Mar 13 th 2015 Research Report

Transcription

1 2014 Emerging Market Development Project Project to Support the Construction of the Partner Country s Industrial Policy and System (Indonesia: Study of Economic Policy Trends and Issues) Mar 13 th 2015 Research Report Arthur D. Little Japan Inc. Reception 37 Mori Bldg Toranomon Minato-Ku Tokyo Phone : Fax : URL :

2 Table of Contents 0 Background & Objectives P.3 3 Policies of the New Administration P.17 1 Indonesia's Economic Conditions P Overview P Economic Growth P New Policy Initiatives P Current Account Balance P Mid-Term Development Plan P Trade Balance P Priority Policies P Employment P Maritime Axis Doctrine P Income Inequality P Advanced Industry P Investment P Indonesian Autonomy P Investment Environment P Regional Development P.31 2 Key Inflection Points in Indonesia & ASEAN P Infrastructure Build-up P Population Bonus P.13 4 Future Japan-Indonesia Economic Cooperation P Middle-Class Expansion P Private & Public Sector Needs P ASEAN Economic Community P Japan-Indonesia Econ. Cooperation Plan P Overview P Proposals (Special Fields) P Proposals (Multiple Fields) P.47 2

3 Introduction Background Objectives Indonesia, as the only G20 member from the ASEAN region, has been steadily raising its presence internationally through strategic partnerships with countries such as the U.S., Australia, China, and India, as well as Japan, and the aim is to strengthen the cooperative relationship based on the idea of an active and independent omnidirectional diplomacy, focused on national interests. Indonesia s economy has continued to enjoy benefits, on both the supply and demand sides, of having the 4 th largest population in the world and long-last Demographic bonus period. With nearly 80% of its population in the middle class, domestic consumption has supported economic growth, even through the global financial crisis in Since then, exports have also rebounded, while the government stimulus spending on infrastructure projects etc. has also increased, leading to continued high growth. Since the 2 nd half of 2012, with the slowdown of the Chinese economy and drop in prices for natural resources, Indonesia has suffered a trade deficit, while its currency exchange, stock, and bond markets have been unstable, leading to Indonesia s government and central bank to draft comprehensive countermeasures to improve current accounts by promoting exports and limiting imports and boosting the economy by promoting investment. This research is aimed at researching trends in the surrounding economic landscape, analyzing the status of and the issues facing Indonesia s economy, plus the policies etc. of the new administration, particularly their announced priority measures, and recommending approaches for a new cooperative relationship between Japan and. Given these circumstances, Indonesia was ranked 1 st in 2013 and 2 nd in 2014 in the research of the Japan Bank for International Cooperation (JBIC) for Promising Mid-Term Business Expansion Destinations. For Japanese companies, Indonesia continues to attract keen interest as a place for investment, and among the direct foreign investment in Indonesia, which reached record highs of $28.5 billion dollars in 2014, investment from Japan was approximately $270 million USD, mainly in the automotive and other fields, accounting for roughly 9.5% of total investment, ranking 2 nd behind Singapore (1 st in 2013). Japan needs to expand its investment in Indonesia by supporting infrastructure construction in the transportation, logistics, electrical power, and other fields, and continue developing Indonesia as a base of production, as well as gaining a consumer market. Moreover, Japan also needs to examine how best to collaborate with the next administration. 3

4 1. Indonesia's Economic Conditions 1.1 Economic Growth In the wake of the Lehman Shock in 2008, most of ASEAN fell into a period of negative economic growth, but Indonesia has maintained steady GDP growth of around 5-6% since Former President Yudhoyono, who was elected directly by the people in the 2004 election, stabilized Indonesia s political foundation which is considered to be a key underlying factor for its steady growth. Real GDP growth rates in ASEAN countries Background [%] Lehman Shock Philippines Malaysia Vietnam Indonesia After the Asian currency crisis, the Suharto Government, which had ruled for 32 years, collapsed, after which there was a period of political unrest, which led to economic instability. But after the democratic election of the Yudhoyono Administration in 2004, the political foundation has been stabilized, resulting in solid economic growth Singapore Thailand 2014 Compared to other ASEAN countries which fell into recession after the financial crisis of 2008, Indonesia has maintained positive economic growth, led by strong domestic demand. Source: 各国の統計局 4

5 1. Indonesia's Economic Conditions 1.1 Economic Growth However, since 2011, GDP growth has slowdown, with 2014 seeing the lowest growth rate since In particular, there has been a large impact from the slowdown in exports, which account for roughly 1/4 th of GDP. Since China is a major trade partner, the decline of the Chinese economy also appears to have a large impact, slowing growth in exports, while the basic ban on raw, unprocessed natural resources has also contributed to this decline. Reviving and maintaining high economic growth once again from 2015 onward is an issue. 15 [%] The level of contribution of each key item to Indonesia s real GDP growth [$1Bil USD] Export volume CAGR -3.6% GDP Growth rate Export Stock Fixed capital Private consumption 0 Import Others Source: National Statistics Agency ( ), Ministry of Trade (2014) -10 Source: Statistics Indonesia Export volume (mining resources) Indonesia s economic growth is supported by solid individual consumptions, and since the fall in overseas demand in the wake of the Lehman Shock in 2009 was covered by domestic demand, domestic demand can be said to be leading economic growth. The demand structure which is not heavily impacted by exports is a contrast to Thailand, Malaysia, and Vietnam, whose economic growth is led by exports. [$1Bil USD] % Source: ADL analysis based on info from the Indonesian Ministry of Trade 5

