Improving Indonesia competitiveness

1 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt

Improving Indonesia’s Competitiveness

Presentation to President Susilo Bambang Yudhoyono

Professor Michael E. PorterHarvard Business School

Boston, MassachusettsSeptember 28, 2009

This presentation draws on ideas from Professor Porter’s articles and books, including, The Competitive Advantage of Nations (The Free Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report, (World Economic Forum), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008) and ongoing research at the Institute for Strategy and Competitiveness. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu, Version: September 28, 2009, 2pm


Agenda for the Second Term

• Improving macroeconomic foundations– Intensify the fight against corruption

• Upgrading the business environment

• Clusters development

• Provincial economic development

• Economic coordination with neighboring countries

• National economic strategy

• Organizing for competitiveness


$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

3% 5% 7% 9% 11% 13%

PPP-adjusted GDP per Capita, 2008 ($USD)

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2008

Source: EIU (2009), authors calculations

China

Vietnam

South Africa

Latvia

Croatia

Thailand

Russia

Brazil

India

Turkey

Egypt

Hungary

Mexico

Jordan

Argentina

Other countriesAsian countries

Prosperity PerformanceLower and Middle Income Countries

Chile

Poland

Indonesia

CambodiaBangladesh

Laos

Malaysia

Philippines

Sri Lanka

Papua New Guinea (-2.6%)

Bulgaria

PeruColombia

Kazakhstan

RomaniaUruguay

UkraineTunisia

Guatemala

Georgia

TanzaniaKenya

Pakistan

Lithuania

Venezuela

Syria

IranEcuador

Costa Rica

Albania

Morocco

Nigeria

Dominican Republic


0%

2%

4%

6%

8%

10%

12%

14%

-10% -8% -6% -4% -2% 0% 2% 4%

Unemployment PerformanceMiddle and Lower Income CountriesUnemployment

Rate, 2008

Change of Unemployment Rate in Percentage Points, 1999-2008Note: In some cases, 1999 data was unavailable, so latest data used.Source: EIU (2009)

Improving Deteriorating

Uruguay

Tunisia

Lithuania

Poland

Estonia

Mexico

Malaysia

HungaryPhilippines

ChinaIndonesia

Spain

Thailand

Brazil

RussiaIndia

Chile

Sri LankaRomania

Bulgaria

Egypt

South Africa (22.9%)

Croatia

VietnamLatvia

PakistanArgentina (-14.6%)

Morocco

Bangladesh

IranOther countriesAsian countries JordanAlbania

Syria

Colombia

UkraineHonduras

Costa RicaPanama

NicaraguaParaguay

KazakhstanEl Salvador

Ecuador Venezuela

Dominican Republic (15.5%)

BoliviaPeru


10%

20%

30%

40%

50%

60%

70%

80%

90%

-15% -10% -5% 0% 5% 10% 15% 20%

Export PerformanceMiddle and Lower Income Countries

Exports of Goods and Services (% of GDP), 2008

Change in Exports of Goods and Services (% of GDP), 2004 to 2008

Russia

Thailand

Jordan

ChinaPhilippines South Africa

India

Romania

Morocco

Brazil

Cambodia

Chile

Indonesia

AustraliaTurkey

Mexico

Pakistan

Argentina

Vietnam

Malaysia (103.5%)

Hungary

Croatia

Source: EIU (2008), authors’ analysis

Egypt

Bangladesh

Poland

Nigeria

Albania

Lithuania

Peru

Ukraine (-17.5%)

Bulgaria

Latvia

Syria

Iran

Kazakhstan

Papua New Guinea

Sri Lanka


Ecuador

Tanzania Colombia

KenyaGuatemala

Venezuela

Tunisia

Costa Rica

Georgia

Uruguay


Indonesia Exports By Type of IndustryExcluding Oil and Gas Industry

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Processed GoodsSemi-processed GoodsUnprocessed GoodsServicesTOTAL

Note: Excluding Oil and Gas cluster

Source: UNComTrade, WTO (2008)

