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Though Indonesia was recently welcomed into the G20 and has earned lower middle income status by the World Bank, it faces significant development challenges which need to be addressed for the country to sustainably thrive in the future. It is still economically fragile after the Asian financial crisis and has mixed progress toward achieving the Millennium Development Goals (MDG‟s). The recently decentralized government is faced with increased pressure to ensure fair resource distribution among districts and regions in an innovative, sustainable fashion that doesn‟t further strip the fragile environment of its resources for economic gain. This will be especially critical for 69% of the population who will be working age in the next few decades,1 who will require education, health and security to support their quality of life and the country‟s economic growth. The Government of Indonesia adopted a Medium Term Development Plan (RPJMN) 2010-2014, “Development for All‟,2 which seeks to raise levels of economic growth, create jobs and accelerate achievement of the MDG‟s. Meeting these stated goals in the delicate moment of democracy consolidation and economic recovery will require a comprehensive package of aggressive (but reasonable) policy reforms.

This paper provides an account of Indonesia‟s recent history to unveil the factors shaping its development progress and highlights its environmental damage, deforestation specifically, as one of the major issues facing the country today. Other critical development challenges include urbanization and a growing population, dependence on primary commodity exports, inequalities in health and education, expensive and fragile infrastructure, and the need to create democratic governance mechanisms within a historically corrupt system. I have used an integrated computer simulation of global change, International Futures (IFs), to aid in the forecast of fuel subsidy reduction and reforestation initiatives through the year 2030. Though the IFs program has a high level of uncertainty in forecasting the outcome of policies, it can be used by policymakers to imagine alternative futures and the feasibility of making change. The results show that, if implemented properly, Indonesia can achieve its national goals while compensating for its historically destructive environmental practices. This will aid in further economic growth by promoting a favorable climate for foreign investment and support while ensuring sustainability for future generations of Indonesians.

1. Introduction

Indonesia‟s national motto of “unity in diversity‟ is a central theme running through all of the country‟s development trends. The archipelago consists of 17,000 islands occupied by 242 million people, giving it the rank of the fourth most populous country in the world.3 Its global positioning has led to strong influences from China, the Middle East and Europe, causing significant religious and ethnic heterogeneity evidenced by its divisions into 300 distinct ethno linguistic groups.4 The diverse population is dispersed in a “core-periphery‟ model whereby the majority of the population lives and continues to migrate to the urban cores. The country has significant natural resources, including timber, fish, petroleum, natural gas and a variety of minerals, and one of the most diverse terrestrial and marine ecosystems in the world.

In the face of its geographic fragmentation and demographic and biological diversity, Indonesia has succeeded in achieving relative economic stability since its independence from strong central control and a rigid hierarchical system of Dutch governance in 1945. Quickly following independence the first President Sukarno enacted laws establishing authority and government structure at a more local level to give greater discretion to regional authorities. However, starting in 1959 Sukarno led Indonesia into a more authoritarian period under his “Guided Democracy‟, a Presidential Decree in which the state became obsessed with national unity, promoting economic development through socialist policies and remaining outside of the world market. Conditions worsened during this period, hitting a low in 1965 with an attempted coup followed by social upheavals against the Communist Party.5 This gave birth to the “New Order‟, a three decade period of highly centralized governance led by President Suharto, marked by rapid growth and reduction in inflation leading to increased foreign aid and investment. Suharto resigned in May 1998 as a response to increased social unrest following the Asian financial crisis, making way for the institution of a democratic political system.

The rapid decentralization process that followed Suharto‟s downfall devolved authority to all 30 Indonesian provinces to manage their own administration, public welfare and public health sectors through unique models of government structure aligning with local custom.6 (See the “Big Bang Decentralization‟ section for a more complete account of the decentralization history and framework.) In the face of this transition, the newly elected officials have dealt with various crises, including the aftermath of the Asian financial crisis, multiple natural disasters such as the 2004 earthquake and tsunami which killed 160,000 people and destroyed the homes of 680,000,7 the recent global economic crisis, from which the country is still recovering, and ethnic strife remaining from the oppressive regime of the past. Simultaneously, Indonesia is feeling increased external pressure to remedy the destruction on the natural environment caused by 30 years of export led growth. It is in this highly transitional context that we can explore Indonesia‟s development trends in order to better understand the challenges it faces today.