6 1. Indonesia's Economic Conditions 1.2 Current Account Balance With the current accounts balance in the red since 2012, this is becoming a potential threat to future economic growth. One of the main factors is the worsening of the trade balance. The balance of payments deficit is also rising year after year, but that is mostly due to payments on interest and dividends from direct domestic investment. In 2014 however, with the US s quantitative easing measures etc., the balance of payments has greatly improved, as well as the current accounts balance. Trends in Indonesia s balance of accounts Background [$1Bil USD] The current accounts balance fell into the red in 2012, but one of the largest reasons behind this was the worsening trade balance. (Factors behind the worsening trade deficit explained later) * Trade Current transfers Service Account balance Payments Also, one of the factors for the deficit in structural balance of payments (dividend distribution payments to foreign companies etc.) is the increase in payments of interest and dividends that accompanied the increase in direct investment in Indonesia. In 2014, the accounts balance improved dramatically, but this was a result of quantitative easing policies in the US, limitations on foreign investment in emerging markets, leading to an improvement in the fairly negative balance of payments. 6

7 1. Indonesia's Economic Conditions 1.3 Trade Balance The background behind the worsening trade deficit is the declining exports due to falling international prices for natural resources and rising imports due to growth in the domestic consumptions. The decline in exports is seen as a structural problem, and a reason for the stronger tendency to move away from industrialization ( reliance on resources). The key issue for strengthening the competitiveness of its exports is the pursuit of industrialization. Trends in Indonesia s trade balance Export/Import Balance of trade [$1Bil USD] Balance of trade [$1Bil USD] 300 Exports Imports Source: Indonesian Ministry of Trade Trends in international resource prices [%] The percentage of manufacturing in GDP 27.9% 27.7% 28.4% 27.8% 26.8% Background 25.8% Source: ADL analysis based on info from the Indonesian National Statistics Agency 25.6% 25.5% [$/Ton] 1,200 1, , Source: IMF Palm oil Coal The underlying factors for the 2012 collapse into trade deficit are the fall in global resource prices which led to a decline in demand for resources in China and India, resulting in lower exports, plus the increase in imports resulting from growth in the domestic economy. (an increase in oil & gas imports in particular) Moreover, as a result of Indonesia s structural shift away from industrialization and towards reliance on natural resources under the Suharto regime, Indonesia is more heavily impacted by the international prices for natural resources. 7

8 1. Indonesia's Economic Conditions 1.4 Employment The promotion of industrialization policies has major significance from the point of view of absorbing employment. Indonesia has high unemployment rates and industrialization is a possible measure to address this. However, while labor supply and demand is not tight, the level of the lowest wages has been rising, indicating that there are a limited number of high quality workers, which in turn means that training industrial workers along with the promotion of industrialization is a key issue. Also, given the battle for school enrollment and other factors, employment rates in the informal sector (housekeepers and street peddlers) is high, and since using this as workforce to invest in industry would not be effective, it is likely a hurdle to long-term economic growth. Unemployment rate Minimum wages [%] Source: World bank Indonesia Malaysia Singapore Vietnam Thailand [1 million rupiah] Jakarta Average W. Nusa Tenggara Source: Indonesian National Statistics Agency Employment rate in the informal sectors School enrollment rates [%] Vietnam Thailand High school graduate & higher Did not enroll in school 31% 6% 14% Quit elementary school 40 Indonesia Malaysia Source: World bank Singapore Source: Indonesian National Statistics Agency Graduated middle school 21% 28% Graduated elementary school 8

9 1. Indonesia's Economic Conditions 1.5 Income Inequality However, on the flip side of economic growth, there has been growing economic inequality, as the Gini coefficient has risen steadily over the past 10 years. This has a strong correlation to regional economic disparities, as Java Island s percentage of total GDP rises year after year, while other islands have been declining. One of the main factors for regional disparities is the lack of development of infrastructure for transportation between islands. In the future, along with promoting unique industry for each island, then building the transportation infrastructure (logistics) to connect each island, they need to tap into the potential skills of each region in order to correct the regional disparities. Gini coefficient Each region s contribution to GDP [coefficient] % 2.5% 1.8% 2.6% 4.8% 5.1% 9.3% 8.2% Papua Bali-NTT Sulawesi % 20.8% Kalimantan Sumatera % 61.5% Java Source: Ministry of State Secretary Source: Indonesian National Statistics Agency 9

