Improving Indonesia competitiveness

Improving Indonesia’s Competitiveness

Presentation to President Susilo Bambang Yudhoyono

Professor Michael E. Porter
Harvard Business School
Boston, Massachusetts
September 28, 2009
This presentation draws on ideas from Professor Porter’s articles and books, including, The Competitive Advantage of Nations (The Free Press,
1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report, (World Economic Forum), “Clusters
and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008) and ongoing
research at the Institute for Strategy and Competitiveness. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E.
Porter. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu,
Version: September 28, 2009, 2pm
20090928 – Indonesia President visit (handouts).ppt 1 Copyright 2009 © Professor Michael E. Porter

Agenda for the Second Term

• Improving macroeconomic foundations
– Intensify the fight against corruption

• Upgrading the business environment

• Clusters development

• Provincial economic development

• Economic coordination with neighboring countries

• National economic strategy

• Organizing for competitiveness


Prosperity Performance
Lower and Middle Income Countries
PPP-adjusted GDP per
Capita, 2008 ($USD)
$20,000 Hungary
Lithuania

$18,000 Poland Latvia
Asian countries Croatia
Other countries Russia
$16,000
Chile Argentina
$14,000 Mexico Malaysia
Venezuela Turkey
Uruguay Bulgaria Romania
$12,000 Iran
Ecuador Kazakhstan
South Africa Dominican Republic
$10,000 Brazil

Colombia Peru
Thailand
$8,000 Costa Rica Tunisia Ukraine
Albania
$6,000 Guatemala Egypt China
Jordan Syria Georgia
Sri Lanka
Morocco Indonesia
$4,000
Philippines
Pakistan India Vietnam
Papua New Guinea (-2.6%) Laos
$2,000 Kenya
Nigeria Cambodia
Bangladesh Tanzania

$0
3% 5% 7% 9% 11% 13%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2008

Source: EIU (2009), authors calculations

Unemployment Performance
Unemployment
Rate, 2008
Middle and Lower Income Countries Dominican
South Africa (22.9%) Republic (15.5%)

14% Improving Tunisia Deteriorating
Croatia

Asian countries Albania Jordan Iran
Other countries
12%
Spain Colombia

10% Poland
Morocco
China
Syria Egypt Indonesia
8% Brazil Peru
Argentina (-14.6%) Chile Hungary
Uruguay Bolivia
Ecuador Venezuela Philippines Pakistan
Kazakhstan India
Bulgaria Russia El Salvador
6% Lithuania Estonia Nicaragua
Panama Paraguay
Latvia
Sri Lanka
Costa Rica
Vietnam
Romania
4% Mexico
Honduras
Malaysia
Ukraine
Bangladesh
2%
Thailand

0%
-10% -8% -6% -4% -2% 0% 2% 4%
Change of Unemployment Rate in Percentage Points, 1999-2008
Note: In some cases, 1999 data was unavailable, so latest data used.
Source: EIU (2009)

Export Performance
Middle and Lower Income Countries
Exports of Goods and
Services (% of GDP), 2008
90%
Malaysia (103.5%)

Hungary
80% Asian countries Vietnam
Other countries Thailand

70%

Papua New Guinea
Bulgaria
60% Lithuania
Cambodia Nigeria Tunisia
Jordan
Kazakhstan
50%
Croatia Chile
Costa Rica
Ukraine (-17.5%) Egypt
Latvia
40% Poland
Philippines China South Africa
Venezuela Uruguay Morocco
Syria Russia Georgia
Romania Mexico
30%
Sri Lanka Indonesia Guatemala Peru
Iran Kenya Ecuador India
Argentina Turkey Australia Bangladesh
20% Albania
Tanzania Colombia
Brazil
Pakistan
10%
-15% -10% -5% 0% 5% 10% 15% 20%
Change in Exports of Goods and Services (% of GDP), 2004 to 2008

Source: EIU (2008), authors’ analysis

Indonesia Exports By Type of Industry
World Export Market Excluding Oil and Gas Industry
Share (current USD)

