Indonesia President Visit PDF

Improving Indonesia’s Competitiveness
Presentation to President Susilo Bambang Yudhoyono
Professor Michael E. Porter

Harvard Business School
Boston, Massachusetts
September 28, 2009
This presentation draws on ideas from Professor Porter’s articles and books, including, The Competitive Advantage of Nations (The Free Press,
1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report, (World Economic Forum), “Clusters
and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008) and ongoing
research at the Institute for Strategy and Competitiveness. 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 the permission of Michael E.
Porter. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu,
Version: September 28, 2009, 2pm
20090928 – Indonesia President visit (handouts).ppt 1 Copyright 2009 © Professor Michael E. Porter
Agenda for the Second Term
• Improving macroeconomic foundations

– Intensify the fight against corruption
• Upgrading the business environment
• Clusters development
• Provincial economic development
• Economic coordination with neighboring countries
• National economic strategy
• Organizing for competitiveness
Prosperity Performance
Lower and Middle Income Countries
PPP-adjusted GDP per
Capita, 2008 ($USD)
$20,000 Hungary
Lithuania
$18,000 Poland Latvia

Asian countries Croatia
Other countries Russia
$16,000
Chile Argentina
$14,000 Mexico Malaysia
Venezuela Turkey
Uruguay Bulgaria Romania
$12,000 Iran
Ecuador Kazakhstan
South Africa Dominican Republic
$10,000 Brazil
Colombia Peru
Thailand
$8,000 Costa Rica Tunisia Ukraine
Albania
$6,000 Guatemala Egypt China
Jordan Syria Georgia
Sri Lanka
Morocco Indonesia
$4,000
Philippines
Pakistan India Vietnam
Papua New Guinea (-2.6%) Laos
$2,000 Kenya
Nigeria Cambodia
Bangladesh Tanzania
$0
3% 5% 7% 9% 11% 13%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2008
Source: EIU (2009), authors calculations

Unemployment Performance
Unemployment
Rate, 2008
Middle and Lower Income Countries Dominican
South Africa (22.9%) Republic (15.5%)
14% Improving Tunisia Deteriorating

Croatia
Asian countries Albania Jordan Iran

Other countries
12%
Spain Colombia
10% Poland
Morocco
China
Syria Egypt Indonesia
8% Brazil Peru
Argentina (-14.6%) Chile Hungary
Uruguay Bolivia
Ecuador Venezuela Philippines Pakistan
Kazakhstan India
Bulgaria Russia El Salvador
6% Lithuania Estonia Nicaragua
Panama Paraguay
Latvia
Sri Lanka
Costa Rica
Vietnam
Romania
4% Mexico
Honduras
Malaysia
Ukraine
Bangladesh
2%
Thailand
0%
-10% -8% -6% -4% -2% 0% 2% 4%
Change of Unemployment Rate in Percentage Points, 1999-2008
Note: In some cases, 1999 data was unavailable, so latest data used.
Source: EIU (2009)
Export Performance
Middle and Lower Income Countries
Exports of Goods and
Services (% of GDP), 2008
90%
Malaysia (103.5%)
Hungary
80% Asian countries Vietnam
Other countries Thailand
70%
Papua New Guinea

Bulgaria
60% Lithuania
Cambodia Nigeria Tunisia
Jordan
Kazakhstan
50%
Croatia Chile
Costa Rica
Ukraine (-17.5%) Egypt
Latvia
40% Poland
Philippines China South Africa
Venezuela Uruguay Morocco
Syria Russia Georgia
Romania Mexico
30%
Sri Lanka Indonesia Guatemala Peru
Iran Kenya Ecuador India
Argentina Turkey Australia Bangladesh
20% Albania
Tanzania Colombia
Brazil
Pakistan
10%
-15% -10% -5% 0% 5% 10% 15% 20%
Change in Exports of Goods and Services (% of GDP), 2004 to 2008
Source: EIU (2008), authors’ analysis

