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Does relocating capital city make financial sense?
Antara/Akbar Nugroho GumayPresident Joko “Jokowi” Widodo has officially announced the movement of the capital city from Jakarta to the East Kalimantan regencies of North Penajam Paser and Kutai Kartanegara
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Antara/Akbar Nugroho Gumay
President Joko “Jokowi” Widodo has officially announced the movement of the capital city from Jakarta to the East Kalimantan regencies of North Penajam Paser and Kutai Kartanegara. The government will prepare 180,000 hectares of land for the new capital, to be built on 40,000 ha of land.
The remaining 140,000 ha will be developed further for the new city’s expansion, including green and open areas. About Rp 466 trillion (US$32 billion) will be needed for the whole project, of which 19.2 percent (Rp 89.4 trillion) will be covered by the state budget and the remaining Rp 376.6 trillion by private investors under public-private partnership schemes.
The idea to relocate the capital of a nation is not uncommon. In the last century, at least 30 countries have relocated their capitals. Some have been successful; others failed. There are some lessons to be learned from other countries’ experiences in relocating their national capitals.
First, the right decision-making process requires public participation in very democratic ways.
Second, a decision to relocate must be based on a sense of need and not on desire. Third, good planning and proper implementation are necessary. On top of that, the country should experience good economic performance for some period of time so that government has fiscal room to accommodate the costs of developing a new capital.
The lessons learned from Brazil show that its new capital, Brasilia, has now developed into a beautifully well designed city but is surrounded by new slum areas. That is because its planning and implementation did not take into account the needs of all groups of society who want to live in the new capital. Another example is Putrajaya, which until now is still only the center of government administration.
However, most Malaysian civil servants still live in Kuala Lumpur since their families live there. Moreover, the two cities are just 25 kilometers apart.
As Australia’s current capital, Canberra remains sparsely populated and does not attract many citizens to live there. South Korea’s government decided to relocate its capital city from Seoul to Sejong in 2012. However, the process has not yet finished.
In Indonesia itself, the relocation of the capital city of North Maluku province from Ternate to Sofifi in 2010 seemed to fail. Nine years have elapsed, but the new capital has not changed much and is only crowded during office hours. After hours, most civil servants go back home to Ternate.
The government cited several points of argument as to why the capital city should be moved to East Kalimantan: First, Jakarta's carrying capacity has been over-stretched, causing traffic gridlock, excessive pollution and many other problems.
Second, Jakarta is prone to natural disasters such as earthquakes, floods, etc. The third point is the need to enhance equitable development outside Java.
The arguments show that the central government really wants to reduce the burdens of Jakarta and to prevent the problems currently faced by the capital city of Jakarta from worsening.
As for equitable economic development, the government has, since the launch of the 2001 regional autonomy program, implemented many programs to enhance equitable development outside Java through increasingly bigger transfers from the national budget.
But we doubt whether equitable economic development could be enhanced simply by relocating the capacity city to East Kalimantan. Under current conditions, it is much better to use the budget for the new capital city for other priority programs.
Relocating a capital city involves many aspects that should be thoroughly and comprehensively studied. Moreover, we have to see the impacts on national security from political, military, social, economic and environmental perspectives.
Another requirement for relocating a capital city is that, structurally, it is not easy to change the portions of inter-island gross domestic product since they are closely related to population distribution and business and economic activities.
Any efforts to evenly distribute economic activities by relocating the civil servants to an island outside of Java will not succeed since what we need more is to develop the regions’ economic activities, such as their industries, agricultures, tourism, etc.
Too many fundamental constraints will hinder the realization of that plan. One of them is the Indonesian tax ratio, one of the lowest among the new emerging economies.
Moreover, Indonesia has entered an era of new economic growth as the growth fell from 8 percent a year between 1976 and 1980, 7 percent from 1987 to 1996, 6 percent from 2005 to 2011 and 5 percent from 2012 to 2018. Currently, Indonesia’s annual per capita income is $3,540, lower than Thailand’s ($5,960), China’s ($8,690), Malaysia’s ($9,650) and South Korea’s ($28,380).
Our economic fundamentals also have been weakening as the growth of the manufacturing sector has been lower than economic growth since 2005.
In 2009, the growth in the manufacturing sector was 2.2 percent, as against a national economic growth of 4.6 percent.
In 2018, the manufacturing growth was 4.3 percent, while the economic growth was 5.2 percent
Instead of allocating scarce resources for the development of a new capital, the government needs to give more attention to raising manufacturing growth, attracting more foreign direct investment and increasing the tax ratio (now below 11 percent) to widen the fiscal room for top priority programs such as infrastructure, education and health.
Given the limited fiscal room, the additional spending for the new capital city development may result in smaller budget allocations for the top priority sectors. In conclusion, there is no strong urgency to relocate the nation’s capital now.
With our more urgent economic problems, the limited fiscal room would be much better used for spending related to human resource development.
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M. Fadhil Hasan is a senior economist at the Institute for Development of Economics and Finance (Indef); Achmad Nur Hidayat is an analyst at Bank Indonesia’s supervisory board.