3.5% Processed Goods
Semi-processed Goods
Unprocessed Goods
3.0% Services
TOTAL

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Note: Excluding Oil and Gas cluster
Source: – Indonesia President visit (handouts).ppt
20090928 UNComTrade, WTO (2008) 6 Copyright 2009 © Professor Michael E. Porter

Inbound Foreign Investment Performance
Stocks and Flows, Selected Middle and Lower Income Countries
Jordan
Inward FDI Stocks as % of
GDP, Average 2003 - 2007 (46.5%,
81.8%)
70%
Tunisia
Asian countries Chile
Hungary
Other countries
60% Vietnam
Bulgaria (69%)

50% Croatia
Kazakhstan

Papua New Guinea Cambodia Georgia
40% Morocco Tanzania
Nigeria
Malaysia
Thailand Latvia (49.5%)
Venezuela Egypt
South Africa Argentina Lithuania Poland
30% Colombia Romania
Laos Mexico Costa Rica
Ecuador
Brazil Russia
Guatemala Peru
20% Ukraine
Uruguay
Dominican Republic
Albania Turkey
Philippines
Indonesia China
10% Sri Lanka Pakistan
Bangladesh
Kenya
India
Iran
0%
-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007

Source: UNCTAD, World Investment Report (2009)

Inbound Foreign Investment Performance
Flows, Selected Countries
Inward FDI Flows, Ranked by Inward
% of GDP FDI Flows (% of
6% GDP), 2007

5% Russia

4%
Brazil

3%
China

2%
India

1%
Indonesia

0%

-1%

-2%

-3%
2000 2001 2002 2003 2004 2005 2006 2007

Innovative Output, Selected Countries
Average U.S. patents per 1
million population, 2004-2008
Malaysia (4.4)
3.5
Czech Republic

3.0
Croatia

2.5

Kuwait

2.0 South Africa

Greece
1.5
Portugal
Russia

1.0
Argentina Chile Saudi Arabia UAE
Poland Bulgaria
Mexico
0.5 Brazil Lebanon China
Ukraine Romania India
Philippines Thailand
Colombia Turkey
Egypt Indonesia
0.0
-20% -10% 0% 10% 20% 30% 40% 50% 60%
CAGR of US-registered patents, 2004 – 2008
Source: USPTO (2008), EIU (2008)

Indonesian Competitiveness in 2009

• Solid growth rates over the medium term
• The impact of the global crisis has been comparably modest
• Political stability has improved significantly
• The achievements of the first term have laid a good foundation for rapid
progress

HOWEVER

• Indonesia’s prosperity remains low, and prosperity growth rates have only
been average relative to regional peers
• Indonesia’s limited integration into the global economy has provided
shelter but greatly limits Indonesia’s long-term growth prospects
• Indonesia continues to face significant competitive weaknesses

• The second term is the time to move to a more ambitious economic
strategy which will place Indonesia on a higher growth path


What is Competitiveness?
• Competitiveness is the productivity with which a nation uses its human,
capital, and natural resources.
– Productivity sets the sustainable standard of living (wages, returns on
capital, returns on natural resources)
– It is not what industries a nation competes in that matters for prosperity, but
how productively it competes in those industries
– Productivity in a national economy arises from a combination of domestic
and foreign firms
– The productivity of “local” or domestic industries is fundamental to
competitiveness, not just that of export industries

• Only competitive businesses can create sustainable jobs and attractive
wages
• Nations compete to offer the most productive environment for
business
• The public and private sectors play different but interrelated roles in
creating a productive economy

Determinants of Competitiveness
Microeconomic Competitiveness

Quality of the Sophistication
National State of Cluster of Company
Business Development Operations and
Environment Strategy

Macroeconomic Competitiveness

Social
Infrastructure Macroeconomic
and Political Policies
Institutions

Natural Endowments

• Natural endowments alone are not enough to support a high standard of living
• Macroeconomic competitiveness creates the potential for productivity
• Productivity ultimately depends on improving the microeconomic capability of the
economy and the sophistication of local competition

