The Thinker: The Devil Is in the Details

A lot of talk and convincing presentations were about Indonesia’s economic performance at the recent Wharton Global Alumni Forum in Jakarta.

The alumni of the University of Pennsylvania’s Wharton School — where the world’s top economists, including people like Vice President Boediono, earned their degrees — were told that Indonesia’s consumer sector, infrastructure and natural resources provided plenty of opportunities while the capital market was the most vibrant in Asia.

Boediono said he expected the economy to grow more than 6 percent this year, and the private sector also presented a rosy picture of the country’s economic potential. Chemicals tycoon Haryanto Adikoesoemo said the economy could grow even faster — up to 10 percent — provided that infrastructure development was up and running.

Asia Pacific Resources International Indonesia’s Tony Wenas presented best practices in forestry management and sustainability with an optimistic view that pulp and paper production would increase by 200 percent by 2050.

Prominent business leaders including timber tycoon Prajogo Pangestu, who made a sudden appearance at the forum, and Franky Widjaja of Sinar Mas shared the view that the forum was a good showcase for Indonesia to the world.

Despite problems with law enforcement, religious tolerance and quality of human resources, Wharton analysts were upbeat and predicted that by the end of this year, or early next year, Indonesia would join the club of 15 countries with an annual GDP of more than $1 trillion.

In 2011, foreign direct investment reached a record $19.3 billion and exports grew by 29 percent, reaching $203.62 billion. Fitch Ratings in December gave Indonesia an investment-grade credit rating after 14 years of junk status, and Moody’s Investors Service followed in January.

But the country also faces challenges. Lingering issues in infrastructure remain the biggest barrier to achieving a more robust economy. Indonesia will need 25,000 megawatts of additional power by 2020, more than 10,000 kilometers of additional roads to boost infrastructure, new airports and railways.

While commodities are driving growth, they are also creating the risk that an increase in exploitation of natural resources leads to a decline in the manufacturing sector in the economy due to exchange rate appreciation.

Manufacturing has lagged behind almost every other sector here. This is unhealthy in the long term. Indonesia should focus more on human capital formation to wean itself off from its resource base. Regional competitors like Vietnam have been focusing on education and infrastructure while Indonesia has lagged behind on both fronts.

The overall level of educational attainment is relatively low. Some 50 percent of the labor force has an elementary school certificate or lower. Only 40 percent of the labor force has completed secondary education and a little more than 5 percent has a university degree. This is probably why paper and pulp mogul Sukanto Tanoto said the forum was a perfect place to address the need for education, empowerment and enrichment.

Indonesia needs to have more PhDs in business and science. Its 30,000 PhDs are primarily in other fields, like political affairs. This is why it is hard for Indonesia to compete with other nations. Japan has Sony, Honda, Mitsubishi and Panasonic, and South Korea has Hyundai and Samsung. But Indonesia has only Djarum, Gudang Garam and Indomie.

Graft only adds to Indonesia’s woes, as does its fragmented political system with policies often prioritizing the wealthier segments of the population.

Indonesia could be one of the leading economies in the world. But to get there, the country needs to create a pool of great minds to help, whether from Wharton or elsewhere. Small mistakes in plans and schemes can cause serious problems later on.

As former World Bank president and former US ambassador to Indonesia Paul Wolfowitz said at the end of the forum: “The devil is in the details.”

Yanto Soegiarto is the managing editor of Globe Asia, a sister publication of the Jakarta Globe.