Improving Connectivity in Indonesia: The Challenges of Better Infrastructure, Better Regulations, and Better Coordination

• Published date: 01 July 2016
• Author: Henry Sandee
• DOI: http://doi.org/10.1111/aepr.12138
• Date: 01 July 2016

Improving Connectivity in Indonesia: The

Challenges of Better Infrastructure, Better

Regulations, and Better Coordination

Henry SANDEE†

World Bank

This paper presents and discusses the main challenges that an archipelago like Indonesia is

facing in improving its connectivity. Distinguishing between intra-island, inter-island, and

international conn ectivity is essenti al in order to understan d the nature of the challe nges and

causes behind the bot tlenecks. High domest ic shipping costs are id entified as one key chall enge.

The Government of Indon esia has identified impr oved connectivity as a key i ssue in promoting

economic growth, esp ecially in the manufact uring sector, now that Indonesia can no longe r rely

on commodities as a dr iver of growth. Better i nfrastructure, reg ulations, and coord ination

among stakeholders ar e crucial component s in promoting improve d connectivity for

manufacturing gro wth. Promoting investment in infrastr ucture is necessary, including both har d

and soft infrastru cture. However, Indo nesian experience hi ghlights that witho ut regulatory

reform and improved po licy coordination, infrastructure in vestment will continue to lag behind.

There is a need for an improved and empowered governance structure to turn investment plans

into reality.

Key words: connectivity, infrastructure, logistics, policy coordination, regulatory reform

JEL codes: F6,H4,H5,I9,O2,R4

1. Introduction

Indonesia has the largest economy in Southeast Asia, the ninth-largest in theworld (PPP),

and is a member of ASEAN and the G-20. Its gross domestic product (GDP) per capita

stood at US$3510 in 2014 (at current prices), significantly behind neighboring Malaysia

(US$10,452). Indonesia is a vast nation with a population of over 250 million. It is the

world’s largest archipelagic state and encompasses over 17,500 islands, of which some

6000 are inhabited. The Indonesian archipelago extends 5120km from east to west and

1760km from north to south. The island of Java, where 58% of the population lives, is

the most densely populated island in the world. Today, Indonesia is one of the most

decentralized countries in the world, divided into 34 provinces, 511 districts and cities,

and some 72,000 villages. As part of the decentralization process, villages have received

funding for localinvestments over the years, butrecently passed legislationwill increase this

funding significantly.

The Government of Indonesia is becoming increasingly aware of the importance of

connectivityin such a vast archipelago. Connectivitymatters for two reasons. First,it results

†Correspondence: Henry Sandee, World Bank, Indonesia Stock Exchange Building, Jl. Let. Jend.

Sudirman Kav. 52-53, Jakarta 12190, Indonesia. Email: hsandee@worldbank.org

doi: 10.1111/aepr.12138 Asian EconomicPolicy Review (2016) 11, 222–238

222 ©2016Japan Center for EconomicResearch

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in lower poverty rates. Connecting rural areas to larger markets (located in cities and on

other islands) provides households with improved access to goods and services at lower

and more stable prices. Poverty rates are higher in remote areas of Indonesia: 55% of the

population in Papua in isolated eastern Indonesia is poor compared with 30% of the

population in West Java. But even in Java and Sumatra, the core islands in the archipelago

where most of the population and economic activity are concentrated, poverty rates are

higher in districts that are isolated from the larger urban centers (World Bank, 2010).

Second, improved connectivity contributes towards greater diversification in production

and exports, given that it helps businesses to develop competitive advantages in higher

value-added goods by producing them more cheaply and, mostcrucially, in a more reliable

and predictable manner. Interviews with manufacturing exporters suggest that in peak

months some 10% of Indonesia’s exports may quite literally miss the boat because of poor

connectivity between industrial hinterlands and ports.

Connectivity concerns the economic linkages between cities, islands, and regions. Two

cities may be wellconnected by a road, but this does notmean that the necessary economic

linkages are well developed or adequate. In such a situation, both cities may well prefer to

trade with coastal areas to trade their products to other regions. Connectivity is also about

the certainty of the economic linkages. Port cities in remote eastern Indonesia may have

scheduled visits from shipping-line services sailing from Jakarta or Surabaya on a weekly

basis. However,port congestion, together with the absenceof well-functioning information

and communication technology (ICT) services that support seamless loading and

unloading of freight, may disrupt regular trade flows.

There may be published shipping-lineservices between the capital,Jakarta, and specific

ports in eastern Indonesia, suggesting that these more remote ports are well connected.

However, if theseshipping-line services areunable to offer regular servicesor are frequently

late, or even canceled,then real economic linkages are much weakerand are detrimental to

trade between the capital and eastern Indonesia. Many traders of perishable goods from

eastern Indonesia can participate only in inter-island trade if sailing schedules are reliable

and fixed.

Connectivity has become an inc reasingly important issue for Indonesia now that it

needs to rely more on the product ion and export of manufacturi ng products, which

require more sophisticated and tim e-sensitive logistics system s. Over the past few years,

the country’s growth and development patterns h ave become somewhat less depe ndent

on commodity exports, which require less cos t-effective and timely logist ics systems.

Successful participatio n in global manufacturing production networks requ ires far more

from supply chain participan ts in terms of efficient logistics a nd the timely delivery of

products.

This paper presents the main challenges faced by an archipelago such as Indonesia in

improving its connectivity. The paper starts with the specific archipelagic connectivity

challenges (intra-island, inter-island and international connectivity) and these are

presented in detail. The importance of distinguishing the challenges in Java from those

outside Java is highlighted. The paper continues by summarizing the various initiatives

and programs that the Government of Indonesia has developed over the years to improve

Henry Sandee ImprovingConnectivity in Indonesia

©2016 JapanCenter for EconomicResearch 223