Economic Transformation: Innovation Solutions Strengthen the Economy and Attract Investment
By: Erlangga Pratama) *
The government introduced a policy of economic transformation to solve the nation’s various challenges in the economic field. A number of pillars are designed to encourage economic transformation so as to produce sustainable, competitive and quality growth.
Many people expect that the economic transformation policy can improve Indonesia’s Logistics Performance Index, so that it becomes an allure of foreign investment. This is because the World Bank has released the 2018 Logistics Performance Index (LPI) which places Indonesia at 46th place or up 17 places from the previous two years. Indonesia’s rank increased to position 46 with a score of 3.15 or up 17 levels from the previous position of 63 with a score of 2.98. Of all aspects of the 2018 LPI assessment, customs aspects achieved the lowest score of 2.67. Meanwhile, the highest evaluation aspect is timeliness with a score of 3.67. Other aspects are infrastructure with a score of 2.89, international freight forwarding 3.23, quality and logistics competence 3.1, and search for goods by 3.3.
The economic transformation policy consists of five main pillars, namely optimizing infrastructure development, strengthening the implementation of economic equality policies, and minimizing dependence on short-term foreign capital. The other two pillars are labor market efficiency and improving the quality of Human Resources (HR), as well as investment configurations to support growth.
The economic transformation policy was triggered by a number of things both at home and abroad. Among them the global economy is facing uncertainty challenges because it was triggered by a trade war between the United States (US) and China. In addition, the decline in commodity prices and volume of world trade, as well as easing monetary policy taken by a number of countries.
A number of domestic challenges are also urged to be overcome, for example: (i) the infrastructure rating is still at the middle level, which is ranked 54th out of 160 countries in the world; (ii) logistics costs are still considered to be less competitive; (iii) imbalances in land and land tenure, as well as challenges in the labor market and business opportunities. In addition, Indonesia is still faced with a saving-investment gap, productivity and competitiveness of human resources (HR) which still need to be improved, as well as the Incremental Capital Output Ratio (ICOR) which is still high.
However, Indonesia’s economic growth is actually still on a positive trend when compared to other large countries. In the second quarter of 2019, Indonesia’s economic growth was recorded at 5.05% (year on year / yoy), inflation was maintained within the target range. A number of social indicators improved, the poverty rate remained at 1 (one) digit level, the gini ratio and the unemployment rate also declined. That is, our economy is healthy and quality. This achievement should be viewed positively in the midst of a turbulent world economy
To maintain this positive momentum, Indonesia needs to carry out economic transformation, in which the future goal is to increase the prosperity of citizens. In every process of economic transformation, there will definitely be risks. However, this risk can be resolved through the efficiency and use of technology to achieve the ideal economies of scale for each business sector.
Economic transformation is a prerequisite of increasing and sustaining growth and poverty reduction, as well as supporting the sustainability of development. The economic transformation that occurs is expected to shift the structure of the economy which was originally commodity based, to an economy based on investment, production, and services that have high added value. This can improve the competitiveness of the Indonesian economy and the quality of life of the people.
The paradigm has always been economic transformation, or formerly known as structural transformation, directed at the transition of labor from the natural resource-based sector (SDA) to sectors that create added values, such as industry. But this triggers urbanization from rural to urban areas.
The economic transformation initiated by the government currently focuses on utilizing the potential of the village as the basis for regional economic growth, which in turn will have an impact on improving the quality of life of the people. So, it is not necessary for example farmers in the villages to move to the city into laborers, but with economic transformation they continue to farm more efficiently utilizing adequate infrastructure and advanced agricultural technology, and the certainty of offtakers who will buy their agricultural products at a good price.
The Five Pillars of Economic Transformation
Economic transformation policy consists of 5 (five) main pillars, namely (1) Optimization of infrastructure development, (2) Strengthening the implementation of Economic Equity Policy, (3) Minimization of dependency on short-term foreign capital, (4) Labor market efficiency and quality improvement Human Resources (HR), and (5) Investment Configuration to support growth. In order for the five pillars to run well, the government strengthens coordination and policy support from all sectors in the economic sector, ranging from fiscal, monetary and financial policies, as well as policies from technical ministries.
The first pillar, Optimization of infrastructure development focuses on optimizing the benefits derived from the development of current government infrastructure, while continuing to build integrated physical, non-physical and digital infrastructure. From 2016 to 2018, the government has indeed been aggressively carrying out infrastructure development. At the end of last year a total of 62 National Strategic Projects (PSNs) were completed.
Infrastructure development will continue to be carried out in stages with integrated planning and completeness of supporting infrastructure, without overloading SOEs. The goal is that the centers of economic activity are integrated together so that efficiency is achieved for economic activity.
The Ministry of Public Works and Public Housing (PUPR) has gradually completed the construction of the targeted toll road of 1,852 KM in the 2015-2019 period. Until May 2019, the toll roads have been operated along 949 KM and will increase by 406.14 KM with the operation of 9 toll roads in stages until the end of 2019.
Head of the Toll Road Regulatory Agency (BPJT) of the PUPR Ministry, Danang Parikesit, said that the 9 toll road sections are first, the Cinere-Jagorawi Toll Road (Cijago) section 2 of the Bogor-Kukusan Highway (5.5 km) with a physical progress of 100 percent and is ready to be inaugurated in August 2019. Cijago Section II Toll Road starts from Jalan Raya Bogor to Kukusan, and Section III Kukusan to Cinere.