10 1. Indonesia's Economic Conditions 1.6 Investment Direct overseas investment in Indonesia is increasing year after year, with Japan becoming the largest investor in Among Japan s investment, 60% was in the transportation machinery related industry. Also, according to JBIC s Overseas Direct Investment Survey, looking at promising countries and regions for business development in the mid-term (the next 3 years), Indonesia was ranked 6 th in 2010, but 1 st in 2013 (2 nd in 2014), indicating that Japanese companies have increasingly keen interest in Indonesia. Direct investment per country Breakdown of direct investment from Japan in 2013 Investment in emerging markets stagnated due to the US s quantitative [$1Bil USD] easing policies. There was also a waitand-see impact related to the presidential election % 28.5 Primary industry Secondary industry Secondary industry Tertiary (transport equipment) (other) industry 0.1% 63.7% 29.2% 7.0% 4, % 24.6 Other Source: BKPM [$1Mil] Promising countries/regions for business development in the mid-term (next 3 years) % 7.8% 10.0% 16.5% 34.3% 26.3% 19.8% 16.3% Source: : Indonesian Investment Coordinating Board 1st 9.5% 20.4% 2014 S. Korea U.S. England Holland Malaysia Japan Singapore Rank China China China Indonesia India 2 India India India India Indonesia 3 Vietnam Thailand Indonesia Thailand China 4 Thailand Vietnam Thailand China Thailand 5 Brazil Indonesia Vietnam Vietnam Vietnam 6 Indonesia Brazil Brazil Brazil Mexico 7 Russia Russia Mexico Mexico Brazil 8 U.S. U.S. Russia Myanmar U.S. 9 S. Korea Malaysia U.S. Russia Russia 10 Malaysia Taiwan Myanmar U.S. Myanmar Source: JBIC 10

11 1. Indonesia's Economic Conditions 1.7 Investment Environment On the other hand, in order to promote industrialization, in addition to being a consumer market for foreign companies, it will be very important to have them position Indonesia as a production base. But in order for them to do so, it is very important that they solve such issues as infrastructure construction, improving the transparency of the legal system, improve worker productivity and personnel training, and other steps to make Indonesia more attractive as a production base. Degree of difficulty (ease) of business expansion Reasons why Indonesia is a promising country for mid/long-term business growth for Japanese companies, plus issues 89 Score in terms of degree of difficulty of operating a business (N=189 countries) Reason for promise 100% 80% 60% 40% 85.5% 37.3% 1. Future promise of the local market 2. Current size of the local market 3. Cheap workforce 20% 4. As a supply base for automakers Singapore Malaysia Thailand Vietnam Philippines Indonesia Indicator Days Rank Starting a Business Construction Permits Getting Electricity Global Rank Issues 0% 50% 40% 30% 20% % 41.0% 5. As a base of exports to 3 rd party countries 1. Rising labor costs 2. Opaque legal framework 3. Intense competition 4. Under-developed infrastructure 5. Difficulty in securing quality, management level talent Registering Property % Paying Taxes hours/year 160 0% Source: World Bank Ease of Doing Business Source: JBIC 11

12 1. Indonesia's Economic Conditions 1.7 Investment Environment Additionally, it is estimated that there are economic losses of around $30 billion annually due to illegal fishing by foreign boats and other such illegal activities, which is equivalent to around 3% of Indonesia s GDP. Moreover, Indonesia s tax collection rates as a ratio of GDP are the lowest in ASEAN, and according to the World Bank, they could collect an additional $25bil annually if they strengthened their tax inspection/auditing. Setting up the legal framework and the organizations of enforcement and strengthening them is a critical issue for the future. [$1Bil USD] Economic losses due to illegal activities (expert from the major industries) 0.13 Mineral resources 0.61 Corruption 2.00 Forestry 4.20 Oil & gas Fishing Economic losses from illegal activities are estimated to be $30.9bil annually, a value equivalent to around 3% of GDP Overall In the fishing industry, nearly 90% of the boats operating in Indonesia s territorial waters are foreign vessels, the majority of whom are fishing illegally. The damage from this is around $24bil annually. The value of the damage from illegal logging is estimated to be $2bil USD annually, at the very least 20% 15% 10% [%] % 0% [%] 14.5% 11.3% Tax collection as a percentage of GDP Tax collection as a percentage of GDP (compared to major countries, 2012) % 11.8% % 11.9% % 12.2% 1, England Australia Thailand Germany Malaysia Singapore 15.8% 12.4% 1, US 15.7% 12.4% 1, Indonesia India Philippines Broad definition tax rate (%) Narrow definition tax rate (%) GDP (Tri. IDR) 11 Japan Source: Tempo, The Jakarta Post, Wall Street Journal, World Bank, Kompas.com, Human Rights Watch, Indonesia Corruption Watch 12

13 2. Key Inflection Points to Monitor in Indonesia & the ASEAN Region 2.1 Population Bonus The most attractive aspects of Indonesia for foreign companies are the size of the market and the growth rate. In addition to being the 4 th most populous country in the world, the population will continue to grow until around 2070 and the Demographic bonus is expected by most to last until around The Demographic bonus period is needed to drive economic growth and to form the industrial structure to absorb the workforce. In other words, it is needed to promote industrialization. Furthermore, for long-term growth, the supply of high quality workers will become an issue as they will be needed to boost productivity in answer to rising wages. Population demographics per age range Demographic bonus period [1mil people] Source: United Nations World Population Prospects: The 2012 Revision Over 65 years old 15 to 64 years old Under 14 years old Japan Hong Kong Singapore China S. Korea Thailand Vietnam Indonesia Malaysia India Philippines Myanmar Laos Cambodia Present Source: ADL analysis from various statistical data 13

