2-2_Wing Woo.used.Bali-Infrastructure for Manufacturing

8/10/2019 2-2_Wing Woo.used.Bali-Infrastructure for Manufacturing

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The Efficient Infrastructure Investment Program to Generate Strong

Sustained, Inclusive Manufacturing Growth in Indonesia

Woo Wing Thye ( )

Jeffrey Cheah Institute on Southeast Asia, Malaysia, University of California at Davis, USA

Fudan University, China

Central University of Finance and Economics, China

[email protected]

Ministry of Finance-Bank Indonesia-National Development Planning Agency (MoF-BI-Bappenas) Workshop, Growth Strategies for a Rising Indonesia, Bali, 10 October 2014
mailto:[email protected]:[email protected]


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Infrastructure! How could you not be in favor for more?

Latest issue of IMFs World Economic Outlook (WEO) for annual

Bank-Fund meeting in October 2014 :

$1 in infrastructure investment raises output by $3 Link most effective when investment is funded by borrowing

than by cutting expenditure elsewhere or by raising taxes, i.e.

external funding is best

Infrastructure spending boosts output through demand side when there is excess production capacity,

especially in the heavy industries reach level of potential

output

supply side by

Removing productions bottlenecks (reach the potential

growth rate)

Increasing the rate of natural growth by unleashing private

sector investment (raise the potential growth rate) 2


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Outline of My Talk

History of the rise and fall of Infrastructure in policy focus.

There are four types of infrastructure investment .

3 are domestic in nature

1 is international in orientation (this infrastructure is relevant

only because Indonesia is a large country).

Every one of these 4 infrastructure is needed for strong

sustainable development. The objective is to generate synergy

from the interaction among these four types of infrastructure,

i.e. to Get the package right! to reflect the comprehensive

nature of the task. The best implementation modality would

usually not be the sequencing of reforms but the parallelpartial progression of reforms.

Indonesia should take on the big country responsibility of

helping to shape the International Infrastructure that governs

global trends. 3


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A Brief History of the Rise, Fall & Rise in the Role of Infrastructure

1950s economists: Domestic savings is inadequate to fund the

required infrastructure investment

Solution: World Bank, Asian Development Bank, ..

But many infrastructure investments went badly wrong, e.g.

white elephants lowered national competitiveness. Lesson:

Software is as important as Hardware in promoting growth

The shifting themes in the Washington Consensus: get the prices

right get the macro-balances right get the institutions right.

Increasing emphasis on Institutional Infrastructure over Physical

Infrastructure. Former is cheaper

The infrastructure-oriented approach to development worked in

China which is why China is promoting the Asian Infrastructure

Investment Bank (AIIB) and the BRICS Development Bank.

The 2014 WEO emphasis on physical infrastructure is a return to

common sense in the new multi-polar environment. 4


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The 3 Required Types of Domestic Infrastructure

For sustained, dynamic Economic Growth (Y) to occur, there

has to be:

Type A: Physical Capital Infrastructure (A)

Type B: Institutional Capital Infrastructure (B)

Type C: Human Capital Infrastructure (C)

Wrong to see growth, Y = A + B + C

More correct to see, Y = A*B*C if any one is zero, Y is zero

Most likely, Y = (D - 1/A 1/B 1/C) + (A*B*C) where D is

the Middle-Income Trap (MIT) in which Latin America hasresided since 1960. Malaysia and Thailand joined the MIT

Club in 1995, and politics these 2 countries have been

unraveling because of the economic stagnation.

Can China and Indonesia avoid the Middle-Income Trap?5


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Digression: How does the Middle-Income Trap Look Like?

Bad criteria: Is a particular level of income (say, US$12k)

being reached?

Better criteria: Is the income gap between the country and

G7 being reduced? Are you really catching up with the best?

Catch-Up Index (CUI) value for a country =

[countrys income level / US income level] We live in a world where income drifts upwards because of

constant technological improvements and institutional

improvements. This is why the World Bank periodically

revises upward the income level of the cutoff between

categories.

Next 2 slides: Visual confirmation of unsuccessful and

successful catch-up growth. 6


7/14

Digression: The Middle-Income Trap: Latin America, Stuck at CUI=30%

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Argentina Brazil Chile Colombia Mexico 7


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Digression: Two World Bank Miracle Economies, Malaysia and Thailand, have been stuck

at 30% since 1994. Malaysia was richer than South Korea and Taiwan in early 1960s

8


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The ABC of Infrastructure Investment for Indonesia

A = Physical Infrastructure = Hardware, economic infrastructure

B = Institutional Infrastructure = Software, administrative infrastruc

C = Human Capital Infrastructure = Power Supply, social infrastruc Human Capital Infrastructure is the Power Supply to the

Economic System because ideas and innovations are the ultimate

drivers of the system and they can originate only in humans.

The greatest failure of the New Order Government was its veryinadequate investment in Human Capital Infrastructure, as

evidenced, particularly, in its low investments in rural sanitation,

rural healthcare and rural education, and in the low international

ranking of its schools and universities (see Wing Thye Woo and

Chang Hong Indonesia's economic performance in comparative

perspective and a new policy framework for 2049, Bulletin of

Indonesian Economic Studies, April 2010, Vol. 46 No. 1).

India, substantially poorer, has done better on most of these

fronts. China (when poorer) exceeded Indonesia on these fronts.9


10/14

Top 10 Priorities in Infrastructure Investment (1/2)

Expand transportation and communication facilities to be short-

term macro-stimulus and to promote long-term private

investment (China is the model, and potential investor andcontractor.)

1. Expand public transportation, roads and seaports; and

improve immigration and customs procedures

2. Expand access to broadband, especially in rural area Increase human capital formation to boost long-term growth

3. Establish 7 Key National Universities with each partnered

with a leading foreign university (Indias system of Institute

of Technology is the model)

4. Improve rural sanitation, education, and access to clean

water

5. Improve training and salary of school teachers; and institute

performance-based bonus 10


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Top 10 Priorities in Infrastructure Investment (2/2)

Upgrade administrative performance to increase private

investment (China is the model)

6. Strengthen political and fiscal decentralization; and improvecentral-local coordination

7. Improve training of provincial civil service

8. Strengthen the national auditing agency and the national

anti-corruption agency.

Shape the International Infrastructure to reap gains from greater

specialization and more green development

9. Push for a meaningful ASEAN Economic Community and East

Asian economic integration to increase Indonesias role in

the global supply chain to foster technology transfer via FDI

(Lee Kuan Yews comment on Soehartos limitation)

10. Set up regional accord on environmental protection to

prevent haze and overfishing 11


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For Lessons on Reform from Abroad,

with emphasis on Chinas experience


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The 2012 Columbia-Fudan Report on

Sustainable High Growth in China

13

Th 2014 Sh h i Ji C l bi F d R


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The 2014 Shanghai Jiaotong-Columbia-Fudan Report

on Financial Market Reform

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