World Export Market Share (current USD)


0%

10%

20%

30%

40%

50%

60%

70%

-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%

Inbound Foreign Investment PerformanceStocks and Flows, Selected Middle and Lower Income Countries

Source: UNCTAD, World Investment Report (2009)

Inward FDI Stocks as % of GDP, Average 2003 - 2007

FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007

Russia

Turkey

HungaryVietnam

Chile

PolandColombia

Philippines

ThailandSouth Africa

Indonesia

India

Brazil

Pakistan

MexicoLaos

Cambodia

Malaysia

RomaniaEgypt

China

Ecuador

Sri Lanka

Iran


Bangladesh

Bulgaria (69%)

Nigeria (49.5%)

Georgia

UruguayUkrainePeru

CroatiaKazakhstan

Tunisia

Papua New GuineaTanzania

Kenya

Albania

Guatemala

Venezuela

Morocco

Argentina

Dominican Republic

Costa Rica

LatviaLithuania

Jordan (46.5%, 81.8%)


Inbound Foreign Investment PerformanceFlows, Selected Countries

Inward FDI Flows, % of GDP

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2000 2001 2002 2003 2004 2005 2006 2007

Russia

Brazil

China

India

Indonesia

Ranked by Inward FDI Flows (% of

GDP), 2007


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-20% -10% 0% 10% 20% 30% 40% 50% 60%

Source: USPTO (2008), EIU (2008)

Average U.S. patents per 1 million population, 2004-2008

CAGR of US-registered patents, 2004 – 2008

Innovative Output, Selected Countries

Saudi Arabia

RussiaPortugal

Turkey

India

Poland

Kuwait

Czech Republic

China

South Africa

UAE

Greece

Indonesia

Argentina

Brazil

Croatia

Malaysia (4.4)

Bulgaria

PhilippinesEgypt

Chile

Lebanon

ThailandUkraine Romania

Colombia

Mexico


Indonesian Competitiveness in 2009

• Solid growth rates over the medium term• The impact of the global crisis has been comparably modest• Political stability has improved significantly• The achievements of the first term have laid a good foundation for rapid

progress

HOWEVER

• Indonesia’s prosperity remains low, and prosperity growth rates have only been average relative to regional peers

• Indonesia’s limited integration into the global economy has provided shelter but greatly limits Indonesia’s long-term growth prospects

• Indonesia continues to face significant competitive weaknesses

• The second term is the time to move to a more ambitious economic strategy which will place Indonesia on a higher growth path


What is Competitiveness?• Competitiveness is the productivity with which a nation uses its human,

capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on

capital, returns on natural resources)

– It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries

– Productivity in a national economy arises from a combination of domestic and foreign firms

– The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries

• Only competitive businesses can create sustainable jobs and attractive wages

• Nations compete to offer the most productive environment for business

• The public and private sectors play different but interrelated roles in creating a productive economy


Macroeconomic Competitiveness

Microeconomic Competitiveness

Sophisticationof Company

Operations andStrategy

Quality of the NationalBusiness

Environment

MacroeconomicPolicies

SocialInfrastructure and PoliticalInstitutions

State of Cluster Development

• Natural endowments alone are not enough to support a high standard of living• Macroeconomic competitiveness creates the potential for productivity• Productivity ultimately depends on improving the microeconomic capability of the

economy and the sophistication of local competition

Determinants of Competitiveness

Natural Endowments


Indonesia’s Macroeconomic Competitiveness

• Indonesia has made significant progress solidifying and improving political institutions

• Macroeconomic policy is solid, but stable fiscal balances are partly due to the inability to execute planned spending, especially at the provincial level

• Decentralization of authority to the provinces is an important step in a large, spread out country such as Indonesia, but better policy coordination and implementation is needed

• There has been some progress in reducing corruption, but this remains a central obstacle to further improvements in competitiveness

• Indonesia performs relatively well in some aspects of basic human development, but has not improved its position significantly over time