14 2. Key Inflection Points to Monitor in Indonesia & the ASEAN Region 2.2 Middle-Class Expansion With the expansion of the middle class, or the increasing number of consumers with buying power, it is possible to achieve growth with a balance between domestic and overseas demand. As a result, steady, ongoing economic growth is projected. On the other hand, with the growth of the consumer market, since both overseas investment and imports are forecast to rise, strengthening the competitiveness of domestic companies will be a critical issue so that they do not lose out on all the benefits of market growth to foreign companies. Population breakdown according to monthly household income levels [1mil people] The elite segment (7.5mil IDR & over) The wealthy segment (5-7mil IDR) Upper middle (3-5mil IDR) Middle (2-3mil IDR) Middle & wealthy segments Newly middle (1.5-2mil IDR) Nearly middle (1-1.5mil IDR) Lower income segment (less than 1.5 mil IDR) The non-affluent segments Source: Boston Consulting Group 14

15 2. Key Inflection Points to Monitor in Indonesia & the ASEAN Region 2.3 ASEAN Economic Community The ASEAN Economic Community is an initiative to free up the movement people, goods, services, and money within the ASEAN region in order to boos the competitiveness of ASEAN as a whole in comparison with other regions and countries. Overview of the ASEAN Economic Community Single Market And Production Base Highly Competitive Economic Region Equitable Economic Development Integration into Global Economy Free Flow of Goods Free Flow of Service Free Flow of Investment Freer Flow of Capital Free Flow of Skilled Labour Priority Integration Sectors Food, Agriculture, Forestry Culture of Fair Competition Consumer Protection Intellectual Property Rights Infrastructure Development (transport, energy, mineral, ICT) Taxation e-asean SME Development Initiative for ASEAN Integration Coherent Approach toward External Economic Relations Global supply networks participation 15

16 2. Key Inflection Points to Monitor in Indonesia & the ASEAN Region 2.3 ASEAN Economic Community The objective of the ASEAN Economic Community is to boost the competitiveness of the ASEAN economy, but it is not necessarily always the case that it offers the same benefits to each country. As the largest market within ASEAN, for Indonesia, it offers opportunities to effectively utilize the production network within the region to expand trade and direct investment. On the other hand, since it is forecast to accelerate the influx of various people, goods, and services from other countries and also draw in foreign companies, it will become necessary to enhance the competitiveness of domestic companies (including small & mid-sized companies). Opportunities Threats Growth in direct investment from overseas Accelerate development of industry and expand exports With the ASEAN Economic Community, ASEAN will become the world s 3 rd largest market and it is likely that investment from overseas will accelerate. As the largest market within ASEAN, Indonesia will be able to attract maximum investment from overseas by building up an environment for investment. By utilizing the production network within the ASEAN Region, procure high quality raw materials at low prices from surrounding countries, allowing for rapid improvement of the competitiveness of Indonesia s domestic industry, making their exports competitive. It will be necessary to achieve a balance in which sectors to promote national industry, considering multiple factors, such as where neighboring countries are present in the value chain, risks, timeframes, employment, costs, and other factors. Create better business environment Enhancing the competitiveness of small/midsized companies Enhancing the competitiveness of exports Although neighboring countries Malaysia and Thailand are smaller markets in terms of scale, they surpass Indonesia as environments for investment, and thus, building up an attractive environment will be a key issue so that investment in production bases does not all go to its neighbors. Since there will be a liberalization in the flow of people, goods, and money from surrounding countries, it necessary to counter these potential threats by strengthening competitiveness, especially for small/mid-sized enterprises With the growth of the Indonesian economy, the resulting robust demand will likely lead to a spike in imports from surrounding countries, so making domestic companies competitive enough to meet domestic demand as well as for exports is an issue. Source: Indonesian Ministry of Trade, ERIA, AIEN, ADL Analysis, The Jakarta Post 16

17 3. Policies of the New Administration 3.1 Overview The new president, Joko Widodo, is known as a populist and enjoys high approval rates among the people. About Joko Widodo Born: June 21, 1961 Religion: Islam Background: Working Class Education: Engineering degree from Gadjah Mada University Political party: Indonesian Democratic Party of Struggle (PDIP) Pre-Political Career: Furniture store owner Political Career: Mayor of Solo ( ), Governor of Jakarta ( ) Notable Achievement: Anti corruption initiatives, barring his own family members from bidding projects City revitalization and infrastructure projects Healthcare insurance program in Solo and Jakarta Source: Wall Street Journal, SMBC, APCO Background Strength Joko (or Jokowi) came from a humble beginning. He grew up at the same settings as most Indonesians do. He is often called as man of the people an acknowledgement that Jokowi is once a normal Indonesian. This gains him enormous support from the low-mid income populations. He is young and has no political ties with elite bureaucrats. Track Record Jokowi was very successful in leading Solo and Jakarta as Mayor and Governor. He is well known for his trademark blusukan or an impromptu visit to understand the situation on the field. He has no record about corruption. Challenge Political Coalition Jokowi s Great Indonesian coalition is a minority in a parliament. This gives the opposition rooms to shoot down Jokowi s reformation effort. However, troubles come not only from the opposition as he has seen to do many transactional appointment for ministers and attorney general to please his own coalition. Lack of experience Jokowi is relatively new to politics, especially to hold a position as central as a president. He seems to rely a lot on his advisors both from political and professional background. It is intriguing to see Jokowi handling foreign affairs matters. 17