Indonesia’s Macroeconomic Competitiveness

• Indonesia has made significant progress solidifying and improving
political institutions
• Macroeconomic policy is solid, but stable fiscal balances are
partly due to the inability to execute planned spending, especially at
the provincial level
• Decentralization of authority to the provinces is an important step
in a large, spread out country such as Indonesia, but better policy
coordination and implementation is needed
• There has been some progress in reducing corruption, but this
remains a central obstacle to further improvements in
competitiveness
• Indonesia performs relatively well in some aspects of basic human
development, but has not improved its position significantly over
time


Corruption Perception Index, 2007
1 Finland New Zealand
Iceland Sweden
Low Deteriorating Norway
Switzerland Improving
Canada
corruption UK
Hong Kong Austria Germany
Ireland Japan
United States France
Chile Spain Uruguay
Portugal Estonia Slovenia
Israel Botswana Taiwan
Hungary South Africa Czech Republic
Italy
Malaysia South Korea
Lithuania Costa Rica Slovakia
Rank in Latvia
Jordan
Global Greece
Tunisia Poland
Corruption Croatia Turkey
Index, El Salvador
Colombia Ghana Romania
2007 Peru Brazil Mexico China India
Senegal

Panama Thailand Tanzania
Argentina
Egypt
Moldova Guatemala Uganda
Nicaragua Ukraine
Vietnam
Philippines Honduras
Pakistan Cameroon
High Cote d’Ivoire
Russia Indonesia
Zimbabwe Kenya Nigeria
corruption Kazakhstan
Venezuela Bangladesh
91
-20 -15 -10 -5 0 5 10 15 20
Change in Rank, Global Corruption Report, 2007 versus 2001

Note: Ranks only countries available in both years (91 countries total)
Source: Global Corruption Report, 2008

Indonesia’s Macroeconomic Competitiveness
Action Priorities

• Sustain progress in improving the stability of the political system
and the battle against terrorism
• Intensify the fight against corruption
• Sustain the focus on stable government finances, while enabling
more effective execution of public sector investments
• Create and implement a clear strategy for improving education and
health care, especially the quality of delivery
• Improve the effectiveness of policies to ameliorate poverty, for
example, through a social safety net instead of broad consumption
subsidies
• Continue strengthening the legal system


Microeconomic Competitiveness: Improving the
Business Environment
Context for
Context for
Firm
Firm
Strategy
Strategy
and Rivalry
and Rivalry

 Vigorous local competition
– Openness to foreign competition
– Competition laws
Factor
Factor  Local rules and incentives
Demand
Demand
(Input)
(Input) encouraging productivity and
investment
Conditions
Conditions
Conditions
Conditions
– e.g. incentives for investment,
intellectual property protection,
 Access to high quality business corporate governance standards Demanding and sophisticated local
inputs customers and needs
– Human resources – e.g., Strict quality, safety, and
– Capital availability environmental standards
Related and
Related and – Consumer protection laws
– Physical infrastructure
Supporting
Supporting
– Administrative infrastructure (e.g.
registration, permitting, Industries
Industries
transparency)
– Scientific and technological  Availability of suppliers and supporting
infrastructure industries

• Many things matter for competitiveness
• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing

Ease of Doing Business
Indonesia, 2009
Ranking, 2009
(of 183 countries)
Favorable Unfavorable
180

Median Ranking, Asia and
160 Pacific Region

140

120
Indonesia’s per capita GDP rank: 101
100

80

60

40

20

0
Ease of Protecting Trading Dealing Registering Getting Paying Closing a Enforcing Employing Starting a
Doing Investors Across with Property Credit Taxes Business Contracts Workers Business
Business Borders Licenses

Source: World Bank Report, Doing Business (2009)

Indonesia’s Business Environment
Critical Strengths and Weaknesses

STRENGTHS WEAKNESSES
• Solid basic skills and a large available • Weak logistical and communication
workforce infrastructure
• Promising reforms of rules and • Unreliable electricity supply
regulations affecting business • Labor market rigidity
– Top Asian reformer in 2010 World Bank Doing
Business ranking
• Regulations and customs procedures
remain complex
• Solid financial system
• Limited depth in the financial system
• Greater formal opening of the economy
to trade and investment • Weak educational quality
– New Investment Law passed in 2007 • Legal system uncertainty for investors,
• Wide array of potential clusters, especially at the provincial level
especially in natural resources-related • Dominance of large business groups
fields and state-owned enterprises
• Weak cluster collaboration and
development
• Lack of advanced skills
• Weak science and technology system


