by Prema Nakra, Ph.D.
The Republic of Indonesia is the largest and most populous economy in Southeast Asia with 240 million people, making it the fourth largest country in the world. Located in the heart of the economic growth in Southeast Asia, it is a vast polyglot nation that stretches more than 5,000 kilometers across the equator and is made up of more than 17,000 islands.
In the first four articles in this series, I provided an overview of Indonesia, the investment opportunities that exist, the country's value proposition, and some of the barriers to doing business in Indonesia. In this article I examine some more of those obstacles.
NON-TARIFF BARRIERS IN INDONESIA: OPERATIONAL
Indonesia is a low-tariff country by developing country standards and has been rather successfully implementing its tariff liberalization program, but since the global financial crisis, new non-tariff barriers have emerged.
Labor Related Problems
Foreign corporations have faced a backlash from local communities in Papua and northern Sumatra as workers often go on strike to push for higher wages and better treatment. Case in point: Under President Suharto, only one trade union was allowed, and its activities were strictly controlled. The collapse of the Suharto regime in 1998 ushered in a frenzy of trade union activity as repressive regulations were lifted. Instead of dealing with one labor union, employers now have to deal with multiple labor organizations, many of which are in competition with one another for membership. Investors in such an environment often find it difficult to dismiss employees due to confusing regulations and labor laws.
Skilled Labor Shortage
Like many other emerging countries, Indonesia's severe shortage of skilled labor is due to out-migration of skilled workers, an aging workforce, and a lack of capacity to provide training. While the education system has been successful in fulfilling basic requirements like literacy, the universities and colleges in the country are widely considered archaic. Foreign universities have faced a challenge to set up campuses in the country in obtaining the necessary licenses and have been discouraged by the National Education Law that prohibits foreign owned, for-profit educational institutions.
Declining Manufacturing Base
For Indonesia manufacturing was the engine for growth in the 1980s and much of 1990s. The average growth of manufacturing in the years preceding the Asian financial crisis was 11.9%. Since then the manufacturing sector has been almost stagnant. One of the primary reasons for this decline in manufacturing is the substandard infrastructure in Indonesia, which forces transportation costs to go up. Investors are reluctant to invest in infrastructure projects due to lack of legal certainty regarding land ownership and use.
Logistical Problems
Indonesia stretches more than 5,000 kilometers across the equator and includes more than 17,000 islands. This vast size has made the development of an efficient national transport network a challenge. The country's most populated island, Java, faces huge congestion around its sea ports, which needs to expand and modernize. The road network has failed to keep pace with car purchases in the main urban centers, pressing the need for public transportation. Jakarta's main port of Tanjung Priok, for example, needs to more than triple its container handling capacity in the next seven years if it is going to keep up with expected growth in Southeast Asia's largest economy.
To remove the logistical bottlenecks, Indonesia will need to spend $70 billion a year on infrastructure alone for the next five years in order to keep economic growth at an annual rate of six to seven percent or higher, according to a global publishing, research and consultancy firm based in Jakarta.
Condition of Social Infrastructure
Indonesia's continuing weakness continues to lay in infrastructure both in terms of social infrastructure such as sewage and electricity transmission as well as transportation. Consistent availability of electricity is one of the main challenges. Periodic blackouts and high costs are obstacles that many producers complain about.
Public transportation is either seriously underdeveloped or completely absent, which leaves the relatively few and poorly maintained roads and highways around the nation unable to cope with the daily volume of cars, truck and motorcycles. Within the confines of large cities like Jakarta, it is even worse. The roads, while better maintained, cannot handle the volume of cars, mini-buses, and the ubiquitous scooters (over five million of them) that carry workers in from the surrounding countryside. Such issues serve to undermine Indonesia's strong economic fundamentals, constrain growth, and dampen investor interest.
Retailing Challenge
Traditional markets still account for around 60% of total retail spending throughout the country as modern retail facilities are heavily concentrated in Java. Government regulations to protect traditional retailers can create non-tariff barriers in this industry. As per regulations put in place in 2002, modern retail outlets can only be set up a certain distance from existing traditional markets.
Challenges certainly exist, but in my final article in this series I will summarize the reasons why Indonesia remains on the path toward becoming one of the world's advanced economies.
  ( Vivian )20 Feb,2013

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