Developing physical infrastructure, a major part of the Joko “Jokowi” Widodo-Jusuf Kalla administration’s program, is beginning to positively affect local economies across the nation.
Infrastructure is a major component in determining a country’s competitiveness. Infrastructure development is one of our urgent needs, considering our high economic growth and our image as a developing economy. The Jokowi-Kalla administration has set high infrastructure targets, not only in terms of quantity, but also in terms of completion volume by 2019.
We agree that building our infrastructure will smoothen the flow of our goods, decrease logistical costs and eventually improve our competitiveness. Indonesia’s logistical costs, at 23.5 percent of production cost, are among the highest in ASEAN and higher than Thailand’s, Malaysia’s and Singapore’s.
Direct impact has been felt at least in those regions where infrastructure projects are taking place. Infrastructure development will more evenly spread development among the regions and islands. New growth centers, including manufacturing, residential areas and tourism, are cropping up in regions with developed infrastructure.
We do not have data measuring the direct correlation between infrastructure development, economic growth and narrowed welfare gap. However, experience shows that the correlation has been positive in other countries, as long as it is supported by other factors. The central bank estimates the economy to grow between 5.1 percent and 5.4 percent this year, driven primarily by the government’s infrastructure spending.
Infrastructure development will be more beneficial if it is supported by robust interregional trade. Trade will occur if one region needs a commodity that is available in another region, or if price differences exist for the same commodity. The national single-price policy for commodities may therefore not be good for growing regional economies.
After infrastructure is developed, regional heads have a duty to drive their economies by fostering a good investment climate. They must also anticipate the possible decline in their region’s economic activities as an impact of infrastructure projects in other regions, like toll roads.
We must also ensure good governance in infrastructure development, especially in the activities of state-owned enterprises that have been appointed by the government to locate funding sources in the money market.
It will also be good to hear what academics and economic observers have to say regarding the fiscal risks infrastructure development may impose on the state budget.