Indonesian Business Environment
Action Priorities

• Continue progress on regulatory reforms
• Improve logistical infrastructure
• Improve communications infrastructure
• Improve the quality of electricity supply
• Reduce rigidities in the labor market
• Reform customs procedures and continue the process of opening to
international trade and investment
• Increase domestic competition, including limits on dominant domestic
market positions
• Create stronger institutions to disseminate management best
practices and support the adoption of new technologies


Microeconomic Competitiveness: Cluster Development
Tourism Cluster in Cairns, Australia
Public Relations &
Public Relations & Local retail,
Local retail,
Market Research
Market Research Travel agents Tour operators health care, and
health care, and
Travel agents Tour operators
Services
Services other services
other services

Food
Food Local
Local
Suppliers
Suppliers Attractions and
Attractions and Transportation
Transportation
Restaurants Activities
Activities
Restaurants e.g., theme parks,
e.g., theme parks,
casinos, sports
casinos, sports
Property
Property Souvenirs,
Souvenirs,
Services
Services Duty Free
Duty Free

Airlines,
Airlines,
Hotels
Hotels Banks,
Banks,
Maintenance
Maintenance Cruise Ships
Cruise Ships
Foreign
Foreign
Services
Services Exchange
Exchange

Government agencies
Government agencies Educational Institutions
Educational Institutions Industry Groups
Industry Groups
e.g. Australian Tourism Commission,
e.g. Australian Tourism Commission, e.g. James Cook University,
e.g. James Cook University, e.g. Queensland Tourism
e.g. Queensland Tourism
Great Barrier Reef Authority
Great Barrier Reef Authority Cairns College of TAFE
Cairns College of TAFE Industry Council
Industry Council

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

Chilean Wine Cluster
Related and
Related and = Strong domestic capacity
Specialized
Specialized
Supported
Supported = Moderate domestic capacity financing
financing
Industries
Industries = Weak domestic capacity

Barrels
Barrels
Government
Government
(trade promotion offices,
(trade promotion offices,
Irrigation
Irrigation Bottles
implementation of standards,
implementation of standards, Bottles
technology
technology export/import/FDI policies)
export/import/FDI policies)
Plastics / /
Plastics
Grapestock
Grapestock Tetrapacks
Tetrapacks

Fertilizer,
Fertilizer, Growers / /
Growers Wineries / /processing
Wineries processing
Corks
vineyards facilities Corks
pesticides,
pesticides, vineyards facilities
herbicides
herbicides
Labels
Labels
Grape
Grape
harvesting
harvesting Educational, research, and trade
Educational, research, and trade Public relations
equipment
equipment organization
organization Public relations
and advertising
and advertising

Agriculture Cluster Tourism Cluster Specialized
Specialized
Agriculture Cluster Tourism Cluster
publications
publications
Food Cluster
Food Cluster

Export
Export
Pisco Cluster
Pisco Cluster promotion
promotion
Source:Sources: Based on diagram by Alexander, Alea, Judd Belstock, Don Lambert, Jacqueline O’Neill, Noah Sawyer), 2005
Research by HBS student team (Asier Arney, Black, Frost, Shivananda, taken from ‘On Competition’, Michael Porter, 2003

Clusters as a Tool For Economic Policy

• A forum for collaboration between the private sector, trade
associations, government, educational, and research institutions
• Brings together firms of all sizes, including SME’s
• Creates a mechanism for constructive business-government
dialog
• A tool to identify problems and action recommendations
• A vehicle for investments that strengthen multiple
firms/institutions simultaneously
• Fosters greater competition rather than distorting the market


Clusters and Policy Implementation
Science and Technology
Education and Investments
Workforce Training (e.g., centers, university
departments, technology
Management Training transfer)

Standard setting and
Business Attraction quality initiatives

Clusters
Export Promotion Environmental
Stewardship

Market Information Natural Resource
and Disclosure Protection
Physical
Infrastructure

