The trouble with Indonesia’s infrastructure obsession

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(Photo: Prive. Doc)

The state’s narrative of economic development oversimplifies complex structural problems 

IO – Wearing his trademark white shirt – the emblem of a hard-working spirit – during the Palapa Ring inauguration, Indonesia President Joko “Jokowi” Widodo expressed high hopes, saying that the new “sky toll” will increase the competiveness of the country’s industry. The “infrastructure president,” as Jokowi is often labelled by local media, felt confident that the Palapa Ring, connecting the capitals of 514 districts and cities across the country, will offer equitable access to technology to all Indonesians and strengthen national unity.

Four decades ago, a similar tone of deep fulfillment was on display when Indonesia became the first country in the developing world to have its own satellite system. Pressing a remote control switch embedded in a Javanese kris (dagger), a symbol of self-confidence, then-President Suharto inaugurated the Palapa Satellite and extolled it as an exemplary national achievement with the capacity to unite the archipelago nation. He stressed that “A nation with easier connections among people, a nation that better understands national problems and that is better educated, will be able to speed up development and strengthen its unity.” The satellite project was imagined as the outcome of development and modernization that would help the country to “take off.”

Clearly, there is a stark contrast between Suharto’s leadership and Jokowi’s. Both face a vastly different political mood and different configurations of power and interests. Yet despite those differences, it would not be an exaggeration to say that under Jokowi’s administration, state tendencies to impose an idealized vision of development on Indonesia remain intact. The state simplifies development issues that people have been invariably frustrated with, insisting on some degree of uniformity and demolishing complex realities if necessary. Large-scale infrastructure and economies of scale, complex value chains, and long-distance trade have been greatly simplified and made “legible” by standard weight and measures set by the government. Connectivity, efficiency and innovation, and good governance serve as “vantage points” from which Indonesians see their imagined future, while in fact there is still a substantial loophole in the development policy.

Infrastructure Is King
Hundred of videos and photos seamlessly uploaded on the official YouTube account of the State Sekretariat (Sekretariat Presiden) as well as the president’s social media accounts depict the inauguration of infrastructural projects as part of Jokowi’s day-to-day activities. More than 500,000 subscribers on YouTube and more than 27 million followers on Instagram witnessed the inauguration of Papua’s longest bridge, Youtefa Bridge; the largest dam in East Nusa Tenggara (NTT), Rotiklot Dam; and the inauguration of one of Jokowi’s landmark maritime infrastructure projects, the Makassar New Port Development. Indonesians can also see recent videos showing the president riding a motorcycle on the new Trans-Kalimantan road near the Nunukan District in North Kalimantan, or riding in his usual presidential car to pass through the new elevated Jakarta-Cikampek II toll road.

Likewise, line ministries in Indonesia, including the Ministry of Public Works and Housing and the Ministry of Industry, have explicitly aired their stances that development is made stronger thanks to infrastructure. Under this narrative, infrastructure development attracts foreign investment and leads to a better manufacturing sector, which will eventually help realize “Indonesia 4.0.” It is also common to see Ridwan Kamil, the governor of West Java, using his Instagram account to inform the public about government projects and achievements while also posting humorous comments and jokes to easily interact with his 11 million followers.

Some projects, including the Kertajati Airport, have become examples of successful cooperation between the central government, provincial government, and the private sector. Kertajati, the “crown jewel” of Public Private Partnership (PPP), is used as a standard for the government to “legitimize” their efforts, showing how the PPP scheme they have vigorously promoted has finally rolled out progress. This kind of accomplishment elicits awe and admiration, showing the world how ministries, different levels of governments, and state-owned enterprises (SOEs) as well as private sector players could harmonize interests and “leapfrog” over infrastructure deficits toward efficient production and adequate infrastructure.

A Partial Solution to a Larger Problem
However, one key facet of the economic betterment that the state is committed to remains unaddressed. As is mentioned above, the formation and legitimacy of the Jokowi government increasingly relies on the use of one standardized “measurement”: the domestic infrastructure push. But the country is less concerned with questions of distribution and ownership.

