Sustaining Indonesia’s Economic and Political
Transformation
H.E. Prof. Dr. Boediono
Vice President of the Republic of Indonesia
Guest Lecture
Leiden University
26 March 2014
Professor Carel Stolker,
Professor Wim van den Doel,
Distinguished Guests,
Ladies and Gentlemen,
It is a great pleasure for me to speak here in het
Academy Building of the Leiden University. Leiden is not
only
the
oldest
and
foremost
university
of
the
Netherlands, but also one with the oldest tradition in the
world of studying Indonesia.
One of your most famous professors in the 19th century
was Jan Hendrik Kern, who was born in Java in the town
of Poerworedjo. His work has been very important for
Indonesia. Professor Kern proved that all languages in
the Indonesian archipelago are related to each other and
that one could speak of one Indonesian people.
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He also translated the Nagarakretagama and proved
that the empire of Majapahit had roughly the same size
as the Dutch East Indies. Later in time, these were all
very important findings for the Indonesian nationalist
movement.
In 1877 Leiden University established chairs for
Javanese, Malay, Islamic & Colonial Law and History &
Geography of the Indonesian Archipelago. It was the
start of a tradition which still flourishes today. Many
Indonesian students studied at this institution. The first
Indonesian to receive a doctorate, Prof. Hoesein
Djajadiningrat, did it at Leiden University 101 years ago.
I am looking forward to meet with his son after the
lecture.
It is also worth mentioning that it was here in Leiden that
a student named, Raden Mas Noto Soeroto, founded in
1908 an Indonesian Student Society, later called
Perhimpunan Indonesia, the first movement to use the
word ‘Indonesia’ in its name.
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One of the founders of the Republic of Indonesia,
Mohammad Hatta, was chairman of the Perhimpunan
Indonesia. I am happy that representatives of the
present day Perhimpunan Pelajar Indonesia in the
Netherlands are here in the Academy Building today.
Leiden University remains one of the foremost research
hubs on Indonesia in the world. It is good to be here,
Prof. Stolker, after your visit to Indonesia last month.
During the visit, your distinguished delegation had
strengthened
Leiden’s
relations
with
Universitas
Indonesia (UI) and Universitas Gadjah Mada (UGM),
with Lembaga Ilmu Pengetahuan Indonesia (LIPI) and
Arsip Nasional Republik Indonesia (ANRI), and last but
not least with your Indonesian alumni - the ambassadors
of your university in my country. I understand that Leiden
University will soon be represented in Jakarta by the
KITLV. I hope this permanent presence of Leiden in
Indonesia will be a stepping stone for further fruitful
cooperation.
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Ladies and gentlemen,
Today I would like to share with you my view on the
main challenges that Indonesia faces in order to sustain
its economic and political transformation. It has become
an undisputed fact that Indonesia is now a dynamic
emerging economy, ranked 16th in the world, as well as
a thriving new democracy, the world third largest.
My perspective will inevitably be influenced by my own
specific experience as an economic policy practitioner in
the country for more than 30 years.
Before I go any further I would like to make explicit my
basic premise that Indonesia’s continued economic
progress is not only dependent on factors related to the
economy, but equally if not even more importantly,
hinges on Indonesia’s success in consolidating and
institutionalizing its political system - its democracy. In
reality economic progress and democratic consolidation
are intertwined, one very much depending on the other.
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Here I would like to focus on three problem areas which
in my view will constrain progress if they are not
satisfactorily
resolved.
The
three
hurdles
are
infrastructure, human capital and public institutions.
Without significant improvements in these three areas
Indonesia may be condemned to linger in a middle
income trap and perennial transition to democracy for
decades to come.
Let me give you brief statistics. Indonesia is the largest
economy in South East Asia. In 2004-2013 growth
averaged 5.9 percent; total GDP increased 170 percent;
and GDP per capita jumped from US$2,700 to
US$4,500 (in constant 2005 PPP $). Yet, in spite of
robust growth, Indonesia is at risk of falling into the
position of being squeezed between low wage producers
and highly skilled, fast moving innovators - the middle
income trap.
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The economic answer to that problem is quite
straightforward - structural transformation - a shift of
resources into higher productivity activities. The shift is,
however, not as simple as it sounds. It is about creating
incentives to save, to accumulate physical and human
capital, and to innovate so that new products and
processes, new way to do things, and better ideas can
emerge and be sustained - or, in the more fancy terms,
becoming endogenous in the system. This rise in
productivity, though, will be sustained if, and only if, it is
anchored in social and political environments conducive
to such process.
In the rest of my lecture, I will focus on the three priority
areas that I mentioned earlier and underline specifically
on how each should be shaped or prioritized in a way
that would ensure the sustainability of Indonesia’s
economic and political transformation.