• Clusters provide a framework for implementing public policy and
organizing public-private collaboration to enhance competitiveness

Indonesian Clusters

• Indonesia has potential strengths in a wide array of clusters,
including agriculture, tourism, forest products, coal, oil and gas, and
forms of mining


Indonesia’s National Cluster Export Portfolio
1997 to 2007
2.5%
Change In Overall World
Fishing and Fishing Products Coal and Briquettes
Export Share: +0.034% (5.35%, 12.36%)

Footwear

Agriculture Products
2.0%
Indonesia’s world export market share, 2007

Forest Products

Furniture Apparel

Building Fixtures and Equipment (-3.76%) Textiles Plastics
1.5% Tobacco

Oil and Gas
Metal, Mining and Manufacturing

1.0%
Entertainment Chemical Products
Construction Materials
Motor Driven Products
Leather and Related Products Communication Services
Average World Export
Publishing and Printing
Share: 0.79% Construction Services Lighting and Electrical Equipment
Sporting, Recreational and Children's Goods Marine Equipment
0.5% Communications Equipment Processed Foods
Prefabricated Enclosures and Structures Transportation and Logistics
Jewelry, Precious Metals and Collectibles Heavy Machinery
Business Services IT Production Technology
Analytical Instruments Automotive
Biopharmaceuticals Aerospace Vehicles and Defense
Financial Services
0.0%
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
Change in Indonesia’s world export market share, 1997 to 2007
Exports of US$4.2 Billion =
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business
20090928 – Indonesia President visit (handouts).ppt 25
School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. Copyright 2009 © Professor Michael E. Porter

Indonesian Clusters

• Indonesia has potential strengths in a wide array of clusters,
including agriculture, tourism, forest products, coal, oil and gas, and
forms of mining
• Indonesia’s emerging clusters are heavily based on the country’s
abundant natural endowments, with few activities in related and
supporting industries
• The National Industrial Policy approved in 2008 identifies priority
sectors, but there is no effective cluster development effort
• Existing cluster related efforts suffer from weak coordination across
ministries and agencies


Share of World Exports by Cluster
Indonesia, 2007
Strong

Stronger Fishing & Textiles
Fishing Entertainment
Prefabricated
Strongest Products Hospitality
Enclosures
& Tourism
Agricultural
Products
Transportation Furniture
& Logistics Building
Distribution Aerospace Fixtures, Construction
Services Vehicles & Equipment & Materials
Information Defense Services
Tech. Processed
Lightning & Heavy
Jewelry & Business Construction Food
Services Analytical Electrical
Precious Services
Education & Instruments Equipment
Metals Forest
Knowledge Medical Power
Creation Generation Products
Financial Devices Communi-
Services cations
Publishing
& Printing Equipment
Biopharma- Heavy
ceuticals Machinery
Motor Driven Production
Chemical Products Technology
Apparel
Products Tobacco
Leather & Oil & Automotive
Related Gas Aerospace Mining & Metal
Products Plastics Engines Manufacturing

Footwear
Sporting Marine
& Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.

Indonesian Clusters
Action Priorities

• Adopt cluster development as a central approach for organizing the
government’s business development efforts

• Utilize cluster initiatives as a tool to engage the private sector in more
effective collaboration with government at the national and regional
level

• Use clusters to organize export promotion and FDI attraction


Geographic Influences on Competitiveness

Neighboring Countries

Nation
Nation

Regions and Cities
Regions and Cities


Specialization by Traded Clusters
U.S. States, 2006
Oregon
Oregon
Agricultural Products South Dakota
South Dakota
Agricultural Products
Prefabricated Enclosures Heavy Machinery
Heavy Machinery Maine
Prefabricated Enclosures Maine
Forest Products Sporting, Recreational
Sporting, Recreational Illinois Forest Products
Forest Products Illinois Forest Products
Analytical Instruments and Children's Goods
and Children's Goods Biopharmaceuticals Aerospace Engines
Analytical Instruments Biopharmaceuticals Aerospace Engines
Financial Services
Financial Services Lighting and Electrical Equipment Communications Equipment
Lighting and Electrical Equipment Communications Equipment
Processed Food
Processed Food Heavy Machinery Hospitality and Tourism
Heavy Machinery Hospitality and Tourism
Metal Manufacturing
Metal Manufacturing

