IN ASIA

Weekly Insights and Analysis

Q&A with Indonesia’s Leading Economist and Former Minister Mari Pangestu

January 25, 2017

By Alma Freeman

pangestuIndonesia’s former Minister of Tourism and Creative Economy, Mari Pangestu, recently visited The Asia Foundation’s headquarters in San Francisco as a 2016 Chang-Lin Tien Distinguished Visiting Fellow. In Asia editor Alma Freeman sat down with her to discuss trade, Indonesia’s infrastructure challenges, the “Beyond Bali” strategy, lessons from Silicon Valley, and thoughts on minority issues as the first woman Chinese Indonesian to hold a cabinet position in Indonesia.

As one of the top economic experts on trade issues in Indonesia, what do you see as the biggest challenges facing Indonesia’s economic development today?

I think the biggest challenge Indonesia faces now is finding new sources of growth, as we have enjoyed the commodity boom up until the most recent global financial crisis. Since then, our exports have plummeted quite a bit, and it has affected growth. We can still grow, obviously, because we have a large domestic market, but I think in the medium-term the country must address the issue of how to diversify the sources of growth away from a primary commodity and manufacturing base, because manufacturing will only provide so many jobs and so many sources of growth.

We should think about how to increase productivity and efficiency across sectors. If you take agriculture, for instance, there’s still a lot of growth potential if you could focus on improved yield. But the most important thing for agriculture is having efficient logistics – getting the goods to market. This depends on an efficient infrastructure, which is a huge constraint to Indonesia’s growth.

What role do you see tourism playing?

While the tourism sector has been growing in Indonesia, it has not been explored to its full potential, mostly because of constraints around poor infrastructure. Limited human resource capacity is also a challenge, and together, these two things constrain the ability to develop destinations that can receive a large number of visitors. But, there’s a lot of opportunity in tourism, and the current government is prioritizing it. Now, Indonesia gets about 10 million visitors a year, bringing in about $11 or $12 billion in revenue a year. That’s about one-third of Thailand, a country I see as a model in tourism.

What lessons are there from a place like Thailand, particularly as it has struggled with its own moments of political instability?

The interesting thing is that instability has had only a small impact on tourism in Thailand. Even after the severe floods a few years ago, Thailand had a crisis management plan for mitigating risk to its tourism sector. The moment something happens, they have a good system of communicating that the instability is isolated to a particular area, which gives people confidence in feeling it’s safe everywhere else as long as you avoid that particular area. Thailand has put a high priority on tourism for a long time, and the sector ranks high in the political as well as policy priorities of the government.

We’re seeing President Jokowi also prioritize tourism, with a strategy know as “Beyond Bali.” Bali is of course very well known internationally, but the rest of Indonesia is not. “Beyond Bali” targets 10 destinations in a coordinated way to ensure that the infrastructure gets built, the airline or road connectivity happens, and that there is attention paid to the quality of the services needed to develop and sustain tourism in those areas.

Jokowi is seeking billions of dollars to fund an ambitious infrastructure agenda that includes building roads, railways, and seaports. Why has infrastructure been such an ongoing struggle for Indonesia, and in what ways do you see an improved infrastructure playing a role in development?

The biggest challenge is land, because until 2012, Indonesia did not have an eminent domain law where, for the purposes of public development, you can develop private-sector land as long as you compensate owners properly and it’s done legally. Because of this, it has been very difficult for the government to develop infrastructure projects such as bridges and toll roads. We were finally able to pass the eminent domain law in 2012, but it was only implementable in 2014. So far, there has only been one project that has used that law as a legal basis to develop.

The second challenge is finding a solid financing model. The government has already identified an infrastructure package at the cost of something like $400 or $500 billion. The government can afford to finance maybe 30 percent from its own budget, so the rest must come from public/private partnerships. The question then is whether there is enough incentive for the private sector to participate in these partnerships? A clear delineation of risk is important for the private sector to make the long-term calculation on the so-called rate of return written on investment. If you can settle that, then you are in a better position to raise funding from consortiums. We still have a long way to go in getting solid public/private partnership projects that can take off in a big way.