-20 -15 -10 -5 0 5 10 15 20

Corruption Perception Index, 2007

Note: Ranks only countries available in both years (91 countries total)Source: Global Corruption Report, 2008

Change in Rank, Global Corruption Report, 2007 versus 2001

Rank in Global

CorruptionIndex,2007

91

1

ImprovingDeteriorating

Highcorruption

Lowcorruption

Finland

Canada

Bangladesh

Indonesia

Ireland

Portugal

Egypt

Iceland

Czech Republic

SlovakiaSouth Korea

Latvia

India

Slovenia

Thailand

Switzerland

France

Romania

Turkey

Estonia

Austria GermanyJapan

Vietnam

China

NorwayUK

MalaysiaLithuania

Colombia

HungaryTaiwan

Spain

Hong Kong

ChileUnited States

South Africa

Mexico

Croatia

Italy

Poland

Brazil

Argentina

Israel

Venezuela

Russia

Uruguay

New ZealandSweden

Tunisia

Peru

Tanzania

Uganda

Senegal

Philippines

Zimbabwe Cote d’Ivoire NigeriaPakistan

GreeceJordan

Ukraine

Panama

CameroonNicaragua

KenyaKazakhstan

Honduras

Moldova Guatemala

GhanaEl Salvador

Costa Rica

Botswana


Indonesia’s Macroeconomic CompetitivenessAction Priorities

• Sustain progress in improving the stability of the political system and the battle against terrorism

• Intensify the fight against corruption

• Sustain the focus on stable government finances, while enabling more effective execution of public sector investments

• Create and implement a clear strategy for improving education and health care, especially the quality of delivery

• Improve the effectiveness of policies to ameliorate poverty, for example, through a social safety net instead of broad consumption subsidies

• Continue strengthening the legal system


Microeconomic Competitiveness: Improving the Business Environment

Context for Firm

Strategy and Rivalry

Context for Firm

Strategy and Rivalry

Related and Supporting Industries


Factor(Input)

Conditions

Factor(Input)

ConditionsDemand

ConditionsDemand

Conditions

Demanding and sophisticated local customers and needs

– e.g., Strict quality, safety, and environmental standards

– Consumer protection laws

• Many things matter for competitiveness• Successful economic development is a process of successive upgrading, in which the

business environment improves to enable increasingly sophisticated ways of competing

Vigorous local competition– Openness to foreign competition– Competition laws

Local rules and incentivesencouraging productivity and investment

– e.g. incentives for investment, intellectual property protection, corporate governance standards

Access to high quality business inputs

– Human resources– Capital availability– Physical infrastructure– Administrative infrastructure (e.g.

registration, permitting, transparency)

– Scientific and technological infrastructure

Availability of suppliers and supporting industries


0

20

40

60

80

100

120

140

160

180

Ease ofDoing

Business

ProtectingInvestors

TradingAcrossBorders

Dealingwith

Licenses

RegisteringProperty

GettingCredit

PayingTaxes

Closing aBusiness

EnforcingContracts

EmployingWorkers

Starting aBusiness

Ease of Doing BusinessIndonesia, 2009

Ranking, 2009 (of 183 countries)

Source: World Bank Report, Doing Business (2009)

Favorable Unfavorable

Median Ranking, Asia and Pacific Region

Indonesia’s per capita GDP rank: 101


WEAKNESSESSTRENGTHS

Indonesia’s Business EnvironmentCritical Strengths and Weaknesses

• Solid basic skills and a large available workforce

• Promising reforms of rules and regulations affecting business

– Top Asian reformer in 2010 World Bank Doing Business ranking

• Solid financial system• Greater formal opening of the economy

to trade and investment– New Investment Law passed in 2007

• Wide array of potential clusters, especially in natural resources-related fields