Idaho
Idaho
Information Technology
Information Technology
Prefabricated Enclosures
Prefabricated Enclosures
Furniture Kentucky
Kentucky
Furniture
Forest Products Automotive
Automotive
Forest Products
Plastics
Plastics
Nevada Transportation and Logistics
Transportation and Logistics
Nevada
Leather and Related Products
Leather and Related Products
Heavy Construction Services
Hospitality and Tourism
Transportation and Logistics
Transportation and Logistics South Carolina
South Carolina
Textiles
Textiles
Forest Products
Forest Products
Automotive
Automotive
Production Technology
Production Technology

Alaska
Alaska Colorado
Colorado Mississippi
Fishing and Fishing Products
Fishing and Fishing Products Mississippi
Oil and Gas Products and Services
Oil and Gas Products and Services Furniture
Power Generation and Transmission
Power Generation and Transmission Furniture
Medical Devices
Medical Devices Fishing and Fishing Products
Heavy Construction Services Fishing and Fishing Products
Aerospace Vehicles and Defense
Aerospace Vehicles and Defense Power Generation and Transmission
Hospitality and Tourism Power Generation and Transmission
Entertainment
Entertainment Motor Driven Products
Motor Driven Products
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.

Indonesia’s Provinces

Source: Wikipedia, Provinces of Indonesia

• Indonesia’s provinces are geographically dispersed and culturally diverse
• Indonesia’s population is becoming increasingly urban
• Weak infrastructure has limited internal trade and specialization and made
it difficult to access Indonesia’s large national market
• Decentralization in government has led initially to inefficiency and
corruption

Indonesia’s Provinces
GDP per Capita, 2007 Divergent Performance
(Constant Market Prices,
2000, Million Rupiah)
Rp20
Kalimantan Timur (2.25%, Rp39.84) DKI Jakarta Rp39.69) Kepulauan Riau (Rp28.96)

Riau

Rp15

Kalimantan Tengah Weighted Indonesian
Kepulauan Bangka Belitung
Rp10 Banten Jawa Timur Average: Rp9.41
Naggroe Aceh Darussalam (-5.23%)
Papau (-2.27%) Kalimantan Selatan Sumatera Utara
Sumatera Selatan Jawa Barat
Bali Papua Barat
Kalimantan Barat Sumatera Barat
Dl. Yogyakarta Sulawesi Tengah
Sulawesi Utara Jambai
Rp5 Sulawesi Selatan Jawa Tengah Sulawesi Tenggara
Lampung
Sulawesi Barat Bengkulu
Nusa Tenggara Barat
Maluku Maluku Utara
Nusa Tenggara Timur Gorontalo

Weighted Indonesian Average: 4.82%
Rp0
3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
Growth of GDP per Capita (Constant Market Prices, 2000), CAGR 2003 to 2007
Note: Since population only available for 2000, population held constant when calculating per capita levels.

Indonesian Provinces
Action Priorities
• Strengthen logistical and communications infrastructure linking the
provinces to expand trade, encourage economic specialization, and
open internal competition

• Reduce internal administrative and policy barriers to inter-provincial
trade and investment

• Improve the capabilities of provincial governments to improve policy
formulation and implementation, and to reduce corruption

• Support provinces in creating distinctive economic strategies

• Create rules that limit destructive competition among provinces for
investments, such as large subsidies

• Create a structure and incentives to align and harmonize national and
provincial policies

Geographic Influences on Competitiveness


Nation
Nation

Regions and Cities
Regions and Cities


Economic Integration with Neighboring Countries
South East Asia

• Economic coordination among neighboring countries can significantly enhance
competitiveness

Economic Strategy For Cross-National Regions

Traditional View
• Regions as free trade zones

Emerging View
• Regional strategy as a powerful tool to enhance competitiveness
across countries
– Expand trade and investment within the region
– Attract more foreign investment to the region
– Capture synergies in improving the business environment
– Accelerate the rate of domestic policy improvement
– Enhance interest and investment in the region by the international
community


