Indonesian Infrastructure Weakness Weighs on Growth

NETRALNEWS.COM - In October 2018 Indonesia will host the annual meetings of the International Monetary Fund and the World Bank in Nusa Dua, Bali.

This is an important occasion: These annual meetings take place outside Washington only every third year, and involve thousands of high-level participants from all over the globe.

Announcing that Indonesia would host the 2018 meetings, IMF managing director Christine Lagarde noted that it would be a "great opportunity to showcase Indonesia's impressive economic and social achievements."

But what will those attending make of the Indonesian economy? Some participants will note that nearly two decades have passed since the Asian financial crisis, which began in July 1997. The crisis did enormous harm to Indonesia, and the scars still show.

In the three decades before the crisis, growth in gross domestic product averaged 7% a year. Since then macroeconomic policy has been more cautious and foreign markets have remained unhelpfully skeptical; they were, for example, ready to include Indonesia among the so-called "Fragile Five" economies when the U.S. Federal Reserve started to review its unorthodox monetary easing policies in 2013.

The emergence of the current democratic political system after the resignation of President Suharto in 1998, and the associated devolution of power from Jakarta to the local level, have presented additional challenges for economic policy makers. Nevertheless, Indonesia has maintained a steady growth rate of 5-6%.

This does not match either China or India, but it is enough to double GDP every 15 years, giving rise to confident predictions that Indonesia will be the world's fourth biggest economy by the middle of this century.

Thus, Lagarde's positive sentiment is justified. But to showcase Indonesia's economic and social achievements, visitors must go beyond the artificial confines of the Nusa Dua enclave.

This area -- part of the almost self-contained Bukit Peninsula at the southern end of Bali -- is a miracle of urban planning in a country characterized by unremitting urban chaos. The peninsula was largely uninhabited until the late 1960s, providing a unique opportunity to develop a large area as an exclusively tourist enclave.

Starting with this clean slate, building heights have been kept down (lower than the coconut palms, at least in theory), roads are wider than usual and broad areas are devoted to tropical gardens and the mandatory golf course.

Beaches are kept free of the plastic rubbish that is ubiquitous elsewhere. A security post at the entrance of the Nusa Dua hotel enclave offers some reassurance to nervous visitors.

Disconnected worlds

But how will the conference attendees observe Indonesia's "impressive economic and social achievements" from the disconnected world of Nusa Dua?

They will have to cross over the isthmus into Bali proper, beyond the airport freeway that slices through a formerly-pristine mangrove lagoon. Here they will find a different Indonesia, where the vibrant commercial economy has run far ahead of infrastructure capacity.

A visitor's first impressions will be of choked roads, where motorcycle taxis are the surest way of reaching destinations on time, because they can weave their way among the pedestrians on the footpath when the road is gridlocked. While traffic jams may be the infrastructure deficiency most apparent to foreigners, they will hardly notice the greater problem of electricity shortages.

All their hotels are equipped with "emergency" generators whose routine use keeps the air conditioners going. Similarly, the visitors will be largely unaware of the near-universal water supply and sewage deficiencies, except for the standard warnings not to drink the tap water.

During the Suharto period Indonesia spent around 4% of GDP on infrastructure. This fell drastically with the 1997 crisis, leading, in particular, to the cancellation of large power generation projects.

Even with the subsequent economic recovery, infrastructure spending is running at only 2.5% of GDP -- half the pace judged necessary by the latest Asian infrastructure report from the Asian Development Bank.

The cancelled electricity projects may have been questionable, but if they had gone ahead their output would have found a ready market. Similarly, Jakarta's abandoned urban rail program would have offered an alternative to the efficiency-sapping traffic jams that continue to afflict the capital.