Trends in Southeast Asia
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ISSN 0219-3213 2017 no. 8 Trends in Southeast Asia ROWING AGAINST THE TIDE? BATAM’S ECONOMIC FORTUNES IN TODAY’S INDONESIA FRANCIS E. HUTCHINSON TRS8/17s ISBN 978-981-4786-39-3 30 Heng Mui Keng Terrace Singapore 119614 http://bookshop.iseas.edu.sg 9 789814 786393 Trends in Southeast Asia 17-J02426 01 Trends_2017-08.indd 1 31/7/17 12:44 PM The ISEAS – Yusof Ishak Institute (formerly Institute of Southeast Asian Studies) is an autonomous organization established in 1968. It is a regional centre dedicated to the study of socio-political, security, and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are grouped under Regional Economic Studies (RES), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). The Institute is also home to the ASEAN Studies Centre (ASC), the Nalanda-Sriwijaya Centre (NSC) and the Singapore APEC Study Centre. ISEAS Publishing, an established academic press, has issued more than 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world. 17-J02426 01 Trends_2017-08.indd 2 31/7/17 12:44 PM 2017 no. 8 Trends in Southeast Asia ROWING AGAINST THE TIDE? BATAM’S ECONOMIC FORTUNES IN TODAY’S INDONESIA FRANCIS E. HUTCHINSON 17-J02426 01 Trends_2017-08.indd 3 31/7/17 12:44 PM Published by: ISEAS Publishing 30 Heng Mui Keng Terrace Singapore 119614 [email protected] http://bookshop.iseas.edu.sg © 2017 ISEAS – Yusof Ishak Institute, Singapore All rights reserved. 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 prior permission. The author is wholly responsible for the views expressed in this book which do not necessarily reflect those of the publisher. ISEAS Library Cataloguing-in-Publication Data Hutchinson, Francis E. Rowing Against the Tide? Batam’s Economic Fortunes in Today’s Indonesia. (Trends in Southeast Asia, 0219-3213 ; TRS 8/17) 1. Batam (Indonesia)—Economic conditions. I. Title. II. Series: Trends in Southeast Asia ; TRS 8/17. DS501 I59T no.8 (2017) August 2017 ISBN 978-981-4786-39-3 (soft cover) ISBN 978-981-4786-40-9 (e-book, PDF) Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Mainland Press Pte Ltd 17-J02426 01 Trends_2017-08.indd 4 31/7/17 12:44 PM FOREWORD The economic, political, strategic and cultural dynamism in Southeast Asia has gained added relevance in recent years with the spectacular rise of giant economies in East and South Asia. This has drawn greater attention to the region and to the enhanced role it now plays in international relations and global economics. The sustained effort made by Southeast Asian nations since 1967 towards a peaceful and gradual integration of their economies has had indubitable success, and perhaps as a consequence of this, most of these countries are undergoing deep political and social changes domestically and are constructing innovative solutions to meet new international challenges. Big Power tensions continue to be played out in the neighbourhood despite the tradition of neutrality exercised by the Association of Southeast Asian Nations (ASEAN). The Trends in Southeast Asia series acts as a platform for serious analyses by selected authors who are experts in their fields. It is aimed at encouraging policy makers and scholars to contemplate the diversity and dynamism of this exciting region. THE EDITORS Series Chairman: Tan Chin Tiong Series Editor: Ooi Kee Beng Editorial Committee: Su-Ann Oh Lee Poh Onn Daljit Singh Francis E. Hutchinson Benjamin Loh 17-J02426 01 Trends_2017-08.indd 5 31/7/17 12:44 PM 17-J02426 01 Trends_2017-08.indd 6 31/7/17 12:44 PM Rowing Against the Tide? Batam’s Economic Fortunes in Today’s Indonesia By Francis E. Hutchinson EXECUTIVE SUMMARY • Despite its good infrastructure and proximity to Singapore, Batam’s economic performance has taken a turn for the worse, with declining levels of foreign direct investment (FDI) and exports. Well-known firms in the electronics sector have closed shop, the shipping industry is in the doldrums, and unemployment rates have begun to climb. • The environment for business is not as conducive as it used to be, with bureaucratic overlaps, persistent red tape, and shortages of land for investors. And, rather than seeking to attract large-scale investments in manufacturing or services, government campaigns have focussed on traditional economic activities such as fishing and farming. • There are three reasons for this state of affairs. First, Indonesia’s decentralization reforms have made doing business in Batam much more complicated than it used to be. Rather than dealing with one all-powerful central government agency, investors need to deal with three levels of government — each with veto power. • Second, Batam’s economic transformation over the past quarter- century has attracted large numbers of migrants