18 3. Policies of the New Administration 3.1 Overview The cabinet was formed with an emphasis on effectiveness with people from the private sector (company managers) and experts, etc. (Among the 34 agency heads, only 14 were members of the party) Office of Coordinating Political, Legal & Security Affairs Minister Home Ministry Foreign Ministry Defense Ministry Law and Human Rights Ministry Communications and Information Ministry Administrative and Bureaucratic Reform Ministry State Secretariat Office of Coordinating Maritime Affairs Minister Transportation Ministry Maritime Affairs and Fisheries Ministry Tourism Ministry Energy and Mineral Resources Ministry Source: The Jakarta Post, Tribunnews.com President Ministry of National Development Planning Office of Coordinating Economic Minister Finance Ministry State-Owned Enterprise Ministry Cooperatives and Small and Medium Enterprises Ministry Industry Ministry Trade Ministry Merged/Change/Split Agriculture Ministry Manpower Ministry Public Works and Public Housing Ministry Environment and Forestry Ministry Agrarian and Spatial Planning Ministry Office of the Coordinating Human Development and Culture Minister Religious Affairs Ministry Health Ministry Social Affairs Ministry Women s Empowerment and Child Protection Ministry Culture and Elementary/Secondar y Education Ministry Research and Technology and Higher Education Ministry Youth and Sports Ministry Village, Disadvantaged Regions and Transmigration Ministry New Background Since they do not possess a majority in the People s Assembly, they are forecast to face high opposition from the legislatures, but over half of the cabinet are experienced leaders (corporate management experience) and industry experts, so it is considered a cabinet with an emphasis on effectiveness, rather than politics. Among the 34 cabinet members, only 14 are party members, so over half of them were selected from among business people. There are 8 female cabinet members (twice as many as the previous administration), showing an emphasis on diversity 18

19 3. Policies of the New Administration 3.1 Overview Since taking office, the administration has acted quickly to cut fuel subsidies, for which protests were expected, and to strengthen control over illegal fishing, which was expected to be difficult to take concrete actions against due to relationships with neighboring countries. These actions have gained them recognition as an effective cabinet. Example of effectiveness1: moves to cut fuel subsidies Example of effectiveness2: stronger control over illegal fishing 0 2,000 4,000 6,000 8,000 10,000 [IDR/liter] Regular 6,500 2,000 8,500 Diesel 5,500 2,000 7,500 Price increases due to cutting subsidies for fuel On Nov. 17 th, 2014, the new administration cut fuel subsidies, and as a result, gasoline prices rose over 30%. This policy was forecast to draw protests from the people, but there was no major opposition. Fuel subsidies for gasoline were completely cut, but at present, but since crude oil prices are currently dropping worldwide, gasoline prices have fallen significantly since Jan Regular: 7,600 Diesel: 7,250 In Indonesia, this month for the first time, 3 Vietnamese fishing boats were captured by the navy for illegally operating in Indonesian territory. After arresting the crew, they blew up and sunk the abandoned ship. Every year, Indonesia looses over $24 billion due to illegal operations, and this was a step towards tamping down on that. After blowing up the Vietnamese boats, they detained 22 Chinese fishing boats, and with concern for protests from China, there is a lot of interest to see whether they will sink those ships as well. With the detention of the Chinese boats, Susi Pudjiastuti, the Minister of Maritime Affairs and Fisheries, held talks with the Embassador at China s Embassy in Indonesia based on requests from Foreign Minister Retno Marsudi. However, if the President grants permission, it is still possible that the boats will be destroyed and this is under consideration. Source: The strait times, The Jakarta Globe, Channel News Asia, DBS 19

20 3. Policies of the New Administration 3.2 New Policy Initiatives Mid-Term Development Plan Indonesian direction National development strategy Working Cabinet Development Norm 1. Develop to increase human quality of living of individual and society 2. Every effort to increase prosperity, welfare, and productivity must not increase inequality. Special attention should be given to increase productivity of lower income society, without disturbing, hindering, or decreasing the freedom of large entities to be the agent of growth. 3. Development activity should not harm or decrease environmental support and stability of ecosystem. 3 Dimension of Development 1 Human Development 2 Strategic Sector Development 3 Equalization and Regional Education Health Housing Mental/Character Food Independency Energy Independency & Electricity Maritime and Marine Tourism and Industry Between Income Level Between Regions: (1) Villages, (2) Rural Areas/Periphery, (3) Non-Java (4) Eastern Region Legal Certainty and Enforcement Security and Order Essential Condition Politic and Democracy Management & Bureaucratic Reform Quick Wins and Other Programs Source: Mid-Term Development Plan (RJPMN ) 20