Indonesia Exports By Type of Industry
World Export Market Excluding Oil and Gas Industry
Share (current USD)
3.5% Processed Goods

Semi-processed Goods
Unprocessed Goods
3.0% Services
TOTAL
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Note: Excluding Oil and Gas cluster
Source: UNComTrade,
20090928 – Indonesia WTO
President visit (2008)
(handouts).ppt 6 Copyright 2009 © Professor Michael E. Porter
Inbound Foreign Investment Performance
Stocks and Flows, Selected Middle and Lower Income Countries
Jordan
Inward FDI Stocks as % of
GDP, Average 2003 - 2007 (46.5%,
81.8%)
70%
Tunisia
Asian countries Chile
Hungary
Other countries
60% Vietnam
Bulgaria (69%)
50% Croatia
Kazakhstan
Papua New Guinea Cambodia Georgia

40% Morocco Tanzania
Nigeria
Malaysia
Thailand Latvia (49.5%)
Venezuela Egypt
South Africa Argentina Lithuania Poland
30% Colombia Romania
Laos Mexico Costa Rica
Ecuador
Brazil Russia
Guatemala Peru
20% Ukraine
Uruguay
Dominican Republic
Albania Turkey
Philippines
Indonesia China
10% Sri Lanka Pakistan
Bangladesh
Kenya
India
Iran
0%
-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007
Source: UNCTAD, World Investment Report (2009)

Inbound Foreign Investment Performance
Flows, Selected Countries
Inward FDI Flows, Ranked by Inward
% of GDP FDI Flows (% of
6% GDP), 2007
5% Russia
4%
Brazil
3%
China
2%
India
1%
Indonesia
0%
-1%
-2%
-3%
2000 2001 2002 2003 2004 2005 2006 2007
Innovative Output, Selected Countries
Average U.S. patents per 1
million population, 2004-2008
Malaysia (4.4)
3.5
Czech Republic
3.0
Croatia
2.5
Kuwait
2.0 South Africa
Greece
1.5
Portugal
Russia
1.0
Argentina Chile Saudi Arabia UAE
Poland Bulgaria
Mexico
0.5 Brazil Lebanon China
Ukraine Romania India
Philippines Thailand
Colombia Turkey
Egypt Indonesia
0.0
-20% -10% 0% 10% 20% 30% 40% 50% 60%
CAGR of US-registered patents, 2004 – 2008
Source: USPTO (2008), EIU (2008)
Indonesian Competitiveness in 2009
• Solid growth rates over the medium term

• The impact of the global crisis has been comparably modest
• Political stability has improved significantly
• The achievements of the first term have laid a good foundation for rapid
progress
HOWEVER
• Indonesia’s prosperity remains low, and prosperity growth rates have only
been average relative to regional peers
• Indonesia’s limited integration into the global economy has provided
shelter but greatly limits Indonesia’s long-term growth prospects
• Indonesia continues to face significant competitive weaknesses
• The second term is the time to move to a more ambitious economic

strategy which will place Indonesia on a higher growth path
What is Competitiveness?
• Competitiveness is the productivity with which a nation uses its human,
capital, and natural resources.
– Productivity sets the sustainable standard of living (wages, returns on
capital, returns on natural resources)
– It is not what industries a nation competes in that matters for prosperity, but
how productively it competes in those industries
– Productivity in a national economy arises from a combination of domestic
and foreign firms
– The productivity of “local” or domestic industries is fundamental to
competitiveness, not just that of export industries
• Only competitive businesses can create sustainable jobs and attractive

wages
• Nations compete to offer the most productive environment for
business
• The public and private sectors play different but interrelated roles in
creating a productive economy
Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the Sophistication