• Weak logistical and communication infrastructure

• Unreliable electricity supply• Labor market rigidity• Regulations and customs procedures

remain complex• Limited depth in the financial system• Weak educational quality• Legal system uncertainty for investors,

especially at the provincial level• Dominance of large business groups

and state-owned enterprises• Weak cluster collaboration and

development• Lack of advanced skills• Weak science and technology system


Indonesian Business EnvironmentAction Priorities

• Continue progress on regulatory reforms

• Improve logistical infrastructure

• Improve communications infrastructure

• Improve the quality of electricity supply

• Reduce rigidities in the labor market

• Reform customs procedures and continue the process of opening to international trade and investment

• Increase domestic competition, including limits on dominant domestic market positions

• Create stronger institutions to disseminate management best practices and support the adoption of new technologies


Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

HotelsHotels

Attractions andActivities

e.g., theme parks, casinos, sports

Attractions andActivities

e.g., theme parks, casinos, sports

Airlines, Cruise Ships

Airlines, Cruise Ships

Travel agentsTravel agents Tour operatorsTour operators

RestaurantsRestaurants

PropertyServicesPropertyServices

MaintenanceServices

MaintenanceServices

Government agenciese.g. Australian Tourism Commission,

Great Barrier Reef Authority

Government agenciese.g. Australian Tourism Commission,

Great Barrier Reef Authority

Educational Institutionse.g. James Cook University,

Cairns College of TAFE

Educational Institutionse.g. James Cook University,

Cairns College of TAFE

Industry Groupse.g. Queensland Tourism

Industry Council

Industry Groupse.g. Queensland Tourism

Industry Council

FoodSuppliers

FoodSuppliers

Public Relations & Market Research

Services

Public Relations & Market Research

Services

Local retail, health care, andother services

Local retail, health care, andother services

Souvenirs, Duty Free

Souvenirs, Duty Free

Banks,Foreign

Exchange

Banks,Foreign

Exchange

Local Transportation

Local Transportation

Microeconomic Competitiveness: Cluster DevelopmentTourism Cluster in Cairns, Australia


Chilean Wine Cluster

Sources: Based on diagram by Alexander, Arney, Black, Frost, Shivananda, taken from ‘On Competition’, Michael Porter, 2003

Related and Supported Industries

Related and Supported Industries

GrapestockGrapestock

Fertilizer, pesticides, herbicides

Fertilizer, pesticides, herbicides

Plastics / TetrapacksPlastics /

Tetrapacks

CorksCorks

LabelsLabels

Public relations and advertising

Public relations and advertising

Specialized publicationsSpecialized publications

Growers / vineyards

Growers / vineyards

Government(trade promotion offices,

implementation of standards, export/import/FDI policies)

Government(trade promotion offices,

implementation of standards, export/import/FDI policies)

Educational, research, and trade organization

Educational, research, and trade organization

Wineries / processingfacilities

Wineries / processingfacilities

BarrelsBarrels

Grape harvesting equipment

Grape harvesting equipment

Irrigation technologyIrrigation

technology

Tourism ClusterTourism Cluster

Pisco ClusterPisco Cluster

Food ClusterFood Cluster

Agriculture ClusterAgriculture Cluster

Specialized financing

Specialized financing

Export promotionExport

promotion

BottlesBottles

= Strong domestic capacity

= Moderate domestic capacity

= Weak domestic capacity

Source: Research by HBS student team (Asier Alea, Judd Belstock, Don Lambert, Jacqueline O’Neill, Noah Sawyer), 2005


Clusters as a Tool For Economic Policy

• A forum for collaboration between the private sector, trade associations, government, educational, and research institutions

• Brings together firms of all sizes, including SME’s

• Creates a mechanism for constructive business-government dialog

• A tool to identify problems and action recommendations

• A vehicle for investments that strengthen multiple firms/institutions simultaneously

• Fosters greater competition rather than distorting the market


Clusters and Policy Implementation

ClustersClusters

Physical Infrastructure

Natural Resource Protection

Environmental Stewardship

Science and TechnologyInvestments (e.g., centers, university departments, technology transfer)

Education and Workforce Training

Business Attraction

Export Promotion

• Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness

Standard setting and quality initiatives

Market Information and Disclosure

Management Training


Indonesian Clusters

• Indonesia has potential strengths in a wide array of clusters, including agriculture, tourism, forest products, coal, oil and gas, and forms of mining


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%

Indonesia’s National Cluster Export Portfolio1997 to 2007

Change in Indonesia’s world export market share, 1997 to 2007Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.