The government has launched an “e-commerce roadmap” as one of components of its 14th economic package. You have said that human resources posed a key challenge for Indonesia to develop its digital economy. Can you talk a bit more about this?

If we don’t focus on human resources, we can’t achieve new sources of growth or be competitive. Education is the number-one factor: if you look at most of the basic indicators surrounding education, Indonesia does well. But the moment you get into the more-skilled, higher levels of learning and what we call “technological readiness,” Indonesia ranks low, even when compared to China, India, and some of our Southeast Asian neighbors. Our internet penetration also remains low in the region.

But connectivity isn’t everything. A recent World Bank study on this argued that connectivity is only a necessary condition, not a sufficient one, for countries to enjoy the digital dividend. If you can’t use the new technology, then the digital divide widens, because those who can access and know how to use it move faster than those who can access it but don’t know how to use it. To keep this gap from widening, we must retrain people to use a different type of skill and adapt to new technology for their benefit.

You have met with a number of innovators and business leaders in the Silicon Valley during your fellowship. What are some highlights?

I’ve realized that it’s difficult to replicate an ecosystem for innovation and creativity that you see in the Bay Area, which is a model everywhere in the world. But I’ve also been looking closely at the elements that make the so-called ecosystem for innovation and creativity conducive to what you see happening here, and one is the educational institutions, as well as the research taking place. I’m always interested in the role of the government, and apparently, the role of government in Silicon Valley is minimal. It’s proof that a government can’t come in and say, “Oh, I want to create an ecosystem for innovation.” It just doesn’t happen that way. I was also interested in the role that the immigrant community has played in driving the innovation here.

What is unique in the Bay Area, even compared to a place like New York City, is first, the level of dynamism that exists. The risk-taking behavior and the acceptance of failure that you can launch a start-up and then fail after one year, as almost a requirement if you then want to go to the next level, is an integral part of success.

The second thing is the very high mobility of talent, with people moving from company to company, going to a start-up and then going back to Google, for example. The mobility of talent is so incredible here, but somehow it works.

Any particular takeaways for the Indonesian context?

Indonesia needs to learn that you need the basic components to create an ecosystem, and that government role must be minimal. Ease of doing business is also important. In Indonesia, we apply to the board of investment and we don’t know what the process will be like. Sometimes it’s easy, sometimes it’s not, and that’s not comfortable for investors or venture capitalists.

I think openness to talent—including foreign talent—is another key component. And having an open, collaborative structure and mentality, both government and non-government.

For such an innovation hub to work in Indonesia, it must be built in central Jakarta, because no other place has those components of the ecosystem. It also needs to be near the university, near the financial center, and near where good talent would want to live.

In November, protestors clashed in Jakarta over comments Governor Ahok made relating to the Koran, leaving one dead and several injured, a reminder of the minority tensions that still exist in the country. Can you talk a bit about this?

I think the minority issue still is and will always be an issue in Indonesia. But I think it has improved tremendously since the 1998 riots on a number of fronts, including the removal of all the laws that have any discriminative elements, and the citizen law, which came out in 2006. That’s quite revolutionary, because if you know the history from 1965, especially for people of Chinese origin, when you had a code to note your Chinese origin on your identity card, and you had to have a birth certificate that showed in the past we had Chinese names. Chinese New Year is now a national holiday, and we have three ethnic Chinese in this current cabinet.

The majority of Indonesians are very tolerant, and that’s the strength of Indonesia. The fact that we see these issues playing out now in the run up to the governor election, is due to politics, and how they are playing up on underlying feelings. We just hope this will be dealt with in a democratic way, without any more violence or unnecessary provocation. That’s our hope for a fair election of the governor in February.

The views and opinions expressed here are those of the interviewee and not those of The Asia Foundation or its funders.

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