National State of Cluster of Company
Business Development Operations and
Environment Strategy
Macroeconomic Competitiveness
Social
Infrastructure Macroeconomic
and Political Policies
Institutions
Natural Endowments
• Natural endowments alone are not enough to support a high standard of living
• Macroeconomic competitiveness creates the potential for productivity
• Productivity ultimately depends on improving the microeconomic capability of the
economy and the sophistication of local competition
Indonesia’s Macroeconomic Competitiveness
• Indonesia has made significant progress solidifying and improving

political institutions
• Macroeconomic policy is solid, but stable fiscal balances are
partly due to the inability to execute planned spending, especially at
the provincial level
• Decentralization of authority to the provinces is an important step
in a large, spread out country such as Indonesia, but better policy
coordination and implementation is needed
• There has been some progress in reducing corruption, but this
remains a central obstacle to further improvements in
competitiveness
• Indonesia performs relatively well in some aspects of basic human
development, but has not improved its position significantly over
time
Corruption Perception Index, 2007
1 Finland New Zealand
Iceland Sweden
Low Deteriorating Norway
Switzerland Improving
Canada
corruption UK
Hong Kong Austria Germany
Ireland Japan
United States France
Chile Spain Uruguay
Portugal Estonia Slovenia
Israel Botswana Taiwan
Hungary South Africa Czech Republic
Italy
Malaysia South Korea
Lithuania Costa Rica Slovakia
Rank in Latvia
Jordan
Global Greece
Tunisia Poland
Corruption Croatia Turkey
Index, El Salvador
Colombia Ghana Romania
2007 Peru Brazil Mexico China India
Senegal
Panama Thailand Tanzania

Argentina
Egypt
Moldova Guatemala Uganda
Nicaragua Ukraine
Vietnam
Philippines Honduras
Pakistan Cameroon
High Cote d’Ivoire
Russia Indonesia
Zimbabwe Kenya Nigeria
corruption Kazakhstan
Venezuela Bangladesh
91
-20 -15 -10 -5 0 5 10 15 20
Change in Rank, Global Corruption Report, 2007 versus 2001
Note: Ranks only countries available in both years (91 countries total)
Source: Global Corruption Report, 2008
Indonesia’s Macroeconomic Competitiveness
Action Priorities
• Sustain progress in improving the stability of the political system

and the battle against terrorism
• Intensify the fight against corruption
• Sustain the focus on stable government finances, while enabling
more effective execution of public sector investments
• Create and implement a clear strategy for improving education and
health care, especially the quality of delivery
• Improve the effectiveness of policies to ameliorate poverty, for
example, through a social safety net instead of broad consumption
subsidies
• Continue strengthening the legal system
Microeconomic Competitiveness: Improving the
Business Environment
Context
Contextforfor
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
 Vigorous local competition

– Openness to foreign competition
– Competition laws
Factor
Factor  Local rules and incentives
Demand
Demand
(Input)
(Input) encouraging productivity and
investment
Conditions
Conditions
Conditions
Conditions
– e.g. incentives for investment,
intellectual property protection,
 Access to high quality business corporate governance standards Demanding and sophisticated local
inputs customers and needs
– Human resources – e.g., Strict quality, safety, and
– Capital availability environmental standards
Related
Relatedand
and – Consumer protection laws
– Physical infrastructure
Supporting
Supporting
– Administrative infrastructure (e.g.
registration, permitting, Industries
Industries
transparency)
– Scientific and technological  Availability of suppliers and supporting
infrastructure industries
• Many things matter for competitiveness

• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing
Ease of Doing Business
Indonesia, 2009
Ranking, 2009
(of 183 countries)
Favorable Unfavorable
180
Median Ranking, Asia and

160 Pacific Region
140
120
Indonesia’s per capita GDP rank: 101
100
80
60
40
20
0
Ease of Protecting Trading Dealing Registering Getting Paying Closing a Enforcing Employing Starting a
Doing Investors Across with Property Credit Taxes Business Contracts Workers Business
Business Borders Licenses
Source: World Bank Report, Doing Business (2009)