Economic Coordination Among Neighbors
Capturing Synergies

Factor
Factor Context for
Context for Related and
Related and Regional
Regional
Demand
Demand Macroeconomic
Macroeconomic
(Input) Strategy Supporting Strategy &
Strategy &
(Input) Strategy Conditions Supporting Competitiveness
Conditions and Rivalry Conditions Industries Competitiveness Governance
Conditions and Rivalry Industries Governance

• Improving regional • Eliminating • Harmonizing • Facilitating cross- • Coordinating • Creating a
transportation trade and environmental border cluster programs to regional strategy
infrastructure investment standards upgrading, e.g. improve public and marketing
barriers within safety program
• Enhancing regional • Harmonizing – Tourism
the region
communications product safety • Coordinating • Sharing best
– Agribusiness
and connectivity • Simplifying and standards macro-economic practices in
harmonizing – Transport & policies government
• Creating an efficient • Establishing
cross-border Logistics operations
energy network reciprocal
regulations and
consumer – Business • Creating regional
• Linking financial paperwork
protection laws services institutions
markets • Coordinating – Dispute
anti-monopoly • Opening resolution
• Harmonizing
and fair government mechanisms
administrative
competition procurement – Regional
requirements for
policies within the region development
businesses
bank
• Opening the
movement of • Developing a
students for higher regional position
education with international
organizations


Indonesia and ASEAN

• ASEAN has set ambitious policy goals but there is limited
implementation
• ASEAN’s agenda is focused on a reciprocal trade liberalization,
rather than upgrading regional competitiveness
• ASEAN is moving too slowly towards greater economic
integration

• Indonesia has played a largely passive role in ASEAN
• Indonesian firms have been slow to penetrate regional markets
• Indonesia can be a leading force in driving ASEAN forward


Developing an Indonesian Economic Strategy

National Value Proposition
National Value Proposition

• What is the unique competitive position of
Indonesia given its location, legacy, endowments, and
potential strengths?
• What is Indonesia’s value proposition for business?
• In what clusters can Indonesia excel?
• What role can Indonesia play in its region?

Developing Unique Strengths
Developing Unique Strengths Addressing Crucial Constraints
Addressing Crucial Constraints

• What are the key strengths that • What weaknesses must be addressed to
Indonesia must build upon? achieve parity with peer countries?

• An economic strategy requires rigorous prioritization and sequencing


Toward an Indonesian Economic Strategy

Unique Strengths Implications

• Significant natural resources Political and Legal Stability
• Pluralistic, diverse society increasingly
embracing democratic principles
Human Development
• Creative and energetic workforce
• Large domestic market with a growing
number of urban consumers Infrastructure
• Complex geography with thousands of
islands and long distances
Regulatory Reforms
• A central location in Asia, with
proximity to numerous foreign markets
Trade, investment and Regional integration

Cluster Development

Government Effectiveness and Organization


Organizing for Competitiveness

• Sustained improvements in competitiveness require coordination
among many parts of government
– Across different ministries to align all the policies that affect clusters
or aspects of competitiveness
– Across geographic levels of government

• Improving competitiveness requires collaboration with the private
sector
– Public-private dialogue to identify competitiveness priorities and
implement solutions

• While Indonesia has made progress on advancing competitiveness
policies at the national level, policy coordination within
government with the private sector remains a challenge


Organizing for Competitiveness
Action priorities for Indonesia

• Create a strategy unit in the Office of the President

• Strengthen the coordinating structure within the national
government

• Create a public-private National Council on Competitiveness
to build consensus on an overall economic strategy and track
implementation

• Foster Provincial Competitiveness Councils to drive
consensus on provincial plans, involving representatives from
both public and private sector and participation by the national
government


Agenda for the Second Term

• Improving macroeconomic foundations
– Intensify the fight against corruption

• Upgrading the business environment

• Clusters development

• Provincial economic development

• Economic coordination with neighboring countries

• National economic strategy

• Organizing for competitiveness


Improving Indonesia competitiveness

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