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Infrastructure
Currently, the most glaring constraint is in infrastructure physical infrastructure. Indonesia urgently needs more
infrastructure investment in all fronts: energy (power),
transportation
(airports,
ports,
rails,
roads),
communications (telephones, mobiles, broadband), and
basic infrastructure (water and sanitation). Before the
Asian Financial Crisis of 1997/1998, infrastructure
investment in Indonesia had reached over 7 percent of
GDP. More than a decade after, it has struggled to reach
3-4 percent of GDP.
Lack
of
infrastructure
has
hampered
Indonesia’s
engagement in the global supply or production chain where
efficient
logistics,
assembly,
distribution,
information technology, and marketing are at its very
heart. Lack of infrastructure has limited Indonesia’s
ability to move up the value chains and to gain
productivity through cheap imported inputs.
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Indonesian
manufacturing
firms
are
struggling
to
compete in export markets - while at home, they face
fierce competition from imports.
CLSA, an independent consulting firm revealed that in
Indonesia, logistic costs reach 27 percent of GDP - the
highest in the region. This is due to insufficient railways,
roads, and long dwelling time at seaports creating
serious congestion. Railway length has barely expanded
in the last 20 years; road density was only 0.27km/km2,
and dwelling time at key seaports reached 7 days compared to 5 and 4 days in Thailand and Malaysia
respectively1.
Traffic
congestion
increases
fuel
consumption, forces people to spend more hours to
commute, and creates air pollution causing significant
harm to public health. In short, deficient infrastructure
imposes high cost to the economy and the society.
1
CLSA, Indo Infrastructure, Special Report, Block by block, Technocrats get things rolling, 21
February 2014.
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Within
the
theme
of
accelerating
infrastructure
development there is one particular area that should be
given the highest priority, namely improving domestic
connectivity. Being an archipelagic nation, special
attention should be given to inter-island connectivity.
Quality fruits and spices produced by our farmers, or
good catch by our fishermen, cannot reach our cities
because of irregular service of ships, poor roads, and
congestion. Tradable products have become nontradable at home. Even if they can, farmers and
fishermen must rely on middlemen and receive only a
small fraction of the final price.
Domestic connectivity is fundamental not only for
economic growth but also for national cohesion and
survival.
Improving international connectivity while
neglecting domestic connectivity would threaten social
and political cohesion. People living in urban areas do
not only make more money, but they also enjoy cheaper
products due to proximity to major ports and better
infrastructure.
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The opposite situation happens in rural and remote
areas. These income and price differentials can be so
huge, exacerbating social inequality, and threatening
national unity.
Lack of domestic connectivity has also made it more
difficult to ensure equal delivery of social services, such
as health and education, including political education. It
is a fact that a vibrant civil society and lively political
debates that characterise a healthy democracy remain
primarily urban phenomena, while in the more remote
areas democratic processes are not always well
understood or valued.
Infrastructure development will remain a big challenge
for Indonesia for some years to come. The present
government has, however, not stood idle. In the last four
years the government has delivered a number of policy
packages to increase capital spending.
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The
latest
Global
Competitiveness
Report
raised
Indonesia’s rank by 16 places from the same report in
2009-2010 to 38th with higher scores for competitiveness
and infrastructure. In their report, CLSA also applauded
“some impressive progress” in Indonesia’s infrastructure,
including revamped railway services; the doubling of
main port’s throughput in 3 years; and the beginning of
the MRT construction in Jakarta.
Many small airports have been built in remote islands
such as Matahora in Wakatobi (South East Sulawesi),
Saumlaki in Maluku, and Yahukimo in Papua. Sarulla the largest geothermal plant located in North Sumatera will start its construction this year and some hydropowers would be revitalized. Many are in the pipeline. In
the coming years, these efforts must be redoubled. The
government needs to harness all the potentials of both
national and international private sector.
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Human resources
Lately, I have often received reports of companies in
Indonesia having difficulties in recruiting skilled labours
and middle-level managers. This is an omen of what an
even more challenging constraint that is yet to come.
Producing high quality manpower is much more complex
and takes much longer time than building roads, bridges
and ports.
Education is the key to that. Good education enables
people to participate fully in economic, social, and
political life.
The challenges in our education revolve around two
themes -how to quickly raise the quality of our education
at all levels, and how to expand the access to education
for all of our citizens. The latest PISA survey revealed an
eye opening result – that our 15-year-old students score
poorly in PISA test and are ranked at the second bottom
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(only above Peru) from 65 participating countries for
Math, Science, and Reading. The quality gap among
schools and teachers in the country is also wide.
Children from poor families have lower enrolment rate
and higher dropout rate. The challenge is huge and
meaningful actions must be taken now.