Second, the Terbanggi Besar – Pematang Panggang – Kayu Agung toll road section spans 189 km, which will be ready to be inaugurated in September 2019. The toll road, which is part of the Trans Sumatra Toll Road, was built using an investment cost of 21.95 trillion rupiah.
Third, the Manado-Bitung Toll Road section 1-2A Manado-Danowudu section (22.5 KM). The Manado-Bitung Toll Road was built with an investment value of 6.19 trillion Rupiah. Fourth, Balikpapan-Samarinda Toll Road section 2-4 Samboja-Samarinda section (66.4 km). The two toll roads are planned to be inaugurated in October 2019.
Fifth, the Kunciran-Serpong Toll Road section (11.14 KM) with a progress of 94.24 percent. Sixth, section Pandaan-Malang Toll Road section 4 Singosari-Pakis (5.1 KM) with a progress of 97.1 percent. Seventh, the toll road that is on the Trans Sumatra route is the Kayu Agung-Palembang-Betung Toll Road section 1 of the Agung Agung-Jakabaring toll road (33.5 KM).
Eighth, Pekanbaru-Dumai Toll section section 1-2 Pekanbaru-Petapahan section (33.6 KM) with a 95 percent progress. Ninth, the Jakarta-Cikampek II Toll Road (Japek 2) (36.4 KM) with a construction progress of 91.42 percent.
The government is developing and developing 11 sea highway projects. The budget allocated in 2017 reaches IDR 132.38 trillion. The sea toll locations are Patimban Harbor in Subang (West Java), Inland Waterways or Cikarang-Bekasi-Java Sea Canal in Cikarang, Kuala Tanjung Harbor, Bitung Port, Maloy SEZ Port, Sorong Harbor, Kalibaru Port, Makassar New Port, Palu Port, Kijing Terminal and Kupang Port.
The progress of infrastructure development in the Jokowi era, namely the construction of the Trans Papua road; revitalizing the Silangit Airport in North Sumatra; revitalizing the Komodo Airport in Labuan Bajo-NTT; Trans Java Toll to Batang and Trans Java Toll to Solo; Development of airports and ports of Tapaleo, Bicoli and Wayabula in North Maluku; construction of 1,900 Km of roads from West Kalimantan to North Kalimantan; construction of 35GW power plants; provision of scheduled vessels through the sea toll program; the construction of 69 dams throughout Indonesia until 2019. The government is building the Palapa Ring which is 36,000 Km of optical fiber infrastructure to reach 440 regencies / cities throughout Indonesia. Palapa Ring will be completed in 2018. In addition, the government will build an internet network infrastructure with satellites targeted to be completed in 2021.
The second pillar is to strengthen the implementation of the Economic Equity Policy. This policy is directed to address the factors of inequality through the pillars of equitable economic policy. One of the economic equalization policies is carried out through the Agrarian Reform consisting of the Land of the Agrarian Reform Object (TORA), Social Forestry, and the moratorium and the rejuvenation of oil palm plantations.
The third pillar, minimizing dependence on short-term foreign capital is directed to overcome the saving-investment gap that often occurs in Indonesia. You do this by increasing financial inclusion through asset utilization, so that public access to the banking system will increase. To reduce the need for the US Dollar, development of non-dollar transactions between countries and encourage foreign exchange-producing industries, including export-oriented non-oil industry, tourism, and services that produce remittances.
The fourth pillar is labor market efficiency and improving the quality of human resources. In the midst of the turmoil of global dynamics and the presence of industry 4.0, challenges also arise for the government in creating regulations that are able to prepare quality human resources, as well as ensuring workers get decent jobs through continuous skills upgrading.
To that end, the government has intervened in the form of vocational education policies to accelerate HR investment which can then support economic transformation. This is done in a way; (i) revitalize the curriculum to suit industry needs and add instructors; (ii) standardizing competency standards; (iii) building a Job Matching platform between vocational institutions and industries; (iv) development of effective and sustainable labor market information; and (v) forming vocational committees both at central and regional levels.
The final pillar is the investment configuration to support growth. At present ICOR Indonesia is relatively high compared to peer countries such as Vietnam and India. This indicates that investment in Indonesia is less efficient macro. Therefore, through this pillar, the investment configuration strategy is directed to be able to reduce ICOR through lowering real interest rates, optimizing investments that provide faster returns and export-oriented, production efficiency through the development of cheap energy sources, human resource development and labor market reforms, and also digitalization to improve efficiency and optimize underutilized assets and resources.
In addition, the government also directs investment to be carried out in the non-infrastructure sector. The 5 (five) priority industrial sectors that have been determined are industries in the (1) Food and Beverage sector; (2) Textiles and Clothing; (3) Electronics; (4) Automotive; and (5) chemicals that are driven as export-oriented industries.
The government is also developing other industries such as downstreaming of products and increasing added value in the mining, plantation, horticulture, fisheries and forestry sectors. These various strategies are implemented as efforts to reduce the value of Indonesia’s ICOR, so that economic growth can be higher.
The government declared, strengthening the capacity of Human Resources (HR) and land management to be one important capital to initiate economic transformation, so that it can produce sustainable, competitive, and quality economic growth. In terms of the labor sector, there are four pillars in the transformation of the labor system. The four pillars are training and productivity, placement and expansion of employment opportunities, industrial relations, and supervision.
Besides that, land policy in the form of agrarian reform is also a concern of the government to help encourage economic transformation in the country. This regulation is designed to reorganize the structure of ownership, ownership, use and use of land that is more authentic. This is done through the structuring of assets accompanied by structuring access to prosperity for the people of Indonesia. *) Observer of Indonesian problems