Indonesia’s Business Environment
Critical Strengths and Weaknesses
STRENGTHS WEAKNESSES
• Solid basic skills and a large available • Weak logistical and communication
workforce infrastructure
• Promising reforms of rules and • Unreliable electricity supply
regulations affecting business • Labor market rigidity
– Top Asian reformer in 2010 World Bank Doing
Business ranking
• Regulations and customs procedures
remain complex
• Solid financial system
• Limited depth in the financial system
• Greater formal opening of the economy
to trade and investment • Weak educational quality
– New Investment Law passed in 2007 • Legal system uncertainty for investors,
• Wide array of potential clusters, especially at the provincial level
especially in natural resources-related • Dominance of large business groups
fields and state-owned enterprises
• Weak cluster collaboration and
development
• Lack of advanced skills
• Weak science and technology system
Indonesian Business Environment
Action Priorities
• Continue progress on regulatory reforms

• Improve logistical infrastructure
• Improve communications infrastructure
• Improve the quality of electricity supply
• Reduce rigidities in the labor market
• Reform customs procedures and continue the process of opening to
international trade and investment
• Increase domestic competition, including limits on dominant domestic
market positions
• Create stronger institutions to disseminate management best
practices and support the adoption of new technologies
Microeconomic Competitiveness: Cluster Development
Tourism Cluster in Cairns, Australia
Public
Public Relations
Relations && Local
Local retail,
retail,
Market
Market Research
Research Travel health
health care,
care, and
and
Travel agents
agents Tour
Tour operators
operators
Services
Services other
other services
services
Food
Food Local
Local
Suppliers
Suppliers Attractions
Attractions and
and Transportation
Transportation
Restaurants Activities
Activities
Restaurants e.g.,
e.g., theme
theme parks,
parks,
casinos,
casinos, sports
sports
Property
Property Souvenirs,
Souvenirs,
Services
Services Duty
Duty Free
Free
Airlines,
Airlines,
Hotels
Hotels Banks,
Banks,
Maintenance
Maintenance Cruise
Cruise Ships
Ships
Foreign
Foreign
Services
Services Exchange
Exchange
Government
Government agencies
agencies Educational
Educational Institutions
Institutions Industry
Industry Groups
Groups
e.g.
e.g. Australian
Australian Tourism
Tourism Commission,
Commission, e.g.
e.g. James
James Cook
Cook University,
University, e.g.
e.g. Queensland
Queensland Tourism
Tourism
Great Barrier Reef Authority
Great Barrier Reef Authority Cairns
Cairns College of TAFE
College of TAFE Industry Council
Industry Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
Chilean Wine Cluster
Relatedand
Related and = Strong domestic capacity
Specialized
Specialized
Supported
Supported = Moderate domestic capacity financing
financing
Industries
Industries = Weak domestic capacity
Barrels
Barrels
Government
Government
(tradepromotion
(trade promotionoffices,
offices,
Irrigation
Irrigation Bottles
implementationofofstandards,
implementation standards, Bottles
technology
technology export/import/FDIpolicies)
export/import/FDI policies)
Plastics/ /
Plastics
Grapestock
Grapestock Tetrapacks
Tetrapacks
Fertilizer, Growers/ /
Growers Wineries/ /processing
Wineries processing
Fertilizer, Corks
Corks
pesticides, vineyards
vineyards facilities
facilities
pesticides,
herbicides
herbicides
Labels
Labels
Grape
Grape
harvesting
harvesting Educational,research,
research,and
andtrade
trade
Educational, Publicrelations
relations
equipment
equipment organization
organization Public
andadvertising
and advertising
Agriculture Cluster Tourism Cluster Specialized