There has been some progress recently. By law, at least
20 per cent of state budget is earmarked for education.
By 2013, a number of important policies and initiatives
have been undertaken, ranging from improving teachers’
salaries, implementing teacher certification programme,
initiating “teach for Indonesia” program, rehabilitating
schools
and
classrooms,
introducing
new
school
curricula, developing online learning system, providing
subsidies for all registered schools in the country, and
increasing the number of scholarships for poor students
at all levels of education.
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One program worth mentioning here is the LPDP
scholarship which has been launched last year. This
program is by far the largest one providing master/PhD
scholarships overseas. In 2013, we could only send 625
students from 17,000 applicants. UK has become the
first destination and the Netherlands the second, with
112 students (18 percent) - where 11 of them are
studying here in Leiden.
Studying abroad is important not only to equip students
with current state-of-the-art knowledge and skills, but
also to expose the best and brightest young Indonesians
to different societies, cultures, values, and environment.
I hope stronger international linkages, including with the
Netherlands, will help to facilitate more Indonesians to
study abroad.
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With better education, people do not only gain
knowledge, but also know how to use it well. Better
educated citizens make more productive labour force.
But equally if not even more strategically,
they
constitute the foundation of good citizenry and provide
appropriate manpower to support and shape the
required institutions to sustain progress.
Institutions
As I stated earlier, economic transformation can only be
sustained if it is supported by congenial social and
political environment. Here lies the importance of the
long term theme of institutional development.
Given the time constraint, here I would only make a
general comment on the importance of public, including
political, institutions.
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In my view, the focus of our efforts for many years to
come is to reform institutions such as the political
parties, the bureaucracy, the judiciary and law and order
agencies which form the backbone of the State. I fully
agree with the economist, Mancur Olson who said that
only by supplying both public goods and the legal
framework for private goods that government can
augment the economy. A stable government and
incorruptible officials augment the economy best. My
own view is that democracy gives the best chance for
those goals to be achieved.
After 15 years since the start of Reformasi in 1998,
despite the undoubtedly impressive progress and
achievements,
one
must
admit
that
Indonesia’s
democracy still has some way to go before becoming
fully consolidated. One key to consolidating democracy
- and ensuring that democratic institutions will deliver
welfare - is to select candidates, who are greatest in
civic excellence and best at identifying the common
good.
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Civil society and the media can play significant roles in
informing the public to ensure that only truly deserving
candidates would be elected to represent the people or
lead the country.
On April 9th Indonesia will hold a parliamentary election
while the presidential election will take place on July 9th.
The current administration has a strong commitment to
ensure that the political transition process remains
peaceful and smooth.
Democracy provides an opportunity for people to decide:
who should have the right to rule. It is up to the people
whether they want to use this opportunity or not. It is the
same will of the people that would determine whether
Indonesia’s democracy will flourish or fail; because,
good laws and sensible regulations or policies can only
be generated by sound political institutions.
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Let me now conclude the main points of my talk:
As a developing country in the globalized world
Indonesia
never
lacks
challenges
and
problems.
Despite the fact that growth has been robust and the
economy has moved toward modern sectors, the
government needs to continuously improve national
productivity, which is the key for successful economic
transformation.
In spite of the multitude of problems that Indonesia
faces, in the next few decades we should concentrate
our efforts on three fronts: infrastructures, human
resources and institutions. Many problems that we face
have roots in one form or another of the weaknesses in
these three areas.
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Top
urgency
should
be
given
to
infrastructure
development. Poor infrastructures are currently the most
binding constraint for growth and improving the quality of
life. We have lagged far behind our neighbours and
badly need catching up. Harnessing the potential of the
private sector is imperative.
Domestic, especially inter-island, connectivity should be
given the highest priority for it is fundamental for national
economic, political and social cohesion and survival.
Some
progress
has
been
made
in
Indonesia’s
infrastructure development, including in developing
sustainable energy. This government and the next must
sustain its commitment to keep all these initiatives
rolling.
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The second major constraint to progress is the quality of
human resources. Education is the key. The challenges
in our education policy revolve around two themes: how
to raise the quality of our education at all levels, and how
to expand the access to education for all of our citizens.
The goals are to raise the knowledge and skills required
to improve participation in the labour market and to
supply the necessary human capital for developing our
institutions.
Institutions are the ultimate determinant of sustained
progress.
Building good institutions have the longest
gestation period. Hence we must start now, systemically.
Consolidating our democracy is the key to a sustained
national progress. The quality of the upcoming elections
in April and July will ensure that the transition of power is
peaceful and smooth, and that the elections are effective
as a filtering device to select good politicians.
Thank you.
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