Masterplan for Acceleration and Expansion of Indonesia's Economic Development

The MP3EI was created by the Susilo Bambang Yudhoyono (SBY) administration (2004-2014) and unveiled in 2011. The original masterplan aimed for real economic growth of 6.4 - 7.5 percent (y/y) in the period 2011-2014. This economic growth was expected to coincide with a decrease in the rate of inflation from 6.5 percent (y/y) in 2011-2014 to 3.0 percent (y/y) in 2025. The combination of these economic growth and inflation rates would reflect the characteristics of a developed country.

However, the global economic slowdown after 2011 (and its massive impact on commodity prices) meant that Indonesia's economic growth would increasingly move away from the target set in the MP3EI.

After Joko Widodo took over from SBY in 2014 there emerged confusion about the status of the MP3EI. The acronym MP3EI is no longer used but the Widodo administration does support the vision set in the masterplan (see below). However, this is no surprise given the vision of the MP3EI is in line with the vision set in the national long-term development plan (RPJPN 2005-2025). The Widodo administration would introduce its own "Nawacita" plan (which refers to nine priority programs).

Below we present an overview of the MP3EI. Please note that this text is a summary of the MP3EI - report published by the Indonesian government. For the full report please visit the website of the National Development Planning Agency (Bappenas).

The vision for 2025 will be achieved by focusing on three main goals:

1. Increase value-adding and expanding the value chain for industrial production processes, and increase the efficiency of the distribution network. In addition, to increase the capability of the industry to access and utilize both natural and human resources. These increases can be attained by the creation of economic activities within regions as well as among regional centers of economic growth.
   
   
2. Encourage efficiency in production and improve marketing efforts to further integrate domestic markets in order to push for competitiveness and strengthen the national economy.
   
   
3. Push for strengthening of the national innovation system in the areas of production process and marketing with a focus on the overall strengthening of sustainable global competitiveness towards an innovation-driven economy.

Indonesia's Potential for Economic Growth

Acceleration and expansion of Indonesia’s economic development is supported by Indonesia's demographic potentials, the abundance of its natural resources, and by its geographical advantages.

Demographic Composition

Indonesia is the fourth most populous country in the world. The rapidly increasing purchasing power of this huge population is creating a significant market. Moreover, the population is also increasing in the quality of its human resources, thus providing a desirable competitive edge. The country is experiencing a transitional period in the structure of the population productive age. In the period 2020-2030 the dependency index (which shows dependency on the federal government, such as subsidies) will reach its lowest point. An important implication of this condition is the increased importance of job creation. More importantly, if general education continuous to improve, Indonesia’s economic productivity will experience an exponential growth.

Natural Resources

Indonesia has an abundance of both renewable (agricultural products) and nonrenewable (mining and minerals) natural resources. It must be able to optimize the handling of its natural resources by increasing a processing industry that will provide high added value, while at the same time reducing exports of raw materials. Indonesia is one of the world’s major producer of a broad range of commodities. It is the largest producer and exporter of palm oil in the world. It is the world’s second largest producer of cocoa and tin. Regarding nickel and bauxite the country comes fourth and seventh respectively in the world’s reserves. Indonesia is also one of the largest producer for steel, copper, rubber and fisheries.

Indonesia contains huge reserves of coal, geothermal energy, and water which are used to support Indonesia’s prime industries such as, textiles, shipyards, transportation, as well as food and beverages.

Geographical Location

Indonesia is the world’s largest archipelago with a length of 5,200 kilometer stretching from east to west and a width of 1,870 kilometer. It has a direct connection to the world’s largest markets as it is located on one of the most economic active sea lanes in the world: the Malacca Strait which is the prime route for global container shipping. Indonesia is located within five hours travel time from the world’s two largest and fastest growing economies: India and China.

Challenges Ahead

Although Indonesia’s fundamentals are strong, achieving a high level of growth will not happen automatically. A number of challenges must be overcome in order to realize sustainable development.

Indonesia’s current economic structure is primarily focused on agriculture and industries which extract and harvest natural resources. There are only limited industries which focus on products with added value. In addition to this, there is a development gap between the western and eastern parts of Indonesia. MP3EI aims at accelerating and expanding nationwide economic development in order to make the nation more equitable.

Another challenge for a huge archipelago like Indonesia is the provision of infrastructure to support economic activities. Infrastructure itself has a very broad spectrum. Connectivity between regions should be developed to accelerate and expand economic development. Provision of infrastructure which encourages connectivity will reduce the costs of transportation and logistics which will improve product competitiveness and accelerate economic growth. Included in the country's infrastructure development is the construction of transportation routes, information and communication technology (ICT), and all regulations associated with them.