The majority of this population seeks employment in the urban centers, aligning with historical internal migration patterns and explaining the population growth rate differential in urban areas as compared to rural regions. In 1960, 14.6 percent of the population resided in urban areas, but by 2005 the urban population was up to 48 percent. For the first time in its history, the population in urban areas exceeds that of rural. If current trends continue, the IFs model shows that by 2030 nearly 60% of the population will live in urban centers. The country is faced with the challenge of accommodating dense populations in urban settings such as Jakarta, which has grown from 0.5 million people in the 1930‟s to 20 million in 1995, holding 10% of the national population.13

As a response, the Indonesian government has historically intervened in migration patterns to achieve a closer match between population densities and natural resources. Such an example is the transmigration program, the largest agricultural migration program of its kind in the world, which seeks to shift people from the densely populated core to outlying islands in the island chain.14 This program has devastating impacts on the environment that need to be reconciled, caused by increased deforestation as dwellings and infrastructure are installed to serve these migrant communities. The increased autonomy granted to outlying regional governments under decentralization has the potential to empower districts to engage in sustainable development practices and provide employment and incentives for people to stay in their villages rather than moving to the cities. This, however, is contingent on sufficient economic resources for these regions.

2. Prospects for the Future

The most recent World Bank economic report on Indonesia shows that the country continues to recover from the global economic crisis, achieving growth above pre-crisis levels. Though the GDP per capita has been steadily increasing, the number of Indonesians who have enjoyed this economic success is questionable. Government investment in the public sector fell from 7% in 1996 to only 4% in 2000; health spending has fallen below 3% of GDP, education expenditures only amount to 6% of the budget and infrastructure only 2%. Additionally, as the IFs model shows, Indonesia‟s Gini value in 2000 was .303 and by 2005 it rose to a record high level of .394. The IFs model forecasts that it will remain just below this level through 2030.

More than half of the population lives on less than $2/day and remains vulnerable to internal and external shocks at all levels, including natural disasters, susceptibility to illness and government restructuring. Decentralization poses additional social and economic obstacles to poverty alleviation and more equal economic distribution as local governments scramble to expand service delivery to their populations. Social services could be further weakened unless significant efforts are made to alleviate corruption by local leaders who are vying for more power without accountability. Though government efforts have been made to fix some of the inefficiencies in decentralization legislation, such as reforms to Laws 22 and 25 enacted in 2004 to increase the role of higher government levels to facilitate more effective budgetary management and administration, only time will tell if the granting of local autonomy will create a healthy environment for democratic development or further fractionalize the country.

The government‟s history of legitimizing itself through economic growth without due regard for the environment will have drastic effects on the stock of key natural resources, a significant threat to health and human welfare caused by industrial and urban pollution and increased conflicts over the use of resources. Future growth and development will depend on the existence of natural resources and the sustainability of critical ecosystems. The problems associated with rapid industrial sector growth concentrated in urban areas will ultimately lead to resistance of industrial expansion and have profound effects on the overall economy.

