Indonesia's Infrastructure Development under the Jokowi Administration

Summary

Infrastructure is vital for development. Today, the role of physical infrastructure has taken centre stage as a country's international competitiveness is determined by the state of development of its infrastructure. Estache and Fay find that, over the past twenty-five years, there is abundant empirical evidence showing the impact of infrastructure on economic growth, especially at lower levels of development. Investment in infrastructure is perceived as key to improving the efficiency and productivity of an economy, thus supporting the country's economic growth while reducing income inequality and poverty.

The current state of the infrastructure in Indonesia is better than it was after the economy was hit hard by the 1997 Asian financial crisis. However, Indonesia is still struggling to increase investment in infrastructure to a level sufficient to support the high growth rates it saw in the early 1990s. In the thirty years prior to the crisis, infrastructure played a key role in driving growth and poverty reduction in the country. After the 1997 crisis the Indonesian government experienced financial difficulty that forced it to reduce development spending, especially for infrastructure. When Susilo Bambang Yudhoyono (SBY) became President in 2004, the state of Indonesia's infrastructure ranked among the lowest in the region. For several years the lack of investment in infrastructure has been blamed for deterring investors, hence dragging Indonesia's economic growth down from its potential. According to World Bank estimates, Indonesia's dilapidated infrastructure has contributed to a 1 per cent loss of economic growth each year since 2004.

During his two-term presidency (2004–14), to his credit, SBY managed to restore and maintain political and economic stability in Indonesia's complex democratic environment. Fiscal consolidation was achieved during his first term (2004–9). This set the necessary foundation for Indonesia to move beyond its infrastructure impasse. During SBY's first term, Indonesia hosted several infrastructure summits to attract investors, both foreign and domestic. It was during this time that the country slowly opened up its infrastructure sectors to private sector participation, mainly in power, toll roads, railways and seaports. Several regulations were enacted and institutions established to promote public private partnerships (PPPs). Then, in 2011, the SBY administration unveiled the Master Plan for Acceleration and Expansion of Economic Development of Indonesia (abbreviated as MP3EI).