SEZs: cure or denial for Indonesia’s investment woes?


Indonesia’s plans to transform the islands of Batam, Bintan and Karimun which are near Singapore into Special Economic Zones is being billed as a breakthrough solution for the government to attract direct foreign investments.

There is little doubt that if conditions are right for Singapore the SEZs would, in the short to medium term, bring in millions of dollars in investment dollars. But what about the long term implications? Would the creation of SEZ’s help or harm Indonesia’s attempts to make itself a more attractive investment destination?

SEZs would help Indonesia if they are part of a long term national strategy to make Indonesia more attractive. China has used this strategy to great effect by opening up Shenzen as a SEZ way before it liberalized its economy. Its success however, was because the Chinese leaders had their eye firmly on the ball – the revival of China’s national economy and the SEZs were but means toward a greater end.

This is because, at the heart of it, SEZs are admissions by countries that their economic, financial and political systems are broken and that no right-thinking investor would bet on them. By creating SEZs, governments can create artificial islands where the law works and is enforced, where bureaucracy is minimised and where the infrastructure exists for investment to thrive.

There is nothing wrong with this so long as the governmens recognize them for what they are and use them to build expertise for the nation as a whole. China did this, learned all they needed to from their SEZ partners and also acquired a pool of trained nationals from those working in the SEZs.

It then used this knowledge in its attempt to open up the rest of the country. It is still struggling but by fits and starts it has gone a long way toward getting it its final destination – China as a robust and attractive investment destination.

If Indonesia goes down the same path as China there are grounds for optimism. Unfortunately, however, there is little evidence to suggest that the SEZ framework that it signed with Singapore yesterday is part of a greater plan of reviving Indonesia’s attractiveness as an investment destination.

All, the speeches given by the government officials indicate that it is an ad hoc initiative to bring in the bacon. What happens next is not articulated.

If this is the situation, then the only winner here is really Singapore. The island state is short of manpower, space and cheap labor and as a result its economy has taken a beating in recent years. The SEZs will provide it a sanctuary to access Indonesia’s cheap labor, land and 220-million strong market.

Indonesia will have short-term and some longer-term economic benefits from the SEZs but unless it sets out to use the SEZ’s as a means to a greater end it will end up the loser in the deal as the SEZ’s will only help it continue its state of blissful denial.
This is because the SEZ’s will provide the decision makers will an illussion that they are succeeding in making Indonesia a more attractive investment destination when in reality, as a nation, it is not.

There is no getting around it: Indoensia will remain an unattractive investment destination unless it creates a favourable investment climate with reduced bureaucracy, a fair judiciary, investment-friendly laws, a safe environment and political stability.

Achieving these things require strong political will and statesmanship to do what’s right for the country in the long run, something that we have not seen any evidence of in all the hullabaloo over the SEZs.

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