from other parts of the country. This has engendered a cultural sub-nationalist movement, which has sought to protect local interests and identities — to the detriment of the economy. • Third, structural changes in Indonesia’s economy and changing corporate strategies have meant that investment into the country seeks to tap its domestic market — as opposed to producing for 17-J02426 01 Trends_2017-08.indd 7 31/7/17 12:44 PM export. In this context, Batam is not a viable destination due to its distance from large population centres, bad connectivity, high labour costs, and unattractive tax framework. • While recent measures have sought to reduce red tape, fight corruption, and improve the island’s infrastructure, it is possible that Batam needs to re-orient its business model away from producing for export and towards enabling firms on the island to also cater to Indonesia’s burgeoning domestic consumer base. 17-J02426 01 Trends_2017-08.indd 8 31/7/17 12:44 PM Rowing Against the Tide? Batam’s Economic Fortunes in Today’s Indonesia By Francis E. Hutchinson1 INTRODUCTION Batam has an unbeatable business proposition. Situated a mere 20 kilometres from Singapore, linked by logistics networks, and possessing vastly cheaper land and labour, the Indonesian island is ideally placed to absorb investment from its wealthier neighbour. In theory, it should be teeming with investors and populated by factories and workers. Indeed, this is just what happened during the 1990s and early 2000s. The liberalization of investment regulations, coupled with Batam’s well- developed infrastructure and proximity to Singapore, made the island an attractive site for manufacturing operations seeking to escape the city- state’s rising costs. During the 1990s, Batam’s industrial base grew in size and sophistication, rapidly becoming one of the country’s centres of electrical and electronics production. In the mid-2000s, the shipbuilding industry also began to develop on the island. Coupled with the older, more established tourism sector, Batam became a crucial source of foreign exchange for Indonesia. Through these three “motors”, hundreds of thousands of formal sector jobs were created, and the island became one of the country’s richest — with its economy often growing at more than 10 per cent p.a. 1 Francis E. Hutchinson is a Senior Fellow and Coordinator of the Regional Economic Studies Programme at the ISEAS – Yusof Ishak Institute, Singapore. He would like to thank Siwage Dharma Negara and Mulya Amri for their comments and suggestions. 1 17-J02426 01 Trends_2017-08.indd 1 31/7/17 12:44 PM The Batam Industrial Development Authority (BIDA) was at the helm of this transformation. Established by presidential decree, this agency had high-quality staff, central government funding, and direct access to decision-makers in Jakarta. It also had the unquestioned backing of B.J. Habibie — Indonesia’s long-serving Minister for Research and Technology — who saw Batam as the gateway to securing capital and technology. BIDA’s commitment to providing investors with advice and expedited approvals, as well as its custodianship of the island’s infrastructure, have been a key part of Batam’s success — even after Indonesia’s far-reaching political and administrative reforms. The island’s economy continues to grow steadily, as do the number of tourists coming to visit its resorts and leisure facilities. However, over the last few years, the success of Batam’s export-focussed industrialization model has come under question. Indeed, exports have been decreasing since 2013, and unemployment has spiked over the last two years and is now considerably above the national average. The once-burgeoning ranks of semiconductor, hard disk drive, and component manufacturers have atrophied over the past half-decade, with anchor firms such as Panasonic, Sanyo and NIDEC closing their facilities. Subsequently, in 2013, the shipping sector, once heralded as Batam’s sunrise industry, also began to contract. Today, an estimated 30,000 workers are employed in the sector — down from its peak of 250,000.2 At present, the majority of the island’s shipyards sit idle, or have turned to lower value repair jobs to cover costs. In addition, Batam’s much vaunted investment climate has shown signs of dysfunction. Large tracts of land sit idle, and yet newcomers are unable to secure sites to establish operations. The central and provincial government have disagreed about the leadership of BIDA and major projects have been bogged down by turf tussles. In addition, despite Indonesia’s growing ranks of urbanizing middle-income families, firms 2 Siwage Dharma Negara, “Can the Decline of Batam’s Ship-building Industry be Reversed?”, ISEAS Perspective 2017/10, ISEAS – Yusof Ishak Institute, Singapore.