2.1. Medium Term Development Plan (RPJMN)

The government‟s Medium Term Development Plan 2010-2014 may prove to be an effective catalyst to enact the necessary environmental improvements and ensure the poor do not suffer through this process if policy reforms are appropriately implemented and monitored. President Yudhoyono and Vice President Boediono formulated the most recent Medium Term Development Plan (RPJMN) as part of a longer development initiative (RPJPN 2005-2025) to realize an Indonesia that is prosperous, democratic and just through focusing on improvement of 11 development priorities, a few of which are outlined below:

  • Average economic growth of 6.3-6.8% per annum; economic growth more than 7% before 2014
  • Poverty rate of 8-10% by 2014
  • Population growth of 1.1% by 2014
  • Illiteracy rate of population aged less than 15 years reduced to 4.18% in 2014
  • Life expectancy increase to 72 years in 2014
  • Mortality rate per 1,000 births reduced to 24 by 2014
  • HIV prevalence less than 0.5% by 2014
  • Corruption perception Index 5.0 in 2014

The government plans to achieve these stated goals through a combination of initiatives funded through the public sector (18%) and private sector (82%). The above chosen development and sectoral targets included in the RPJMN can be measured in the IFs program to determine the effectiveness of policy interventions in meeting national priorities.

2.2 Policy Recommendations

Any long-term environmental policy reform would need to set up a regulatory and economic framework which provides incentives to change behavior, accounts for environmental costs, enhances resource conservation and improves revenue collection mechanisms. One example of this is to reduce fuel subsidies while providing conditional and unconditional cash transfers to the poor – compensating for short term economic burden while increasing access to education and health. Simultaneously, a carefully implemented reforestation initiative which protects sufficient land for crop production would serve to protect biodiversity and offset increased carbon emissions. Good governance is critical during this process to manage the distribution of funding to poor households and create reforestation monitoring mechanisms to avoid illegal logging and mining activities.

2.2.1 Subsidy Removal and Cash Transfer Program

The removal of fuel subsidies is an important step in the direction of internalizing the costs of environmental destruction into production, re-pricing good to align with international benchmarks and making producers and consumers accountable for unsustainable practices. The increases in world fuel prices in 2005 inspired such a policy, whereby the government significantly decreased subsidies and increased fuel prices by 29% and again later that year by114%. Though this created significant funding pools, up to $10 billion in 2006, it further marginalized the poor who were unable to meet the increased fuel costs. The government implemented an Unconditional Cash Transfer (UCT) program in August 2005 to ensure the impoverished population would not suffer. There were inherent problems with the

unconditional nature of this initiative, mainly that a large portion of the recipients were not classified as poor by government standards. The Conditional Cash Transfer Program (CCT), enacted in 2007, connected payments to education and health spending to eliminate some of the targeting problems of the UCT program. This pilot CCT program applied cash transfers to both households (individuals receive quarterly payments through the post office as long as they meet requirements of using specified health and education services) and communities (communities decide how to best use allocated block grants to achieve health and education targets).

Since 1998 the Indonesian government implemented the Kecamatan Development Program (KDP) and the Urban Poverty Project (UPP), large scale community development programs implementing participatory, community driven development. In August 2006 President Yudhoyono announced a dual-component poverty alleviation program consisting of the National Community Empowerment Program (PNPM-Mandiri), building upon the KDP and UPP which ended in 2005, and the CCT program, which together targeted all 70,000 villages in 5,300 rural and urban sub-districts in the country.The cash transfer program, implemented in six provinces, is designed to achieve objectives and goals in line with the national development plan and the MDG‟s. More specifically, these programs target poverty reduction, maternal mortality reduction, child mortality reduction and ensure universal coverage of basic education. The CCT emphasizes certain lagging health and education outcomes through targeted community investments. It is an appropriate policy intervention for Indonesia for multiple reasons: it utilizes mechanisms developed through eight years of community driven development; allows communities to articulate service demands and propose local solutions; and utilizes a participatory approach to better target services to self-identified beneficiaries. Though the Conditional Cash Transfer program is in a pilot stage and is thus limited in scope, the likelihood of the program being implemented on a national scale is very high, suggesting many potential benefits not only for the impoverished but for the country as a whole.