21 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Below are 5 key distinctive economic policies of the new administration. 3 Sovereignty 2 Industry 4 Non-Java Development 1 Maritime 5 Infrastructure Development Distinctive economic policies of the new administration Source: ADL analysis based on the Mid-Term Development Plan (RJPMN ) 21

22 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Maritime Axis Doctrine Indonesia desires to be a global maritime axis with strong maritime supremacy and diplomacy coupled with excellent infrastructure 5 Pillars of Maritime Axis Doctrine Comments Rebuild Indonesia s Maritime Culture Maintain and Manage Sea Resources Prioritize Maritime Infrastructure Strong Maritime Diplomacy Maritime Defense Power As a country that is made up of 17,000 islands, the nation must realize that its future is largely determined by how it manages the oceans. Indonesia will maintain and manage sea resources with a focus on establishing sovereignty over seabased food products. The country will prioritize infrastructure and maritime connectivity development by building sea tolls and deep sea ports while also improving the shipping industry, logistics and maritime tourism. Through maritime diplomacy, Indonesia must end the sources of conflict at sea, such as fish thefts, violation of sovereignty, territorial disputes, piracy and pollution. As a country that is the bridge between two oceans, Indonesia is obligated to build its maritime defense power The goal of Indonesian maritime axis doctrine is to establish Indonesia as a maritime fulcrum, the power between two oceans. Thus, as a maritime country, Indonesia should assert itself as the World Maritime Axis. This position opens opportunities for Indonesia to develop regional and international cooperation for the prosperity of the people, Indonesia is obligated to build its maritime defense power. This is necessary not only to secure its maritime wealth and sovereignty but also to take responsibility for safeguarding navigation safety and maritime security. Joko Widodo, during East Asia Summit Taken from the Jakarta Post Source: The Jakarta Post 22

23 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Maritime Axis Doctrine Indonesian maritime resources has to be utilized optimally for the national needs and people s welfare Maritime and Marine Sector Target Comments Maritime and Marine Target Strengthening Identity as a Maritime Nation Completion of small and isolated islands registration to UN (by 2017) Settlement of Maritime Boundary Dispute (Country) 1 9 Eradicating Illegal Fishing Strengthening law conformation of fishing Actors 52% 87% Developing National Connectivity Development seaports for "sea highway" - 24 Development of home ports or passenger ports Procuring "pioneer ships (units) Developing of Maritime and Oceanic Economy Fishery production (million ton) 22, Development of fishing port (units) Widening sea conservation area (M ha) 15,7 20 Government placed maritime as its priority program due to its central position in government strategy. As a maritime country, maritime sector encompassed many fields of Indonesian interest. Source: RJPMN Book 1, The Jakarta Post 23

24 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Maritime Axis Doctrine Sea Highway is connecting Indonesian main ports from east to west by providing regular schedule of large cargo ship Indonesian Sea Highway Initiatives Comments Sea Highway is an integrated domestic shipping network across Indonesian main ports which aims to promote a more efficient and economical national distribution system. This way, price of goods outside of Java can be reduced due to smaller distribution cost. It applies Trade Follow the Ship concept whereby the infrastructure and the route are firstly build and the trade flow will follow the route. It will utilize large 3000 TEU s ships to go back and forth across Main Sea Corridor connecting 6 main ports from the East to West of Indonesia.. Smaller Feeder ships will go around looping. Source: World Export Development Forum 2012 Indonesia Port Corporation 24

25 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Maritime Axis Doctrine Sea Highway is expected to increase domestic container volumes across regions in Indonesia while significantly decreasing the shipping cost Indonesian Sea Highway Initiatives Comments Distribution Cost Comparison Before and After the Pendulum Service (USD) [USD/TEU*] 2,000 1,500 1, Before After Singapore Belawan Surabaya (North (East Sumatera) Java) 2, Sorong (Papua) Data from World Export Development Forum 2012 Indonesia Port Corporation *TEU: Twenty-foot Equivalent Unit Price of One Sack of Cement before Sea Highway One Sack of Cement JAVA = IDR 60,000 Shipping PAPUA = IDR 2,500,000 Due to high shipping cost, price of one sack of cement in Papua IDR 2,500,000 or USD 200 as compared to IDR 60,000 or USD 5 in Java, as quoted by president Joko Widodo during his interview. This is caused mainly by irregularities on shipping frequency as ships will depart from Java ports only when goods are enough to cover the operator s shipping cost. Hence Sea Highway is a much needed initiative to provide regular shipping services and reduce national logistics cost and bring price parity across Indonesia. Source: World Export Development Forum 2012 Indonesia Port Corporation, Kompas 25