Indo

nesi

a’s

wor

ld e

xpor

t mar

ket s

hare

, 200

7

Change In Overall World Export Share: +0.034%

Average World Export Share: 0.79%

Exports of US$4.2 Billion =

Coal and Briquettes (5.35%, 12.36%)

Automotive

Processed Foods

Business Services

Transportation and Logistics

Biopharmaceuticals

Production Technology

Motor Driven Products

Oil and Gas

Marine Equipment

IT

Aerospace Vehicles and Defense

PlasticsTextiles

Construction Services

Agriculture Products

Construction Materials

Financial Services

Lighting and Electrical Equipment

Heavy MachineryPrefabricated Enclosures and Structures

Entertainment

Jewelry, Precious Metals and Collectibles

Communications Equipment

Metal, Mining and Manufacturing

ApparelFurniture

Footwear

Leather and Related Products

Building Fixtures and Equipment (-3.76%)Tobacco

Sporting, Recreational and Children's Goods

Analytical Instruments

Chemical Products

Communication ServicesPublishing and Printing

Forest Products

Fishing and Fishing Products


Indonesian Clusters

• Indonesia has potential strengths in a wide array of clusters, including agriculture, tourism, forest products, coal, oil and gas, and forms of mining

• Indonesia’s emerging clusters are heavily based on the country’s abundant natural endowments, with few activities in related and supporting industries

• The National Industrial Policy approved in 2008 identifies priority sectors, but there is no effective cluster development effort

• Existing cluster related efforts suffer from weak coordination across ministries and agencies


FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products Hospitality

& TourismAgricultural

ProductsTransportation

& Logistics

Share of World Exports by ClusterIndonesia, 2007

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Aerospace Vehicles &

Defense

Lightning & ElectricalEquipment

Financial Services Publishing

& Printing

Entertainment

Information Tech.

Communi-cations

Equipment

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Apparel

Leather & Related Products

Jewelry & Precious Metals

Textiles

Footwear

Processed Food

Tobacco

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation

Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.

Marine Equipment

Aerospace Engines

Heavy Machinery

Sporting & Recreation

Goods

Automotive

Production Technology

Motor Driven Products

Mining & Metal Manufacturing

Strong

Stronger

Strongest


Indonesian ClustersAction Priorities

• Adopt cluster development as a central approach for organizing the government’s business development efforts

• Utilize cluster initiatives as a tool to engage the private sector in more effective collaboration with government at the national and regional level

• Use clusters to organize export promotion and FDI attraction


Geographic Influences on Competitiveness

Neighboring CountriesNeighboring Countries

Regions and CitiesRegions and Cities

NationNation


Specialization by Traded ClustersU.S. States, 2006

MaineForest ProductsAerospace EnginesCommunications EquipmentHospitality and Tourism

MaineForest ProductsAerospace EnginesCommunications EquipmentHospitality and Tourism

MississippiFurnitureFishing and Fishing ProductsPower Generation and TransmissionMotor Driven Products

MississippiFurnitureFishing and Fishing ProductsPower Generation and TransmissionMotor Driven Products

OregonAgricultural ProductsPrefabricated EnclosuresForest ProductsAnalytical Instruments

OregonAgricultural ProductsPrefabricated EnclosuresForest ProductsAnalytical Instruments

ColoradoOil and Gas Products and ServicesMedical DevicesAerospace Vehicles and DefenseEntertainment

ColoradoOil and Gas Products and ServicesMedical DevicesAerospace Vehicles and DefenseEntertainment

IllinoisBiopharmaceuticalsLighting and Electrical EquipmentHeavy MachineryMetal Manufacturing

IllinoisBiopharmaceuticalsLighting and Electrical EquipmentHeavy MachineryMetal Manufacturing

