Indonesia: building infrastructure for inclusive growth

Economic growth averaging about 6% over the past six years has helped lift 8.6 million people out of poverty. Yet 29 million Indonesians continue to live below the government’s poverty line, and another 30 million would join them in the event of even a small reduction in their incomes. Of those employed, 60% work in the informal sector, where incomes are low. Further, income inequality as measured by the Gini coefficient has worsened from 0.35 in 2008 to 0.41 in 2011.

Improved public infrastructure would make a significant contribution to reducing poverty and closing gaps in income inequality.

Toward reducing poverty, better infrastructure, particularly for transportation and generating electricity, would support growth in manufacturing, which generates jobs in the formal sector. The performance of manufacturing has been lacklustre since the late 1990s and started to improve only in the past 2 years.

Congested ports and rising logistic costs are major constraints on the expansion of manufacturing. The average time cargo containers spend at Tanjung Priok, the country’s main port, stretched to 6.7 days in January 2012 from 4.9 days in 2010. This compares with 1–2 days at Asia’s most efficient ports. It costs US$750 to transport a container 56 kilometers from the Cikarang industrial zone to Tanjung Priok port, almost 70% more than moving a container a similar distance in Malaysia. The difference is primarily caused by road congestion in Indonesia.

Toward closing income gaps, investment in infrastructure is needed to address high poverty rates in rural areas, which average 14.7% compared with 8.6% in urban areas. Surveys suggest that 41% of district roads and 24% of provincial roads throughout Indonesia are in bad condition. Development prospects are poor for rural areas that lack good connections with towns and markets. Finally, poverty in some eastern provinces is even higher—at 24.1% in Maluku and Papua. Weak infrastructure there hinders economic activity, the growth of employment, and access to services such as education and health care.

The government’s master plan to accelerate economic development, known by its Indonesian abbreviation MP3EI, has three main pillars: developing six economic corridors, improving connectivity both within the country and internationally, and strengthening human resource capacity and technology. Acting to support these goals, the government has increased its budget for infrastructure, with a large share allocated to eastern provinces. Substantial additional funding could become available if the government redirected huge budget allocations for fuel subsidies, equivalent to 2.6% of GDP in 2012, toward infrastructure and social development. The fuel subsidies benefit mainly higher-income households.

Progress on infrastructure is being achieved. Work started last year on 182 infrastructure projects valued at US$65 billion under the MP3EI program. Funding came from private companies (44%), state-owned enterprises (20%), governments (19%), and public–private partnerships (17%). Nearly 40% of this amount was allocated to eastern provinces. More projects are scheduled for this year.

Economic prospects
Economic growth is forecast to pick up to 6.4% this year and 6.6% in 2014, underpinned by robust private consumption, the improving investment performance, and a gradual pickup in world trade. Growth of 6.6%, projected for 2014, would be the highest in 15 years.

Private consumption is expected to quicken in 2013, fuelled by rising employment, a 30% increase in average minimum wages, a 7% rise in public service wages, and a tax break from January 2013, when the government raised the incoAir Jordan 12 Low