Remarkable Indonesia: Whats Next?

Turn on a major international television channel these days and one cant but help to notice the catchy Remarkable Indonesia investment promotion advertisements. During three days on a working visit to Indonesia walking in rural villages and meeting local residents, witnessing the bustle in Jakarta, talking with government, private sector and civil society representatives Ive come to appreciate that Indonesia is indeed a remarkable nation on the move.

Indonesias rising international profile as a large, middle-income country is reflected in the rapid increase in foreign investors interest in the country. It plays a prominent international role as a member of the G-20, this years chair of Asean and an active participant in APEC.

Its economic performance over the past six years has been impressive, with growth reaching 6.5 percent in the first half of 2011. This is notable given the internal and external shocks the country has experienced. Sustained and resilient economic growth has doubled average incomes, and the number of people living below the national poverty line has declined steadily.

The government has set a target for Indonesia to become an advanced country by 2025. The nations abundant natural resources, relatively young population, burgeoning middle class, and location in a dynamic region of the world provide cause for optimism. Significant reforms since the Asian financial crisis have contributed to economic development and helped establish a vibrant, pluralistic democracy.

To be sure, there are challenges on the path to prosperity. First, even with the decline in poverty, inequality may increase as the economy grows. In this respect, the governments commitment to pro-growth, pro-poor policies and programs is positive. Smoothing out these inequalities will r! equire a ttention to disadvantaged groups and regions, well-targeted poverty alleviation programs, and a social safety net to protect the poor and near-poor. Inclusive, sustainable growth is imperative to avoid a middle-income trap. To achieve this, the government should introduce policies to ease the transition from growth that relies on low-cost labor, capital, natural resources to growth driven by enhanced productivity and innovation.

Second, rapid urbanization is outpacing Indonesias ability to build and maintain infrastructure. Global surveys identify inadequate infrastructure and related services, particularly in transport and energy, as a critical constraint to Indonesias growth. The Asian Development Bank applauds the governments vision for infrastructure development and domestic connectivity as a means to support economic growth that is more broad-based and equitable.

The public sector will play a major role in infrastructure development. However, with the scale of investment estimated in the hundreds of billions of dollars over the medium term, more investment will have to come from the private sector. This will have the added bonus of bringing improved management efficiency and better services for citizens. To attract such investment, Indonesia must expand opportunities for public-private partnerships and address related implementation bottlenecks.

A third challenge is the sustainable management of the environment and Indonesias vast natural resources. Deforestation, forest degradation, over-exploitation of coastal resources, and unsustainable use of water resources are serious threats to the countrys natural resources and biodiversity, and compromise the potential for growth and development. To address these threats, Indonesia needs to consider appropriate pricing of carbon emissions to better reflect their true cost, promotion of renewable energy and energy efficiency, and better management of forests and peat lands.

Adaptation to climate change will also require more integrat! ed appro aches to disaster preparedness and response, better management of river basins and coastal resources, and greater community participation in rehabilitation and conservation. Here again, Indonesia has made impressive commitments to reduce carbon emissions and improve environmental management.

Finally, there is a need to strengthen institutions and streamline regulations at the central and regional levels to reduce the costs of doing business. Improving governance and public finance management, and eradicating corruption, are critical to enhance public service delivery. In addition, as some sectors decline and others rise, Indonesia needs an education system that can adapt to the needs of employers and promote entrepreneurship and innovation.

Despite turbulent global economic conditions, Indonesias economy remains resilient. In our recent Asia 2050 study, the ADB foresees Indonesia as one of seven potential engines (along with India, Japan, Malaysia, China, South Korea, and Thailand) of the Asian Century, provided that these key development challenges are addressed effectively.

Over the past four decades, ADB has worked with other development partners, the private sector and civil society to support Indonesias remarkable development journey. We look forward to continuing to invest in innovative, inclusive and environmentally sustainable growth solutions that help improve the quality of life for all Indonesians.

Stephen P. Groff is vice president of Operations Group 2 of the Asian Development Bank, responsible for East Asia, Southeast Asia and the Pacific.