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COMMENTARY ON US-INDONESIA COMMERCIAL DEVELOPMENTS FROM THE AMERICAN INDONESIAN CHAMBER OF COMMERCE

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Wednesday, August 12, 2015

The Meaning of Banggai

August 7, 2015

President Jokowi traveled to the Banggai Regency in central Sulawesi this week to inaugurate the $5.8 billion "Pertamina Mega Integrated Project", which is planned to match the upstream production of natural gas with downstream users. The visit follows other forays of the President around the country to jump start other infrastructure projects including: parts of the Trans-Java - a 1,000 kilometer proposed toll road across Java from Merak in Banten, West Java, to Banyuwangi in East Java; the Trans-Sumatran Highway, a 2,508 km north-south road in Sumatra, from Banda Aceh to Bandar Lampung; new power plants that are part the 35,000 gigawatts expected within the next five years; and a 433-km Holtekamp Bridge in Papua. 

 
At Banggai, the President cautioned: "It must be integrated not only on paper but also in its real implementation in the field. This must be truly integrated, incorporating upstream and downstream industrial sectors and connecting gas producers and users. This must be implemented in the petrochemical and LNG business sectors and power plants," said Jokowi.

 
The huge project symbolizes the dreams of Indonesia's policymakers: for every raw material, there must be integrated downstream uses in the country. One hears the term "integrated" often in discussions and I suppose its natural. We like to think that everything is connected to everything else. When I lived in Indonesia in the 1970's I was always surprised by the natural way many of my Indonesian friends integrated the micro and macro aspects of life. An accident on a road could be instantly connected to a cosmic pattern that had been detected. Integration is harmony, steady-state, stable, values that resonate strongly in Indonesia rather than the dynamic, inherent conflicts of markets.

 
The meaning of Banggai is not just harmonius upstream and downstream integration, its also about self sufficiency and independence. The gas can be turned into LNG for power as well as ammonia for fertilizer and other uses, lowering the need to import. But in an increasingly interdependent world is this type of integration planning sufficient ? Could it not turn into an ideological imperative, locking Indonesia into policies that isolate rather than integrate it with the region and beyond ?

 

I think we are at a critical juncture in Jokowi's Presidency. If infrastructure of the kind that lowers logistics costs and helps supply chain integration cannot be accelerated we will only see more nationalist and protectionist policies, further isolating Indonesia's economy, especially given the weaknesses in the rupiah. We rarely hear the voices of Indonesian economists who know their way around international economics, even though some remain in the government. This week two Indonesian economists based in Australia--Arianto A. Patunru and Sjamsu Rahardja-- released an important report via the Lowey Institute, "Trade Protectionism in Indonesia". They observed that in past times bad economic circumstances led to good economic policies but today we are seeing "bad times leading to bad policies". Whether their cautionary voices and those of us outside Indonesia who are her closest friends, alarmed by the protectionist trend, will be heard remains to be seen. Indonesia's needs more "Banggais" and more industrial integration but not at the expense of regional and global intergration. Indonesia's future is not just supply chain connections within its borders but outside them as well.  The former will not happen without the latter.

Idul Fitri Reshuffle

June 30, 2105

The serious Cabinet reshuffle rumors began in June: in Indonesia, they are part of the air one breaths. An underwhelming economic performance would prompt President Jokowi to reshuffle his Cabinet after Lebaran (end of the Muslim fasting month on July 18), especially his economic team. The economy is, given Indonesia's potential, standing still, even though GDP growth hovers at close to 5%. Very little of the dividend from the elimination of energy subsidies has found its way into infrastructure projects, even though the government now has more authority to settle nettlesome land issues. The question is whether the implementation problems are due to incompetent management at the top of ministries-hence the need for a Cabinet change-or something more structural. I am persuaded by the latter. Changing the Cabinet will not necessarily quicken the pace unless the President is persuaded to use more of the power that is vested in his office to bring a greater policy coherence throughout the government and the regions. The import and export ban and value added thesis along with a rupiah-only currency policy are overcompensations for a bureaucracy that has difficulty efficiently delivering the services it was created to deliver. One of the co-chairman of PECC (Pacific Economic Cooperation Council), Jusuf Wanandi, (who since the 1960's has been an influential thought leader) recently said some very important things at a regional economic conference worth repeating here:



"There has been widespread disappointment with the Jokowi government, with economic growth falling to 4.7 percent in the first quarter, a lack of policy coherence keeping investors on the sidelines and bureaucratic inertia causing repeated delays to budget implementation. Investors have been waiting for the right signal to enter Indonesia, but the President should not convey mixed signals. He should do away with the inordinate nationalistic sentiment of the Indonesian Democratic Party of Struggle (PDIP)".
  
You will read further in this issue of Outlook/Indonesia that the President intends to move quickly in the second half of the year to start spending. You can see moves in this direction by observing the statements of the state-owned construction companies who have announced toll road projects they have won as well as the progress in negotiations over a high speed rail project between Jakarta and Bandung. The stimulus achieved by getting projects underway will certainly help move Indonesia's growth forward as most of it has been from consumption which has been slacking off. But the continuance of populist and protectionist policies (Indonesia just boosted tariffs on a range of food and consumer items), some designed to expand the role of the state in the economy, will likely yield mixed results or worse.


President Jokowi, unlike his fellow political mavericks such as the Governor of Jakarta and the Mayor of Bandung, has chosen to stick by the political party that chose him, PDI-P, a party that remains wedded to a 1950's ideology of state interventionism and a patronage culture (return of favors ) that has been largely eschewed by Indonesia's people. Cabinet changes could make a difference but only if accompanied by more open and transparent economic policies unfettered by the impulse to reward political parties and their benefactors. At least there has been the beneficial influence of the watchdog KPK (anti-corruption commission), press, and NGOs. However, their necessary vigilance has a side effect of paralyzing project implementation by fearful bureaucrats. Let's hope that with or without a Cabinet shuffle the President and his team can reduce the transactional politics that underlies too much of the government's decision-making and get the bureaucracy moving more swiftly. Only then will Indonesia get close to the 6% or higher growth that it is highly capable of achieving.

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President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

These views do not necessarily represent those of the American Indonesian Chamber of Commerce or its members.

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