 years, including in infrastructure work. Some Rp 544 trillion ($63.72 billion) of government cash has been earmarked for investment to 2025, to be supplemented by Rp 836 trillion ($97.93 billion) from state firms.

At the MP3EI launch, Yudhoyono identified 17 projects worth Rp 190 trillion ($22.26 billion) in the plan that are expected to start this year, some of which had already been announced. They include hydroelectric and solar power plants; oil palm developments; a steel mill in East Java; new roads including toll motorways; mining projects; expansion of broadband internet; and nickel, cobalt and aluminium factories.

Another major project that the government has pledged to launch this year is the long-awaited Sunda Strait Bridge that would link Java and Sumatra, Indonesia’s most populous islands (and the first and fourth most populous in the world, respectively). The bridge is expected to cost Rp 150 trillion ($17.57 billion) and has been subject to planning delays.

While infrastructure and industrial investments have taken most of the headlines, the MP3EI also highlights the importance of moving Indonesia’s economy up the value chain and increasing the level of innovation. Through improving education and boosting school and university attendance, as well as expanding the industrial base, Indonesia aims to develop a more high-tech economy, exporting more tertiary goods and becoming less reliant on commodities, the prices for which have fluctuated greatly over the past five years.

Yudhoyono has acknowledged that Indonesia must first overcome some serious challenges if its vision is to be realised. He identified “five diseases that can make us fail”, including slow bureaucratic processes, conflicting interests in regional government (Indonesia has undergone a process of devolution in recent years), obstructive regulations, broken promises to investors and “unhealthy” political factors.

Despite these challenges, Indonesia has developed into something of an investors’ darling of late, particularly since the economic crisis, which the country weathered remarkably well. The country offers a large and thriving domestic market, access to much of Asia and abundant natural resources.

Business leaders have also drawn attention to the need for a renewed focus on economic reform to enhance the investment climate if growth targets are to be achieved, asserting that the private sector must take the lead in the longer term.

“Foreign direct investment has shown positive increases, demonstrating the level of interest from companies looking to capitalise on the growth of the region,” Mike Gundy, the president-director of BlueScope Steel Indonesia, the local wing of an Australian metals company, told OBG. “However, fiscal incentives and tax holidays are a necessary step if the country is to remain competitive in the region.”

As Yudhoyono noted, red tape is another common complaint cited by investors, and clearing the regulatory thicket around businesses and the limitations on foreign ownership in some sectors would be beneficial.

Indonesia is demonstrably one of the world’s rising economic powers, and has now set the target of shifting up a gear to become one of its very biggest in less than a generation. While public investments will play a crucial part in meeting this goal, a liberated and thriving private sector is the hallmark of an advanced economy.