26 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Advanced Industry Tourism has the potential to yield foreign exchange earnings and generate jobs. Manufacturing industry is focused to add value to economy Tourism and Manufacturing Sector Target Comments Tourism and Manufacturing Target Manufacturing Industry Growth of Industry Sector (GDP) 4.7% 8.6% Contribution to GDP 20.7% 21.6% Increase the number of Medium and Large Enterprises 9000 ( ) Tourism has a huge potential in Indonesia as the country has many potential tourism spots, especially in non-java area. Tourism will also give direct income for the living of the people outside of Java. Direct foreign exchange earnings to Indonesia from the foreign tourists Manufacturing industry is prioritized to create an economy based on value adding creation with good technology, creativity, skills, and human capital. Developing manufacturing industry will help ease Indonesian current deficit pressure due to the fall of commodity prices. 26

27 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Advanced Industry 3 key directions: development of industry outside Java, increase of industrial population, and increase competitiveness and productivity Development of Industry Outside Java Increase Industrial Population Key initiatives for industry Build 14 industrial parks outside Java and at least 1 inside Build 22 Center for Small Medium Industry 11 in Eastern Indonesia and 11 in Western Indonesia Build main infrastructures for industry growth and a quality working life for the workers. Addition of 9000 medium and large industry with 50% growth outside Java and small industries Increase investment on: Resource processing (agriculture, petroleum and mining) Labour intensive consumer products industry (machinery, textile, transportation, electronics) Components or raw materials producing industry Industry which utilize the opportunity on global production network as subsidiary, contract manufacturer, or supplier Integration of SMEs to value chain of OEMs industry to be the foundation of growth for the population of larger industry Comments Policy direction in manufacturing industry is to attract industrial investment by facilitating the development of industrial areas through the availability of infrastructure around the area Developing industry outside Java is a key priority in Indonesia to promote equitable growth and share the welfare to the residents. Indonesia would like to add more value to its resources and hence is supportive to resource processing industry Increase Competitiveness and Productivity Source: RJPMN Book 1 Improve technical efficiency (machinery, labour skills, utilization of economic of scope with industrial cluster) Increase of technology management Increase of management and creation of new product development by domestic industry Labour intensive industry is also a concern to utilize demographic bonus. 27

28 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Advanced Industry Increase export in manufacturing sector to reach 65% of total export by 2019 totaling 185 B. Exports will be driven by priority products Non-Oil & Gas Export Target Comments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% [$1Bil USD] 63.0% 37.0% % 53.0% 49.0% 44.0% 47.0% 51.0% % 57.0% % 65.0% data from Indonesian Ministry of Trade and Indonesian Ministry of Industry data RPJMN Book 1 analyzed by ADL Non-Manufacturing Manufacturing Manufacturing product is only 37% of Indonesian export while its import share is 60% Indonesia would like to increase export in manufacturing sector as a measure to the decreasing commodity price and increasing manufacturing price Manufacturing export will reach 65% by 2019 totaling B USD with CAGR of 23.3 % Indonesian ministers of trade says that Indonesia will prioritize manufacturing export for priority products such as electronics, textile, chemical, wooden products, furniture, metal products, automotive, and machinery. Source: Indonesian Ministry of Trade, Indonesian Ministry of Industry, RPJMN Book 1, Tempo 28

29 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Advanced Industry Indonesia objective is to increase the value of mining products, fulfill domestic demand, create better business environment for the players Key Initiatives in Mining Industries Comments Improve Mineral Industry Development Incentivize Mineral Processing Investment Increase Legal Certainty for Mining Industry Players Define strategic mining products as raw material to be processed for higher economic value. Perfecting Domestic Market Obligation and limit export of mineral ore to ensure continuity of supply for local market Develop plan for smelters building which follows the potential of mineral reserves and availability of infrastructure. Develop infrastructures such as road and electricity to support operating smelters or planned smelters. Acquisition of necessary technology for processing Development of export tariff reduction, tax allowance, and royalty payment scheme for smelters activities which is integrated with mining enterprises. Perfecting regulation regarding domestic value adding activities and regarding state revenue through the adjustment of fixed tariff and production tariff. Renegotiate management of mineral resources based on equal profit sharing between government and corporation. Solve issues regarding mining business quickly The direction of the initiatives is to fulfill domestic demand and increase the competitiveness of mining products as well as protect the sustainability of the mineral production and resources. Incentives will be given to increase investment on mineral processing through the provision of infrastructure, technology acquisition, and fiscal incentives. Indonesia is aware of the importance of legal certainty for the mining players and is now working towards improving the necessary elements. Source: RJPMN Book 1 29