The quality of human resources is a big challenge for Indonesia. Currently only about 50 percent of workers in Indonesia have enjoyed primary school education, and only eight percent have a formal diploma. Quality of human resources is affected by access to quality education and health facilities, as well as access to basic infrastructure.

Indonesia is facing rapid urbanization. In 2010, 53 percent of Indonesia’s population lived in urban areas. It is predicted that by 2025, the population in urban areas will reach 65 percent. The direct implications that must be anticipated are the increase in movement patterns, the changing patterns of consumption and production structures. These will impact the employment structure, increased land-use conflicts, and increase the need for reliable infrastructure to support the distribution of goods and services.

Indonesia also faces the challenge of global climate change. Several indicators significantly affecting human life are: rising sea levels, rising air temperatures, changes in rainfall period, and extreme climate change.

The Road Ahead for Indonesia

In order for Indonesia to accelerate its economic development, it will need to embrace a new way of thinking, a new way of working, and a new way of conducting business. Regulations at the central and regional level need to be streamlined to ease the doing of business. A new way of thinking should be based on the spirit of 'Not Business as Usual'. The implementation of the new way of thinking regarding economic development, needs collaborative efforts among government, local governments, state-owned enterprises, private enterprises and the people. The government has very limited funds to finance development through its State Budget (APBN). Thus, to foster the economic growth in Indonesia, it will depend largely on private sector participation which includes state-owned enterprises, and private domestic and foreign investors.

Government policy must be streamlined to allow for a bigger participation from the private sector. Regulations must be clear and without any possibility for misinterpretation in order to encourage trust and maximize participation from investors to build much needed industries and infrastructure. In order to achieve the above objectives, all existing regulatory frameworks must be evaluated and strategic steps must be taken to revise and change regulations. The spirit of 'Not Business As Usual' should also be reflected in the implementation of important development elements, such as nationwide infrastructure development in Indonesia. The old way of thinking suggests that infrastructure must be build using government funding. However, due to the limitation of government funding, the old line of thinking resulted in the slow fulfillment of adequate infrastructure to support rapid development. Under the new way of thinking and working, cooperation between the government and the private sector under the public-private partnership (PPP) scheme is expected to bring in much needed investments.

The role of the government in the implementation of MP3EI is to provide a set of rules and regulations that give incentives for investors to build sectoral industries and infrastructure. Incentives can consist of conducive policy on tariff, taxes, import duties, labor regulations, licensing and permits, land procurements, etc. The central and local governments must build a reliable link within and beyond the centers of economic growth.

To support the acceleration and expansion of economic development in Indonesia, the central government has set a number of major programs in collaboration with key stakeholders including government ministries and the private sector. The focus of development is divided into eight main programs: agriculture, mining, energy, industry, marine, tourism, telecommunication, and the development of strategic areas. The eight main programs consist of 22 main economic activities:

Palm   Oil	Rubber	Cocoa	Animal Husbandry	timber	Oil & Gas	Coal	Nickel
Copper	Bauxite	Fishery	Tourism	Food Agriculture	Jabodetabek       Area	Sunda Straits Strategic Area	Transportation   Equipment
ICT	Shipping	Textiles	Food Beverages	Steel	Defense  Equipment

Economic Corridors

Important part of the MP3EI is the development of economic corridors in Indonesia based on the potentials and advantages inherent to each region throughout the country. By taking into consideration these potentials and strategic roles of each major island, six economic corridors have been identified:

Sumatra	Center for production and processing of natural resources and the nation’s energy reserves
Java	Driver for national industry and service provision
Kalimantan	Center for production and processing of national mining and energy reserves
Sulawesi	Center for production and processing of national agricultural, plantation, fishery, oil & gas, and mining
Bali - Nusa Tenggara	Gateway for tourism and national food support
Papua - Moluccas	Center for development of food, fisheries, energy, and national mining

MP3EI - An Integral Part of National Development Planning

MP3EI is a working document and as such it will be updated and refined progressively. It contains the main direction of development for specific economic activities, including infrastructure needs and recommendations for change/revision of regulations as well as initiatives for the need of new regulations to push for acceleration and expansion of investments. MP3EI is an integral part of the national development planning scheme and is not meant for substituting the existing Long-Term Development Plan 2005-2025 (Law No. 17 year 2007) and the Medium-Term Development Plans (Presidential Decree No. 7 year 2009). MP3EI is formulated in consideration of the National Action Plan for Greenhouse Gas (Rencana Aksi Nasional Gas Rumah Kaca - RAN GRK) as a national commitment which recognizes the global climate change.

MP3EI after the Yudhoyono Government

Criticism has been ventilated about the MP3EI plan as it lacks concrete measures to achieve the (abstract) targets that are set out in the program. As mentioned above the Joko Widodo administration that was inaugurated in October 2014 has not used the term MP3EI anymore although it does share the same vision.