2.2.2 Reforestation Initiative

A reforestation initiative would expand and protect biodiversity, improve human health, mitigate the alarmingly high level of the country‟s greenhouse gas emissions and provide indigenous populations an opportunity to reclaim their livelihoods. See Appendix 1 for the drivers and forward linkages of environmental change.The Suharto government created a national forest Reforestation Fund in 1989 to support reforestation and rehabilitation of degraded land. However, during this time the Ministry of Forestry used the fund to promote the development of industrial timber and pulpwood plantations and granted contracts to plantation companies with close ties to political elites. A subsequent audit of the Fund showed losses of $5.2 billion in public funds during a five year period in the mid 1990‟s alone.

Since then, the government has taken steps to restore legitimacy to the Fund, but the challenges of financial management and administration posed by decentralization remain. The likelihood of adherence to a wide scale reforestation effort today is high, considering the government‟s interest in participating in a Reducing Emissions from Deforestation and Forest Degradation (REDD) program, a global effort which uses market incentives to reduce greenhouse emissions from deforestation. This type of international forest carbon market is expected to be established after 2012 and could provide tremendous financial opportunities for Indonesia. Estimates of potential gains to the country through REDD range from $0.5-$2 billion/year. As of this year, the government has planned on a two-year moratorium on new forestry concession on rainforest lands and peat swamps and will be supported over the next five years by a $1 billion contribution from Norway. Future external contributions and funding set aside from the domestic budget could finance the reforestation efforts in the future.

Along with these initiatives to protect environmental biodiversity through reforestation and promote environmental accountability through fuel subsidy removal, action must be taken to improve governance to curb destructive practices and ensure fair distribution of funding to the poor. Integrating these proposed policy reforms into the IFs model, we can forecast Indonesia‟s future development path through year 2030 to determine if these interventions will catalyze the achievement of the country‟s development goals and the broader MDG‟s.

3. The Intervention

In order to mimic a nationwide Conditional Cash Transfer program, I first increased the value of government transfers to unskilled households (govhhtrnwelm) to 1.2 starting in 2010 through 2030. Though this would transfer government funding to households, it does not subsequently tie the increased household income on education or health expenditures as the program requires. Rather, IFs automatically assumes the additional income will be spent on domestic consumption. To create a scenario more realistically tied to the CCT program, I increased the total transition rate of students into lower secondary education programs (edseclowtrangr) to 1.0 and lowered infant mortality (hlmininfmort) to 1.0 through 2030. I manipulated the level of corruption as a fourth intervention point, aligning with the national anti-corruption efforts already in place. To do this, I increased the government corruption multiplier (govcorruptm) starting in 2010 by 250%, forcing Indonesia to reach 6.69 on Transparency International‟s

Corruption Perception Index by 2030.

The main drivers for environmental change are population, land use, economic activities and governance. Within the environmental leverage points, IFs provides forest land use as the indicator most relevant to the reforestation initiative. In order to be fully accurate, the model would need to differentiate between the types of forests generated (to account for such differences such as a primal forest or timber plantation). However, I have assumed that the land area will not be reforested for future clearing. Although ecological activity and population are highly correlated, there would likely be no effect in lowering TFR on the amount of forest land given that the land is not automatically credited to nature. Neither economy nor governance result in direct changes for environmental indictors in the model, thus the one possible intervention that will effect change is the Forest Protection Multiplier, forestm, which causes the area dedicated to forest land use to change. Since forestm displaces other land use and thus would have grave implications on agricultural production and food security, I implemented a moderate increase to 1.1 starting in 2010 through the year 2030 and after that it returns to the neutral value of 1.0.

The scenario implemented as would have an inherent conflict between improving the natural environment and food security. To modify the intervention to increase the likelihood of its implementation, I increased the agricultural yields multiplier (ylm) by 1.2 through 2030, after which time it was decreased back to 1.0.

