Indonesia’s new land reform law could pave the way for the sort of large-scale infrastructure boom the country needs for long-term growth.
After being overshadowed for many years by its larger neighbors China and India, Indonesia is now well and truly in the limelight. Its annual growth rate has averaged between 5 and 6 percent over the past seven years – a healthy clip by anyone’s estimate. Exports, fueled by the global commodities boom, have more than doubled since 2005, while industrial production has risen significantly.
Still, a number of investors and economists feel that Indonesia isn’t living up to its full potential. At Credit Suisse’s recent Asian Investment Conference, Muhammad Chatib Basri, the vice chairman of Indonesia’s National Economic Committee, argued that given the country’s strong demographic trends and the productivity gains achieved over the past decade, Indonesia could actually grow between 8 and 10 percent annually, putting it on par with major emerging markets like Brazil, Russia, India and China.
Standing in the way, though, is Indonesia’s notoriously weak public infrastructure, which makes for overcrowded airports, congested roads and bridges in dire need of renovation. In recent years, as the country’s economy has grown, its infrastructure spending has actually fallen to roughly 3 percent of GDP in 2011 from about 8 percent in 1997.
But a potential boom lies ahead, thanks to comprehensive land reform legislation signed into law earlier this year, analysts say. The new rules force a speedier land acquisition process, guarantee fairer compensation for landowners and could finally help unleash the sort of sustained infrastructure spending Indonesia has sorely lacked. In fact, over the next four years Indonesia could spend as much as $250 billion in new infrastructure projects, including roads, bridges and airport facilities.
The legislation is a strong indication “that the Indonesian government is serious in moving the country into an investment up-cycle phase,” says Teddy Oetomo, Credit Suisse’s Head of Research for Indonesia.
Professor Jamie Davidson at the National University of Singapore tells The Financialist that the bill stands out because it is the first such measure in Indonesia enacted by parliament, as opposed to being forced through as a presidential decree. He says that this motion reflects a shift in power away from the state, meaning that the government now has rules it must follow when it appropriates land. The involvement of civil society groups in drafting the legislation is an encouraging political sign, adds Davidson.
The law’s ultimate success, though, depends on its accountability and decision-making mechanisms, writes Mika Purra, the managing director of the Singapore-based risk management consultancy StraitsGlobal. In a recent editorial, he writes that the prices set to compensate property holders whose land has been appropriated have to be attractive enough for them to willingly hand over their property to the government. Simply expropriating land at the lowest price could cause land disputes to drag on for years through an over-stressed legal system.
Ultimately Indonesia will have to ensure government agencies effectively acquire land and that adequate funding backs infrastructure projects, Oetomo says.
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