Communiqué: An Island Nation with Poor Ports

November 4, 2010
Communiqué: An Island Nation with Poor Ports
Dean Ellwood, Anthony Saich, Dean Firmanzah, Trias Kuncahyono, Fritz Simandjuntak, and Peter Sondakh

New Ash Center Report Assesses Indonesia's Prospects for Success

By Kate Hoagland – Communiqué Fall 2010, Volume 7

Over the last ten years, Indonesia has transformed from an authoritarian state into the world’s first majority-Muslim, multi-party democracy. The country’s successes and challenges as a new democracy are the subject of the Ash Center’s Rajawali Foundation Institute for Asia report, “From Reformasi to Institutional Transformation: A Strategic Assessment of Indonesia’s Prospects for Growth, Equity, and Democratic Governance.”

Peter Sondakh, founding donor of the Rajawali Foundation Institute for Asia, commissioned the report due to concerns that Indonesia’s fledgling democracy might be faltering despite general praise of the country’s steady progress. An HKS team led by Professor Anthony Saich began to explore Indonesia’s deeper problems of inadequate infrastructure, inequality, and a stunted economy. The findings of the report led to the Rajawali Foundation establishing the Harvard Kennedy School Indonesia Program at the Ash Center in order to expand and strengthen policy research and training in the country.

“The achievements of Indonesia’s Reformasi era (1998 to present) are important and lasting,” said Anthony Saich. “But the country must undertake a substantive institutional transformation, and it must do so quickly to make the most of globalization and avoid the pitfalls of heavy dependence on natural resources and low-wage manufacturing.”

The report begins with a description of Indonesia’s current economic and social conditions. Indonesia’s infrastructure ranks 96 out of 133 countries. Only 55 percent of roads are paved, and the country still lacks a cross-Java highway. Low capacity and frequent cargo delivery delays of the nation’s ports have forced many companies to opt for more efficient neighboring Singaporean ports for shipments.

The report’s authors argue that spending on public health and academic achievement has been similarly inadequate. “At 1.1 percent of GDP, Indonesia spends less on public health than any country in the region.” Current academic curricula lack a strong focus on science and technology, reflected in the country’s R & D spending of only 0.05 percent of GDP.

Because it exports non-value added natural resources while importing finished goods it could produce domestically, Indonesia is currently in a trade deficit with China. This heavy reliance on commodities – including palm oil, copper, and nickel – makes the country more susceptible to price fluctuations that lead to an overvalued exchange rate which depresses more long-term employment.

The report argues that deep-seated corruption is at the heart of the country’s economic and social challenges. Recent decentralization of central to regional authorities has fragmented power, making accountability difficult. “We used to have one dictator,” said David Dapice, Center economist and one of the report’s authors. “Now we have hundreds of dictators because every little county head thinks of himself as a Suharto.”

The report’s authors recommend several measures for moving Indonesia away from its legacy of corruption. As the country’s electoral processes are often corrupt and vary across the country, the authors propose exploring changes to the models by which politicians are elected. Electoral reform could reduce some of the complexities in elections and incentivize politicians to act more in the public interest.

To ensure longer-term prospects for economic growth, Indonesia could benefit from attracting foreign investment to the region. China’s adoption of international standards of accountability and transparency has drawn foreign interest to the region; by following China’s example, Indonesia could halt ineffective practices influenced by domestic interests.

With over half of the country’s population living just above the poverty rate, Indonesia has a small middle class by comparison to other countries. Indonesia could promote a more entrepreneurial economy by expanding access to public education and social services including better credit and bankruptcy protection to strengthen this “missing middle.”

Other recommendations include encouraging Indonesia to create inter-governmental bodies to oversee decentralization and channeling public dissatisfaction with corruption into larger NGO watchdog groups, which would in turn give people more of a stake in their democracy’s ongoing stability.

According to the report, “Indonesia is changing, but most of the dynamic economies of East Asia are changing faster....Our main motivation in writing this report was to provide a framework for future research relating to the country’s institutions and institutional change.”

The report was authored by HKS faculty and staff Anthony Saich, David Dapice, Tarek Masoud, Dwight Perkins, Jonathan Pincus, Jay Rosengard, Thomas Vallely, Ben Wilkinson, and Jeffrey Williams. An Indonesian translation of the report has been published in Indonesia under the title Indonesia Menentukan Nasib: Dari Reformasi ke Transformasi Kelembagaan.