Specialized
Agriculture Cluster Tourism Cluster
publications
publications
Food Cluster
Food Cluster
Export
Export
Pisco Cluster
Pisco Cluster promotion
promotion
Source:Sources:
ResearchBased on diagram
by HBS studentby Alexander,
team Arney,Judd
(Asier Alea, Black, Frost, Shivananda,
Belstock, takenJacqueline
Don Lambert, from ‘On Competition’,
O’Neill, NoahMichael Porter,
Sawyer), 2003
2005
Clusters as a Tool For Economic Policy
• A forum for collaboration between the private sector, trade

associations, government, educational, and research institutions
• Brings together firms of all sizes, including SME’s
• Creates a mechanism for constructive business-government
dialog
• A tool to identify problems and action recommendations
• A vehicle for investments that strengthen multiple
firms/institutions simultaneously
• Fosters greater competition rather than distorting the market
Clusters and Policy Implementation
Science and Technology
Education and Investments
Workforce Training (e.g., centers, university
departments, technology
Management Training transfer)
Standard setting and

Business Attraction quality initiatives
Clusters
Export Promotion Environmental
Stewardship
Market Information Natural Resource

and Disclosure Protection
Physical
Infrastructure
• Clusters provide a framework for implementing public policy and

organizing public-private collaboration to enhance competitiveness
Indonesian Clusters
• Indonesia has potential strengths in a wide array of clusters,

including agriculture, tourism, forest products, coal, oil and gas, and
forms of mining
Indonesia’s National Cluster Export Portfolio
1997 to 2007
2.5%
Change In Overall World
Fishing and Fishing Products Coal and Briquettes
Export Share: +0.034% (5.35%, 12.36%)
Footwear
Agriculture Products
2.0%
Indonesia’s world export market share, 2007
Forest Products
Furniture Apparel
Building Fixtures and Equipment (-3.76%) Textiles Plastics

1.5% Tobacco
Oil and Gas

Metal, Mining and Manufacturing
1.0%
Entertainment Chemical Products
Construction Materials
Motor Driven Products
Leather and Related Products Communication Services
Average World Export
Publishing and Printing
Share: 0.79% Construction Services Lighting and Electrical Equipment
Sporting, Recreational and Children's Goods Marine Equipment
0.5% Communications Equipment Processed Foods
Prefabricated Enclosures and Structures Transportation and Logistics
Jewelry, Precious Metals and Collectibles Heavy Machinery
Business Services IT Production Technology
Analytical Instruments Automotive
Biopharmaceuticals Aerospace Vehicles and Defense
Financial Services
0.0%
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
Change in Indonesia’s world export market share, 1997 to 2007
Exports of US$4.2 Billion =
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business
20090928Richard
School; – Indonesia PresidentProject
Bryden, visit (handouts).ppt 25
Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. Copyright 2009 © Professor Michael E. Porter
Indonesian Clusters
• Indonesia has potential strengths in a wide array of clusters,

including agriculture, tourism, forest products, coal, oil and gas, and
forms of mining
• Indonesia’s emerging clusters are heavily based on the country’s
abundant natural endowments, with few activities in related and
supporting industries
• The National Industrial Policy approved in 2008 identifies priority
sectors, but there is no effective cluster development effort
• Existing cluster related efforts suffer from weak coordination across
ministries and agencies
Share of World Exports by Cluster
Indonesia, 2007
Strong
Stronger Fishing & Textiles

Fishing Entertainment
Prefabricated
Strongest Products Hospitality
Enclosures
& Tourism
Agricultural
Products
Transportation Furniture
& Logistics Building
Distribution Aerospace Fixtures, Construction
Services Vehicles & Equipment & Materials
Information Defense Services
Tech. Processed
Lightning & Heavy
Jewelry & Business Construction Food
Services Analytical Electrical
Precious Services
Education & Instruments Equipment
Metals Forest
Knowledge Medical Power
Creation Generation Products
Financial Devices Communi-
Services cations
Publishing
& Printing Equipment
Biopharma- Heavy
ceuticals Machinery
Motor Driven Production
Chemical Products Technology
Apparel
Products Tobacco
Leather & Oil & Automotive
Related Gas Aerospace Mining & Metal
Products Plastics Engines Manufacturing
Footwear
Sporting Marine
& Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
Indonesian Clusters
Action Priorities
• Adopt cluster development as a central approach for organizing the