30 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Indonesian Autonomy There is a strong nationalistic notion in the government plans. Indonesian resources should be utilized maximally for the benefit of the people Quote from Government Plan Comments Regarding Energy and Electricity Regarding Maritime Resources Regarding Economic Independency Regarding Development Strategy Indonesian Energy Independency and Electricity (for the Indonesian people) has to be done by utilizing maximally domestic energy resources. Maritime resources have the utilized maximally for national interest and the people s welfare. Established Economic Independency by utilizing domestic economic strategic sectors. Indonesia cancelled infrastructure projects which was not aligned with its development strategy even though there is strong pressure from the private sectors and foreign governments. Indonesian government has a strong nationalistic notion in the government plans. Indonesian resources should be utilized maximally for the benefit of the Indonesian people. Based on ADL primary interview with a well known economic professor in Indonesia, there is a strong tendency for Indonesia to be more domestic oriented on its trade and economic partnership with foreign countries. Regarding Mining Law Indonesia continues the Mineral export ban even though many private sectors and foreign governments had voiced out discontent about the law. Source: RJPMN Book 1, ADL Primary Interview 30

31 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Regional Development Acceleration of growth of regional economic centers especially outside Java by maximizing agglomeration benefits Key Initiatives on Strategic Regions Development Comments Development of Regional Economic Potential Acceleration of Connectivity Development Development of Human Capital and Technology Improvement on Business Climate Development of 8Special Economic Zone (7 non Java) 14 new industrial parks especially ones with high value adding and job creations. Development centers of growth to accelerate maritime km road, 10 seaports, 10 airports. Expand economic growth from centers to hinterland. Distribute development benefit vastly through connectivity. Integration of economic growth centers through connectivity. Human capital development based on the need of the region Development of polytechnics with modern infrastructure Development of Science and Techno Park for innovation Increase of research budget Simplification of investment procedures Improvement of logistics efficiency in strategic regions One Door Policy in strategic regions to accelerate permits Fiscal and non-fiscal incentives for strategic regions which can attract investment for processing raw materials for domestic industries and natural resources processing. Development of strategic regions is the acceleration of growth of regional economic centers especially outside Java by maximizing agglomeration benefits, exploit potential and excellence of the region and efficiency improvement in providing infrastructure. Developing Non-Java area may seem to be delaying Indonesian growth, however from political and social perspective, this is a necessary step to bring equality to the people as every Indonesian have the same right to gain economic welfare. Source: RJPMN Book 1 31

32 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Regional Development Region development is based on competitive excellence potential of each region, as well as strategic geographical position of each island Region Papua Maluku Nusa Tengara Sulawesi Java-Bali value adding in sector/sub-sector of agriculture, plantation, livestock, and forestry. maritime economy development through fishery and maritime tourism development. maritime nature and culture tourism development through improvement of socio-culture potential and biodiversity; downstream industry for mining, oil & gas as well as mineral (copper). improvement of environmental support for low carbon development Strengthening of local and civil society institutional capacity; accelerating manpower quality improvement in Papua which are independent and productive with moral sense. maritime food and fishery reserves fishery industry. nickel and copper processing industry. Maritime tourism. Key initiatives MICE industry; Meeting, Incentive, Convention and Exhibition national food reserve by accelerating development of maritime based economy through development of fishery, salt, and see weed industries. manganese and copper industry; One of the gate for International Commerce and gate for Eastern Indonesia. Logistic based industry development National food reserve through development of cacao, paddy and corn industries; Development of rattan, asphalt, nickel, iron ore and natural gas industries; National food reserves; Support for national service and manufacturing industry through development of FMCG, textile, automotive, military instrumental weapon system (alutsista), telematics, chemical, alumina, and steel industries; One of tourism gates for international finest tourism attraction through development of creative economy; Acceleration of maritime based economy through development of shipbuilding industry and maritime tourism DAS rehabilitation areas, critical land, preserved and production forest; as well as development of flood and wildfire (forest fire) warning system; Kalimantan National energy reserves through development of coal based downstream energy industry, as well as development of renewable energy such as biomass, hydropower or solar PV or based on resource in each Province; Development of palm oil, natural rubber, bauxite, iron ore, liquid natural gas, zircon sand and quartz sand industries; Declaring Kalimantan as one of national food reserves One of the gates for international commerce; Sumatera National energy reserve, as well as renewable energy development such as biomass; Development of coal-based downstream industry; Development of palm oil, natural rubber, tin, bauxite, and kaolin industries; Acceleration of maritime-based economy through development of fishery, maritime tourism, plantation and mining industries; Source: RJPMN Book 1 32

33 3. Policies of the New Administration 3.2 New Policy Initiatives Priority Policies Regional Development Developing economy outside Java is a manifestation of the mandate on the national development. Java GDP ratio will decrease from 58% in 2013 to 55% in 2019 Key Initiatives on Strategic Regions Development Comments 2.2% 2.9% 4.8% 5.2% 8.7% 9.6% 2.5% 2.6% 58.0% 55.1% Maluku, Papua Sulawesi Kalimantan Bali-Nusantara Java In one of the norm of national development, it is mentioned that: every effort to increase prosperity, welfare, and productivity must not increase inequality. Special attention should be given to increase productivity of lower income society, without disturbing, hindering, or decreasing the freedom of large entities to be the agent of growth Taken from RPJMN Book Developing economy outside Java is a manifestation of the mandate on the national development norm. By 2019, Indonesia would like to have greater share of its GDP contributed from non Java from the currently 42% to 45%. A modest increase as the government is still planning to develop Java as the center of national economy. Source: MP3EI 33