INFRASTRUCTURE DEVELOPMENT ROLE IN ECONOMICS GROWTH

INFRASTRUCTURE DEVELOPMENT ROLE IN ECONOMICS GROWTH

Indonesia’s large population and strong domestic demand is contributing to its positive growth outlook. With a population over 261 million, over 50% of whom live in urban areas, Indonesia has a large domestic market. And, a growing and affluent middle class supports GDP growth, where approximately 60% of GDP is derived from private consumption.

There is a significant need for infrastructure investment in roads, toll roads, ports, airports railways, water, and power plants. The Jokowi administration’s plan for 2015-2019 increases infrastructure funding compared to the previous period by nearly 10 billion dollars a year. Priority projects include the revitalization of 10 airports, a number of thermal and hydropower plants, toll roads, Mass Rapid Transit and the construction of new and upgrading of existing ports (Pwc Report).

After experiencing a severe economic crisis in 1997, the Indonesian economy has, in many ways, relatively recovered from the East Asia financial crisis. By 2006, the economy has grown at 6-6.5 percent per year while inflation has been kept at single digit. Indonesia’s estimated Gross Domestic Product (GDP) for 2006 was around US$ 364.5 billion, with a per capita GDP, PPP (constant international price US$) of about US$ 3,900 (World Development Indicator, 2007).

The access to road transport is deteriorating due to the insufficient facilities in the business districts and the lack of availability of road networks in the rural areas. At the national level, the growth of road network has not kept pace with the growth of the number of motor vehicles, creating severe traffic problems. Meanwhile, at the regional level (province, district, rural), the low network density as well as the unreliable and poor access to existing network has hindered the poverty reduction and growth in the isolated remote areas. The road quality is also uneven across country in Indonesia, ranging from relatively high condition of the national and provincial roads to poorly maintained sub-national roads. The Jokowi administration has introduced US$342 billion worth of infrastructure projects under its Priority and Strategic Infrastructure Programmed.

Estimated Long-term Impact of the Government’s Infrastructure Investment (Current and Future) on Indonesia’s Growth Rate Source: Tusk Advisory Estimates, 2018

Achievement of the estimated growth target also requires that macroeconomic management continues to facilitate growth, and that no policy actions are taken which endanger this growth. In particular, it is important that policy changes by the Ministry of Energy and Mineral Resources do not reduce the bankability of the independent power producing projects. We have assumed that this programmed will continue its delivery schedule with better regulatory support from the Ministry and the state power utility. Finally, the estimates assume that use of the constructed infrastructure is operationalized as soon as it is completed and that all feasible actions are taken to maximize its effective use.

These expected growth rates are achievable, given the history of Indonesia and its Asian neighbors. In this report, we have demonstrated the close relationship between infrastructure investment and economic growth. This relationship is reflected in the experience of Indonesia, China, India, Malaysia and Singapore in the 1991-1996 period, as shown in the following table:

 

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