Editorial: Big talks about growth centers

The Jakarta Post   |  Mon, 02/08/2010 10:31 AM  |  Opinion

Over the past few weeks the government propagated three seemingly different manufacture-based development policies which could, at a glance, confuse businesspeople, but boil down to the same concept-building natural resource-based growth centers through a special economic zone.  

In mid January, Coordinating Economic Minister Hatta Rajasa said the government would offer to Japanese investors two economic corridors for development into manufacturing centers. One of them connecting eastern Sumatra and northern West Java focusing on palm oil, rubber and coal, and the other — linking northern Java and East Kalimantan — will center on textiles, food products and transportation equipment.

Then late last month, as part of the action program during the first 100 days of the administration, Hatta and several other economic ministers made the ceremonial announcement of plans to develop palm oil-based clusters of industries in North Sumatra and Riau and natural gas-based  industrial clusters in East Java and East Kalimantan.

Again last week, Hatta talked about the same concept but used a different term — the special economic zone (SEZ).  

He said the government is wooing big investment for the development of three agriculture-based SEZs. Two SEZs in Medan (North Sumatra) and Dumai (Riau) will focus on palm oil-based industries and the other one in Merauke (Papua) on food crops, notably rice.

The economic corridors and cluster of industries are part of the SEZ development concept that essentially calls for the development of enclaves or islands with streamlined licensing procedures, good physical infrastructure, flexible labor regulations, superior logistical efficiency, efficient tax administration and customs and immigration service.

A SEZ may include various types of development areas such as free  trade zones (FTZs), export processing zones and special industrial estates or single commodity-based clusters of manufacturing industries. SEZ also can enhance the development of economic corridors through economic linkages with other SEZs.

A palm oil-based cluster of industries, for example, can generate localization economies arising from specialization and integrating of manufacturing operations. Industrial clusters could reduce the costs of transportation and significantly improve supply chain management. This in turn would decrease the costs of distribution and other logistical arrangements.

Such a grouping of manufacturing operations also enables assemblers and big retail chains to gain maximum cost savings by rationalizing when and where they want to procure products and how they organize production.

Unfortunately, though, all the big talk about the development of SEZ has not been supported with real action, notably inter-ministerial coordination and cooperation on the part of regional administrations, to build up the legal, institutional and physical infrastructure.

It is already five months after the enactment of a law on SEZ last September by the House of Representatives, but the government has yet to issue regulations as the technical directives for the enforcement of the law.   

Yet more challenging is physical infrastructure.

Given the long time needed for the building of basic infrastructure, SEZ development certainly should give top priority to regions that already have fairly adequate infrastructure, easy access to international trade and whose local governments, including local legislature, have strong commitment to support such a “liberal” concept of development.

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Evan Jones (not verified), Batam — Tue, 02/09/2010 - 8:28pm

The Jakarta Post's editorial on the need for growth centers correctly points out that lots of bold talk about growth-centers is not being properly backed by useful growth-center action. Why is it that culturally similar near neighbors such as Malaysia and Thailand have effectively modernized their regulatory environments (and therefore, their economies), while Indonesia stays stuck in sea of well meaning but antiquated rules and regulations, that makes doing business here, akin to wading through a Sidoarjo mud pool? An oft discussed solution is to create "growth centers", also known as Special Economic Zones (SEZ). SEZ's have a good name. In the early 80s, China designated several coastal areas as SEZ's. Practical application of the administrative lessons learned, laid the regulatory foundations for China's phenomenal success today. But what attitude should Indonesia have towards establishing SEZ's? We could ask why is it that China, India and Indonesia need to use the SEZ model, when we can we observe that Thailand and Malaysia have done very well without SEZ's? The reason given, is that large countries (such as Indonesia), whose economic progress is bogged down by unwieldy rules, regulations and inflexible bureaucracies, can use the example of successful SEZ's to undertake business friendly reforms. Given that China evidently gained benefit from taking the SEZ model and adopting it nation-wide, could Indonesia hope to do the same? The answer to that is not so positive. For example, Indonesia's primary SEZ, Batam, had a decade long head start over China's Shenzhen. As recently as the early 70s, both places were sleepy fishing villages of little economic consequence. As fledgling SEZ's, both were sponsored by totalitarian governments with the power to reduce regulatory red tape. Indeed, neither would have got very far without strong support from highly placed central government officials. But today, Shenzhen is a large city of 9 million, whose downtown has been demolished and rebuilt twice , while Batam, has lagged behind, having just reached 1 million inhabitants. Somehow, China's civil administrators went though a profound learning and behaviour-change process, while Indonesian policy makers appear relatively ideal and apathetic - simply not interested in moving out of their personal comfort zones - to change their traditional defensive inward-looking civil service mentality. In other words, after several decades of first hand experience operating a moderately successful reduced-red-tape SEZ, Indonesia has not properly adopted the lessons learned, either to apply them to Batam or to the country as a whole. So, although this country may possibly benefit a from a few more growth centers and SEZ's, what is really needed is change in basic behavior and thinking, at a national and local level, so that like the Malaysia, China and Thailand experience, every town and port across the archipelago can become a Growth Center.

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