Weak infrastructure holds back Indonesian economy

Monday - 1/21/2013, 7:51pm EST

By CHRIS BRUMMITT
Associated Press

JAKARTA, Indonesia (AP) - Months behind schedule, the construction crew racing to finish a highway encircling Indonesia's traffic-choked capital is being blocked by a determined group of locals and the ramshackle cemetery that is home to their ancestors.

Talks on a new location have yet to reach an agreement accepted by all the relatives of the some 500 people buried there. That has not stopped authorities digging a new cemetery a short distance from the old one _ pointlessly according to Yaman, the neighborhood chief.

"There is no way we can agree to that," said Yaman, pointing to workers hacking through the thick red earth during a midafternoon rain shower. "It will be too noisy. How are we supposed to pray for our ancestors there?"

Indonesia's economy is booming. But to sustain and deepen its growth, it badly needs new roads, bridges, power stations and ports. Land disputes such as this one in west Jakarta, and a host of other difficulties from corruption to budget-draining populism, make building such infrastructure a long and costly process. That is preventing the country from attaining the kind of transformational development experienced in a generation by countries such as South Korea and more recently China.

Last week, floods engulfed around 30 percent of Jakarta, including its central business district, dramatically exposing decades of underinvestment in the drainage and flood defenses of the city of 14 million people.

To be sure, beleaguered economies in the West would envy Indonesia's current growth rate of more than 6 percent. Coupled with political and social stability, it represents a dramatic change from the Indonesia of 12 years ago, when political crisis, separatist violence and economic meltdown led to fears the massive island nation could break apart.

Investment has soared over the last two years amid high Chinese demand for the country's coal, palm oil and rubber and rampant consumer spending across the country. Property prices have doubled in downtown Jakarta over the last 6 years, while malls, hotels, housing estates and convenience stores have sprung up in towns large and small to cater for a newly minted middle class.

The boom has left some wondering whether the country should now sit alongside Brazil, Russia, India and China in the BRIC club of newly powerful emerging economies. While the government expects the country will continue to attract investment, others doubt it will fulfill its potential.

"Six or 7 percent is all well and good, but can it go the next step to 8 or 9 that the government wants?" said Gareth Leather, an Asia specialist at Capital Economics. "The main problem is the business environment is still not conducive to the kind of conditions needed for economies to grow to that level."

While scrimping on infrastructure, schools and hospitals, successive governments have chosen to maintain subsidies on fuel for the country's 240 million people. Cheap fuel may win votes come election time, but it comes with a cost. In 2011, the subsidy bill ran close to $20 billion, the same amount the government is targeting to spend on infrastructure in 2013.

That figure represents a 15 percent rise on 2012, but experts doubt the government will be able to spend it all because it lacks the capacity to do so. Foreign investors can bring in expertise, but for many the country remains too risky because of corruption, legal uncertainty and problems acquiring land.

Political and social problems are also looming. Most of the leading candidates vying to replace President Susilo Bambang Yudhoyono in mid-2014 are old faces, seen as likely to champion economic nationalism rather than reforms. Labor disputes are on the rise, as are wages. While poverty is being reduced, income inequality levels are some of the highest in the world.

The country's investment chief dismissed fears of economic protectionism, predicting Yudhoyono's successor would be driven by pragmatism despite campaign rhetoric to the contrary.

"Whoever the president is in 2014, if they want to maintain power, they need to provide jobs to reduce poverty," said Basri Chatib. "Like it or not, even if they become nationalist, there needs to be an open economy. "

The infrastructure challenges facing the country become clear when travelling around it: highways between major cities cut through markets where traders spill onto the road, snarling traffic. Local fruit is often more expensive than that imported from China because of the costs of shipping to the capital from the regions. Cement costs 10 times more on outer islands than in Jakarta once it has made its way through the antiquated port system.