On adding value to the economy
How can improving the ease of doing business translate into more foreign direct investment (FDI)?
SUMIT DUTTA: President Joko Widodo’s administration came to office with some very clear objectives, one of which was to improve infrastructure in the country. Since the start, one of the areas he has focused on is making it easier for companies to establish operations in Indonesia, whether international or domestic businesses. There have been good results – the country is moving in the right direction in terms of simplification, but more needs to be done in order to get closer to the president’s objective of Indonesia moving into 40th place in the World Bank’s ease of doing business index.
There is a direct correlation between these simplifications and investment inflows to Indonesia. There are many things to consider when international investors want to come to a country, like the country’s prospects, its potential and the legal system, but the biggest factor is how easy it is to start operations. Hence, the more simple and transparent the information flow, the more certainty investors have in knowing how long it will take them to start operating, and the more investment Indonesia will receive. If the country keeps streamlining and standardising processes, making it easier to do business, we will see FDI coming to Indonesia from foreign companies interested in setting up shop and contributing to the growth of our GDP.
To what extent can foreign investment support infrastructure development?
DUTTA: With the complex geography of Indonesia, comprised of over 17,000 islands, linking the archipelago and closing the infrastructure gap is absolutely fundamental to turning the country into an economic superpower. It is very unlikely that the $450bn of expenditure to support infrastructure projects can be derived from domestic revenue. The country needs not only funding, but also infrastructure design expertise and international banks with global networks to help attract funding, and specialists that have implemented similar infrastructure projects in other countries.
The government has openly acknowledged that they can’t do everything by themselves and are trying to promote FDI for infrastructure projects. But investments need to be stable and come to the country for the long term, not just to get quick profit and leave as soon as something looks like its going wrong. Nonetheless, it is important to keep making projects profitable and commercially viable in order to attract investment. With any project there are a number of aspects to examine and it is essential to determine if the rate of return makes it worthwhile. The government understands that unless they have a business case and can make the projects commercially viable, they won’t go forward.
How can Indonesia change its export patterns and reduce its reliance on commodities?
DUTTA: If you look at the past few years, imports and exports have been growing at a pretty sustainable pace – around 10-11% over the last two years. We also had a commodity bust phase, which from a long-term perspective was a great thing for Indonesia. It forced people to realise that Indonesia cannot continue its dependency on commodities and that the country can do much more than that. If commodities are doing well and ensuring 6% GDP growth, looking at other options is not very necessary, so it was a good wake-up call for the country to reduce its reliance on commodities, which is headed in the right direction.
The government is already looking to add value to exports. Even on the import side we are recognising that we should only bring in value-added items – products that can’t be made in Indonesia. On the export side, the government is already moving from low-value exports to value-added exports. I expect Indonesia to be able to compete as one of the largest economies in the world. It can become one of the few countries able to compete with China or India in terms of added-value exports.