KentuckyAutomotivePlasticsConstruction MaterialsTransportation and Logistics

KentuckyAutomotivePlasticsConstruction MaterialsTransportation and Logistics

South CarolinaTextilesForest ProductsAutomotiveProduction Technology

South CarolinaTextilesForest ProductsAutomotiveProduction Technology

South DakotaHeavy MachinerySporting, Recreational

and Children's GoodsFinancial ServicesProcessed Food

South DakotaHeavy MachinerySporting, Recreational

and Children's GoodsFinancial ServicesProcessed Food

NevadaLeather and Related ProductsHeavy Construction ServicesHospitality and TourismTransportation and Logistics

NevadaLeather and Related ProductsHeavy Construction ServicesHospitality and TourismTransportation and Logistics

IdahoAgricultural ProductsInformation TechnologyPrefabricated EnclosuresFurnitureForest Products

IdahoAgricultural ProductsInformation TechnologyPrefabricated EnclosuresFurnitureForest Products

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.

AlaskaFishing and Fishing ProductsPower Generation and TransmissionHeavy Construction ServicesHospitality and Tourism

AlaskaFishing and Fishing ProductsPower Generation and TransmissionHeavy Construction ServicesHospitality and Tourism


Indonesia’s Provinces

Source: Wikipedia, Provinces of Indonesia

• Indonesia’s provinces are geographically dispersed and culturally diverse• Indonesia’s population is becoming increasingly urban• Weak infrastructure has limited internal trade and specialization and made

it difficult to access Indonesia’s large national market• Decentralization in government has led initially to inefficiency and

corruption


Rp0

Rp5

Rp10

Rp15

Rp20

3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%

Indonesia’s ProvincesDivergent Performance

Weighted Indonesian Average: 4.82%

Note: Since population only available for 2000, population held constant when calculating per capita levels.

Weighted Indonesian Average: Rp9.41

DKI Jakarta Rp39.69) Kepulauan Riau (Rp28.96)Kalimantan Timur (2.25%, Rp39.84)

Riau

GDP per Capita, 2007 (Constant Market Prices,

2000, Million Rupiah)

Growth of GDP per Capita (Constant Market Prices, 2000), CAGR 2003 to 2007

Kalimantan Selatan

Sulawesi Selatan

Sumatera UtaraSumatera Selatan

Papau (-2.27%)

Gorontalo

Dl. Yogyakarta

Bali

Kepulauan Bangka Belitung

Nusa Tenggara Barat Bengkulu

JambaiJawa Tengah

Maluku

Papua Barat

Banten

Sulawesi Barat

Naggroe Aceh Darussalam (-5.23%)

Sulawesi TengahSulawesi Tenggara

Nusa Tenggara Timur Maluku Utara

Lampung

Kalimantan TengahJawa Timur

Sumatera Barat

Jawa Barat

Sulawesi UtaraKalimantan Barat


Indonesian ProvincesAction Priorities

• Strengthen logistical and communications infrastructure linking the provinces to expand trade, encourage economic specialization, and open internal competition

• Reduce internal administrative and policy barriers to inter-provincial trade and investment

• Improve the capabilities of provincial governments to improve policy formulation and implementation, and to reduce corruption

• Support provinces in creating distinctive economic strategies

• Create rules that limit destructive competition among provinces for investments, such as large subsidies

• Create a structure and incentives to align and harmonize national and provincial policies


Geographic Influences on Competitiveness

Neighboring CountriesNeighboring Countries

Regions and CitiesRegions and Cities

NationNation


Economic Integration with Neighboring CountriesSouth East Asia

• Economic coordination among neighboring countries can significantly enhance competitiveness


