Anomalies and controversies in Indonesian investments

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Anthony Budiawan
Managing Director of the Political Economy and Policy Studies (PEPS)

IO – The Government of In­donesia is reportedly anxious about the downward trend of investments in Indonesia over the past several years. Such anxiety is understandable, as investments form the backbone of the economy. In other words, with­out growth from investment, there will be no resultant economic growth; this will in turn signify no new jobs or business opportunities. Unemploy­ment will rise, as will poverty.

A steady stream of investments is thus essential for the economy and for the people’s welfare, particularly for a developing country like Indo­nesia. World Bank data shows that Indonesia’s annual per capita income for 2018 was just USD 3,894.00. This is extremely low in comparison with that of our neighboring coun­tries: Malaysia’s annual per capita income for the same year was USD 11,239.00, while Thailand’s was re­ported at USD 7,274.00. In order to catch up, Indonesia must find a way to stimulate its economic growth rate – which demands a high investment growth rate.

It is concerning that Indonesia’s rate of investment within the past few years has not only failed to grow, but has actually slowed down: average investment growth over 2010-2014 was at a happy height of 27.33% per annum. Investment growth in 2010 rose again, to 38.73%, and in 2012 and 2013 peaked out at 31.07% and 33.03%, respectively. That is an amazing phenomenon.

It started to stall significantly af­terwards: the average investment growth rate for 2015-2018 dropped to a mere 9.99% per annum. This scary trend continues even now: the 2018 rate was just 4.11%, rising slightly in 2019 to 5.29%.

Foreign investment rates (Penana­man Modal Asing – “PMA”) dropped even further: PMA (in USD) for the 2010-2014 period averaged 22.47% per annum. While investment grew 49.93% in 2010, in 2015-2018 PMA growth rate fell to only 0.94%. In 2018, PMA dropped 9.09%.

Logically, such a plummeting investment growth rate would also cause economic growth to fall. How­ever, miracles do occur: economic growth in 2018 was quite high under the circumstances at 5.17%. In fact, it was the highest economic growth lev­el for the 2015-2018 period, despite investment growth in 2018 being the lowest over those three years, at a mere 4.11%. Furthermore, the 2018 trade balance also suffered the big­gest deficit rate in Indonesian history at USD 8.57 billion. Imports also sky­rocketed. We should be grateful for this miracle: despite many economic indicators showing that 2018 was the worst record yet, the economic growth rate for 2015-2018 was actually the highest.

The Government seems anxious to deal with this slowdown in invest­ment growth rate. This is reflected in a recent speech of President Joko Widodo (Jokowi), which explicitly promised to seriously deal with in­vestment issues. The Government is allegedly struggling to open invest­ment opportunities as widely as pos­sible. In fact, Jokowi was so irritated that he even threatened to “beat up” anyone who attempted to impede in­vestments.

The question is, “What factors trig­gered such an astonishing drop in investment growth over the past few years?” Is it true that certain bureau­crats with vested interests have ob­structed several types of investments? Hasn’t the behavior and attitude of bu�­reaucrats improved, compared to that of ten, or even five years ago? If so, how come investments in 2010, 2012, 2013 grew above 30%, while “infrastructure” at the time was rudimentary compared to that of 2015-2018?

Investment issues are more com­plex than mere streamlining of reg­ulations. Basically, investment flows depend on how attractive investment opportunities are, for a given coun­try. Investment rates do not always depend on specific incentives, such as tax holidays. Let us ask, for in­stance, what is the development of investments in our special (tourism) economic areas like Mandalika in Lombok, Tanjung Lesung in Banten, or Morotai in North Maluku? How many investors would be interested and invest in these extremely new tourism areas? Investors would natu­rally calculate the business viability of these investments. Tax holidays are only important if there is an apparent profit on the horizon. Without profits, what is there to “holiday” to? There­fore, it is no wonder that the Govern­ment’s 16 Economic Policy Packages (Paket Kebijakan Ekonomi – “PKE”), which focus on incentive offers, have proven plainly unable to attract in­vestments into Indonesia.