First, the inherent “enabling” character of infrastructure is contested. Infrastructure should serve as the foundation that enables something else to happen. In this sense, it should bring about improvements to support business processes, which eventually give rise to productivity. Yet productivity itself seemingly is an open-ended term that has been narrowly defined by the government.

Despite infrastructure being on the fast track, the World Bank’s 2019 Ease of Doing Business ranking shows that Indonesia is severely lagging behind in providing a supportive business environment, even relative to its ASEAN peers. Infrastructure development is a necessary, but not sufficient, element in the country’s development. Productivity should not be equated simply with a call to fill in infrastructure gaps. To upgrade the economy and have leverage on the value chain, extensive efforts should include increasing the efficiency of existing facilities and moving up the product cycle with both efficiency and local inputs. The upgrade requires human capital development and an endogenous cumulative learning process. The network of innovation must be linked and supported by dynamic complementarities between upstream and downstream firms. All this could have been facilitated not only by infrastructure, but also a complex combination between sound market regulations and supportive bureaucracies and political institutions.

More problematic, Jokowi’s administration adopts a precarious solution to solve the overriding structural problems. The state has evidently become obsessed with “digital innovation” and “unicorns,” which are now seen as “magical” techniques for solving Indonesia’s underlying structural problems. But in fact, these unicorns benefit from the “incompleteness” of infrastructure and institutional weaknesses, rather than addressing the core problems. Therefore, the disruptive problem-solving techniques that the government is aiming for might only become a façade, ignoring the country’s fundamental issues.

What the government has overlooked is that, just as industrial development has been hindered by structural problems, so too are start-ups and digital technologies. Illustrating this, based on the 2018 Asian Productivity Organization (APO) Productivity Databook, Indonesian economic growth still heavily relies on non-IT capital, with a 79 percent contribution. The contribution from labor accounts for only 17 percent of growth and only 1 percent comes from Total Factor Productivity (TFP) – the measurement of technological capacity and institutional quality. This is a very compelling evidence that Indonesia still beset with development constraints – not only lacking in physical infrastructure, but also such social infrastructure as quality labor, IT capital, and technology, as well as soft infrastructure like institutions and regulation.

Specifically, the abundance of start-up businesses might not fully absorb the Indonesian workforce given the number of skilled workers – those with high levels of education and training, who are direly needed by technology-based start-ups – are so limited. This issue is further exacerbated by the recent decline in Indonesia’s PISA scores. The reading score dropped from 397 in 2015 to 371 in 2018, the mathematics score fell from 386 to 379 during the same period, and the science score fell from 403 to 396. Adding to this, the prospects for advancing digital businesses are becoming problematic and perhaps even undesirable. Limited financial literacy has been fraudulently exploited by loan sharks behind the mask of microfinancing startups. This can potentially produce a high level of nonperforming loans that become a hindrance to Indonesia’s microfinance development.

Another problem is that, even though infrastructure development is sorely needed in Indonesia, there are major concerns about the government’s way of doing it. Though some projects offer economic payoff in the longer term, the government also replicates risks. It often appoints SOEs as infrastructure development agents without competitive bidding. In addition, the limited option of financing schemes results in a high financial burden. These issues are also coupled with careless planning and a rushed timeline, which lead to questionable infrastructure quality and usage. The government even issued Presidential Regulation No. 82/2015, which allowed the Indonesian Infrastructure Guarantee Fund (IIGF), initially set up to support the private sector, to provide guarantees for SOEs through direct loans from international financial institutions. Infrastructure boosters in Indonesia have often cited China as an example of how an infrastructure-first approach, although state-led, can lead to economic growth. In fact, rapid growth emerging out of the earlier development successes of rural entrepreneurship in sthe 1980s preceded China’s peak period of infrastructure spending.