Economic Strategy For Cross-National Regions

Traditional View• Regions as free trade zones

Emerging View• Regional strategy as a powerful tool to enhance competitiveness

across countries

– Expand trade and investment within the region

– Attract more foreign investment to the region

– Capture synergies in improving the business environment

– Accelerate the rate of domestic policy improvement

– Enhance interest and investment in the region by the international community


• Eliminating trade and investment barriers within the region

• Simplifying and harmonizing cross-borderregulations and paperwork

• Coordinatinganti-monopoly and fair competition policies

• Harmonizing environmental standards

• Harmonizing product safetystandards

• Establishing reciprocal consumerprotection laws

• Opening governmentprocurementwithin the region

• Improving regional transportationinfrastructure

• Enhancing regional communicationsand connectivity

• Creating an efficient energy network

• Linking financialmarkets

• Harmonizing administrativerequirements for businesses

• Opening the movement of students for higher education

• Facilitating cross-border cluster upgrading, e.g.

– Tourism

– Agribusiness

– Transport & Logistics

– Business services

• Creating a regional strategy and marketingprogram

• Sharing bestpractices in government operations

• Creating regional institutions

– Dispute resolution mechanisms

– Regional development bank

• Developing a regional position with international organizations

Factor (Input)

Conditions

Factor Factor (Input)(Input)

ConditionsConditions

Regional Strategy & Governance

Regional Strategy & Governance

Context for Strategy

and Rivalry

Context for Context for Strategy Strategy

and Rivalryand Rivalry



Demand ConditionsDemand Demand

ConditionsConditions

Economic Coordination Among NeighborsCapturing Synergies



• Coordinating programs to improve publicsafety

• Coordinating macro-economicpolicies


Indonesia and ASEAN

• ASEAN has set ambitious policy goals but there is limited implementation

• ASEAN’s agenda is focused on a reciprocal trade liberalization, rather than upgrading regional competitiveness

• ASEAN is moving too slowly towards greater economic integration

• Indonesia has played a largely passive role in ASEAN• Indonesian firms have been slow to penetrate regional markets• Indonesia can be a leading force in driving ASEAN forward


National Value PropositionNational Value Proposition

Developing an Indonesian Economic Strategy

Developing Unique StrengthsDeveloping Unique Strengths Addressing Crucial ConstraintsAddressing Crucial Constraints

• What are the key strengths that Indonesia must build upon?

• What weaknesses must be addressed to achieve parity with peer countries?

• What is the unique competitive position of Indonesia given its location, legacy, endowments, and potential strengths?

• What is Indonesia’s value proposition for business?• In what clusters can Indonesia excel?• What role can Indonesia play in its region?

• An economic strategy requires rigorous prioritization and sequencing


Toward an Indonesian Economic Strategy

Implications

Political and Legal Stability

Human Development

Infrastructure

Regulatory Reforms

Trade, investment and Regional integration

Cluster Development

Government Effectiveness and Organization

Unique Strengths

• Significant natural resources• Pluralistic, diverse society increasingly

embracing democratic principles• Creative and energetic workforce• Large domestic market with a growing

number of urban consumers• Complex geography with thousands of

islands and long distances• A central location in Asia, with

proximity to numerous foreign markets


Organizing for Competitiveness

• Sustained improvements in competitiveness require coordination among many parts of government

– Across different ministries to align all the policies that affect clusters or aspects of competitiveness

– Across geographic levels of government

• Improving competitiveness requires collaboration with the private sector

– Public-private dialogue to identify competitiveness priorities and implement solutions

• While Indonesia has made progress on advancing competitiveness policies at the national level, policy coordination within government with the private sector remains a challenge


Organizing for CompetitivenessAction priorities for Indonesia

• Create a strategy unit in the Office of the President

• Strengthen the coordinating structure within the national government

• Create a public-private National Council on Competitiveness to build consensus on an overall economic strategy and track implementation

• Foster Provincial Competitiveness Councils to drive consensus on provincial plans, involving representatives from both public and private sector and participation by the nationalgovernment


Agenda for the Second Term

• Improving macroeconomic foundations– Intensify the fight against corruption

• Upgrading the business environment

• Clusters development

• Provincial economic development

• Economic coordination with neighboring countries

• National economic strategy

• Organizing for competitiveness