Lessons from other countries
Globally, capital city relocation is actually rather commonplace. Other countries that have moved their capital cities include Brazil (from Rio de Janeiro to Brasilia), Myanmar (from Yangon to Naypyidaw) and Malaysia (from Kuala Lumpur to Putrajaya). A variety of obstacles from infrastructure to the economy have often posed significant challenges in the process. However, as a latecomer, Indonesia is actually in an advantageous position, in that it can learn from the experiences of other countries.
As a case in point, Naypyidaw unveiled as Myanmar’s new capital in November 2005 by a then-military regime is largely considered a failure and a waste of public money and resources. The expected economic impact failed to materialize because it offers little appeal for companies and businesses to move their operations there, for obvious reasons. The sprawling city is a virtual ghost town, devoid of traffic and largely empty of people.
Brasilia, inaugurated in April 1960, was initially a failure in many ways. Its main problem was an inability to meet the community needs arising from rapid urbanization. The development of Brasilia was not well thought out, and thus led to greater inequality, which in turn created social problems that plague the city.
Another case study is that of Putrajaya, which has been the seat of the federal government of Malaysia since 1999. It is considered a wellplanned urban center with modern facilities and technology enabled to house all federal government ministries and national level civil servants. Still, building a planned capital city is a costly undertaking. Putrajaya itself was completed at an estimated cost of US$8.1 billion.
Other than those three countries, there are many examples of purpose-built capital cities that failed to yield the desired economic impact and social transformation. They have served as a cautionary tale of what not to do. Thus, the Government should heed these lessons and anticipate potential problems that may arise from flawed planning and execution.
The impacts
Apart from weak reasons, the impact of relocation is also relatively subdued. The Institute for Development of Economics and Finance (INDEF) calculated in 2020 that Nusantara would increase Indonesia’s GDP by merely 0.01 percent. It would only generate 0.02 percent of additional investment and create 0.02 percent of new jobs. On the other hand, household consumption would slip by 0.04 percent, a result of weakened consumption in Jakarta, as the state civil apparatus move to the new capital. (FIGURE-2)
In addition, the relocation would only benefit the economy of the new capital and surrounding provinces. The INDEF analysis projected that the GDP of East Kalimantan would increase significantly, by 0.24 percent. North Kalimantan and South Kalimantan would see their GDP go up by 0.02 percent and 0.01 percent, respectively. As for other provinces, there would be no significant change in their GDP growth rates. Conversely, several provinces would experience a significant drop in GDP, most notably Jakarta DKI.
As the financial and commercial hub of the nation, Jakarta acts as a fairly large multiplier, compared to other provinces. Thus, any reduction in Jakarta’s economic activity will exert a widespread impact on other provinces, such as Banten, West Java and even Bali. The Government should realize that the new capital will not be able to offset the decline in economic activity suffered in Jakarta.
Relocation would also impair the output of the tradable sector, which to a great extent is dependent on government procurement (state administration, defense, health, education, etc.) Meanwhile, industrial and agricultural sectors will also be adversely impacted, due to reduced demand. Of course, these calculations are of a short-term nature. However, they should serve as a cautionary note, to prompt the Government to prepare for a worst-case scenario.
Another impact will be inevitable deforestation in East Kalimantan. The Government claims that 75 percent of the city will be developed as “green open areas”. However, this claim is difficult to confirm, because over the long term the city will certainly need more land for development.
Budget constraints
In numerous public statements, the Government insists that the impact on the state budget in the development of a new capital city will be minimal. Of the total Rp466 trillion estimated cost, only 20 percent (Rp89.4 trillion) will be directly funded from state coffers. State-owned enterprises will contribute 27 percent (Rp123.2 trillion) while the largest chunk, 54 percent (Rp253.4 trillion) of the funding will derive from the private sector. (FIGURE-3)
The Government financing scheme, drawing from the state budget, allocates funds for the construction of a State Palace and other strategic buildings, land acquisition and basic infrastructure, as well as green open spaces. Meanwhile, other urban facilities are projected to be built by the private sector, through public-private joint ventures.
The plain fact is that there has been little interest in investment by the private sector. As a result, development is bound to rely heavily on public funds, at least for the time being. This is also reflected in an increase in infrastructure spending in 2023.