Another Round of Simplification
Amid an increasingly complex development domain, the state offers the possibility of expanding political spaces while narrowing the substantive issues open to contest. Such a power reconfiguration, built upon the staunch belief of institutional betterment, has in fact undermined substantial efforts at institutional reform.

Jokowi, billing himself as the millennial president, is opening up political spaces for millennials, directing their powerful voices to curb what are seen as politically motivated and bureaucratic hurdles to growth. Appointing young professionals and Indonesian Solidarity Party (PSI) members to his new Cabinet and presidential expert staff team imprints state simplification further. These young people are tasked to handle all innovation-related things, as Jokowi stated, “The young staff members… will provide us with fresh and innovative ideas so we can find a new way to take a leap to reach for advancement.” Despite the growing millennial-influenced trends in Indonesia, this is at heart a new policy alliance for promoting state-defined measurement and addressing state-defined problems. Innovation and the seemingly inclusive and meaningful participation in policymaking are increasingly hallmarks for the Jokowi government as well as an exclusive measurement to legitimize current progress.

What’s more, the state has been increasingly deploying anti-corruption rhetoric to gloss over the complex structural problems at the micro level. It is always corruption that is widely regarded as the main factor causing inefficiency in micro-agencies, including SOEs. In fact, the real culprit is the patrimonial nature of economic sectors, through which the corruption is nurtured and later causes inefficiency. In short, anti-corruption rhetoric becomes a means to repackage structural flaws without destroying the structure.

Just recently, state airline Garuda Indonesia became a lightning rod for criticisms of corruption and bad governance. The newly-appointed SOE minister, Erick Thohir, announced the dismissal of Garuda’s CEO, I Gusti Ngurah Ashkara, for allegedly ordering his subordinates to have a vintage Harley Davidson motorcycle brought into Indonesia illegally on an Airbus flight. Thohir also plans to establish a team to investigate other cases of corruption and harassment in Garuda and other SOEs.

It seems clear that anti-corruption provides a “one-size-fits-all” solution to improve the government’s legitimacy on the one hand and to cover up a much more complex structural problem on the other hand. Growing public anger at Garuda has lamented the national airline company’s corruption, yet few paid attention to more fundamental issues. Garuda is not the source of the problem. It is rather a product of the inflexible and ideologically rigid mode of organizing and managing SOEs, a mirror of the state tendency to hide SOEs’ business incompetence under national welfare motives, and a consequence of the limited public role in SOEs’ transparency, even with public stock ownership.

The overreliance on SOEs also creates a heavy burden within the firms themselves. According to a recent report, SOE debts in Indonesia increased around 13.8 percent from January to July 2019, indicating weaker financial conditions. Nonperforming SOEs create implicit liabilities where the government is required to cover business losses and debts. The recent case of Jiwasraya, a state-owned life insurance company that failed to pay more than 17,700 maturing policies, is a good example of the implicit liabilities problem.

To make things worse, the reliance on SOEs is unlikely to stop under the current administration, as there are already plans to inject another 17.7 trillion rupiah ($1.7 billion) to selected SOEs in 2020, which just 100 million less than the 2019 amount. Several SOEs have deficits even after the capital injection, further proving the inefficiencies in SOE management. SOE problems have proven to be a much harder nut to crack – thus the state uses corruption and technical issues as a proxy for complex questions of political economy.

The upshot is what prominent economist Dani Rodrik called the “central economic paradox of our time”:  that “development is working while development policy is not.” No doubt, as the World Bank predicts, Indonesia continues to enjoy economic growth this year that will be stable at around 5 percent. Nevertheless, the government has been too quick to content itself with a gross simplification of development. It is therefore important to look at the gap between development standards as envisioned and measured by states and the everyday development constraints and practices. (Trissia Wijaya & Samuel Nursamsu)

Trissia Wijaya is a Ph.D. Candidate at the Asia Research Centre, Murdoch University.

Samuel Nursamsu is a Research Associate in the Economic Research Institute for ASEAN (ERIA) Jakarta.. Any opinions expressed in this article are the author’s own and do not reflect the view of the Institute.