4. Policy Challenges

The ultimate goal of implementing this package of reforms is to reverse the devastation on the environment caused by decades of stripping the land of its natural resources for short-term economic gain. As Indonesia has made the shift from an agricultural to a manufacturing economy, thus diversifying its income, it has the opportunity to effectuate positive environmental changes. However, implementing these policies will face challenges from those who are unable and unwilling to financially absorb the shocks caused by subsidy reductions and the decline in agricultural land. Monitoring mechanisms need to be put into place to protect the reforested areas from illegal logging, which has received recent global attention as a critical problem in the country. The corrupt governance system allowing for such practices needs to be further cleaned if progress is to be made in adhering to existing environmental law and bringing transparency to governance.

Both the community and household CCT face additional challenges in ensuring equitable access to services. Supply shortages, both in medical supplies and junior secondary schools in particular, quality of services due to increased beneficiaries, and the extra burden of administration and management imposed on newly formed regional governments are serious threats to the effectiveness of the CCT programs. The marked improvements in education and health as a result of the CCT program and anti-corruption efforts places extra pressure on the government to provide quality employment for a growing population of educated citizens entering the labor force. Currently, over 40% of 15-24 year olds with completed senior secondary school in the labor market are unemployed, partly due to lack of information about employer expectations but largely due to growing employment demand without a correlating supply. Regional governments and the private sector should collaborate to ensure youth exiting the education system have the requisite skills to successfully gain and retain employment.

The reforestation effort faces land tenure and access issues related to the rights of communities and the role of private enterprises. After decentralization, the relationship between the sectoral ministries and the regional authorities are more collaborative than top-down as the communities recognize their increased power and leverage they have to have their voices heard. If the central government wants to continue to curb conflict, the rights of the traditional peoples demanding a community-based approach to natural resource management must be respected. The unique adoptive management and land tending models of these communities makes formulation of general policies nearly impossible. The central ministries need to play an active role in evaluating the lessons learned from the province-based service provision models in other recently decentralized countries in the region, providing resources to provinces to effectively train and manage the social and environmental service workforce and change its role in relationship to regional governments.

In looking to the future, Indonesia must focus its attention away from environmentally destructive practices for economic gain. Given the fragile nature of the state post economic crisis and the increasing global prices of oil, which is heavily consumed by the industrializing nation with a growing consumer population, the inclination to expand cash crops such as palm oil and engage in strip mining for increased coal use will be high. However, the country must focus on enhancing existing and integrating new technology into the agricultural and services sectors to make production more efficient as well as continuing to diversify its economy through the transition into manufacturing. Tapping in to its huge stock of geothermal resources as a source of renewable energy is a viable option to transition away from the use of fossil fuels. Positioned on the ring of fire, the country holds 40% of the world‟s potential geothermal resources.

5. Conclusion

Providing a careful historical analysis of the factors that shape a country‟s growth path is the first step to understanding its future trajectory and aids in informing policy and action. Though it is framed on uncertainty, the IFs model provides detail to general understanding of growth trends and offers a glimmer of hope for the future. Given its limitations, the model shows that an approach to reverse the environmental damage to Indonesia while protecting the livelihoods of the population is possible. It also presents a realistic challenge to policy implementation, whereby following one goal has negative spillover effects on other sectors and parts of the global system. It is ultimately up to the policymaker and the population he/she represents to decide which goal to pursue, based on feasibility of implementation and social values.

This paper covered the major development issues chosen by the author and in no way provides comprehensive coverage of all of the challenges the country faces. In reality, the Indonesian government and various ministries are working to tackle a complex array of development challenges to meet the holistic needs of its population and respond to external pressures. The government is continuing to engage in diverse activities that will continue domestic growth and expand its partnerships with external agencies to garner support in its effort to achieve its development goals. Such collaborative efforts offer opportunities for Indonesia‟s growth through an influx of funding for capacity building and technical assistance projects. The government has a real opportunity to reverse environmental damage, reduce poverty and grow the economy if it continues to pursue necessary policy reforms with support from its population and collaborative partners.

J e s s i e G o f f

N o v e m b e r 1 9 , 2 0 1 0

I N T S 4 6 0 1 : D e v e l o p m e n t
F o r e c a s t i n g J o s e f K o r b e l S c h o o l o f
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