government’s business development efforts
• Utilize cluster initiatives as a tool to engage the private sector in more

effective collaboration with government at the national and regional
level
• Use clusters to organize export promotion and FDI attraction
Geographic Influences on Competitiveness
Neighboring
Neighboring Countries
Countries
Nation
Nation
Regions
Regions and
and Cities
Cities
Specialization by Traded Clusters
U.S. States, 2006
Oregon
Oregon
Agricultural South
SouthDakota
AgriculturalProducts
Products Dakota
Prefabricated Heavy
HeavyMachinery
PrefabricatedEnclosures
Enclosures Machinery Maine
Maine
Forest Sporting,
Sporting,Recreational
ForestProducts
Products Recreational Illinois
Illinois Forest
ForestProducts
Products
Analytical and
andChildren's
Children'sGoods
AnalyticalInstruments
Instruments Goods Biopharmaceuticals
Biopharmaceuticals Aerospace
AerospaceEngines
Engines
Financial
FinancialServices
Services Lighting
Lightingand
andElectrical
ElectricalEquipment
Equipment Communications
CommunicationsEquipment
Equipment
Processed
ProcessedFood
Food Heavy Machinery Hospitality
Heavy Machinery Hospitalityand
andTourism
Tourism
Metal
MetalManufacturing
Manufacturing
Idaho
Idaho
Agricultural
AgriculturalProducts
Products
Information
InformationTechnology
Technology
Prefabricated
PrefabricatedEnclosures
Enclosures
Furniture Kentucky
Kentucky
Furniture
Forest Automotive
ForestProducts
Products Automotive
Plastics
Plastics
Construction
ConstructionMaterials
Materials
Nevada Transportation
Transportationand
andLogistics
Logistics
Nevada
Leather
Leatherand
andRelated
RelatedProducts
Products
Heavy
Heavy ConstructionServices
Construction Services
Hospitality
Hospitalityand
andTourism
Tourism
Transportation
Transportationand
andLogistics
Logistics South
SouthCarolina
Carolina
Textiles
Textiles
Forest
ForestProducts
Products
Automotive
Automotive
Production
ProductionTechnology
Technology
Alaska
Alaska Colorado
Colorado Mississippi
Fishing
Fishingand
andFishing
FishingProducts
Products Mississippi
Oil
Oiland
andGas
GasProducts
Productsand
andServices
Services Furniture
Power
Power Generationand
Generation andTransmission
Transmission Furniture
Medical Devices Fishing
Heavy
HeavyConstruction
ConstructionServices
Services
Medical Devices Fishingand
andFishing
FishingProducts
Products
Aerospace
AerospaceVehicles
Vehiclesand
andDefense Power
Hospitality
Hospitalityand
andTourism
Tourism
Defense Power Generationand
Generation andTransmission
Transmission
Entertainment Motor
Entertainment MotorDriven
DrivenProducts
Products
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.
Indonesia’s Provinces
Source: Wikipedia, Provinces of Indonesia
• Indonesia’s provinces are geographically dispersed and culturally diverse

• Indonesia’s population is becoming increasingly urban
• Weak infrastructure has limited internal trade and specialization and made
it difficult to access Indonesia’s large national market
• Decentralization in government has led initially to inefficiency and
corruption
Indonesia’s Provinces
GDP per Capita, 2007 Divergent Performance
(Constant Market Prices,
2000, Million Rupiah)
Rp20
Kalimantan Timur (2.25%, Rp39.84) DKI Jakarta Rp39.69) Kepulauan Riau (Rp28.96)
Riau
Rp15
Kalimantan Tengah Weighted Indonesian

Kepulauan Bangka Belitung
Rp10 Banten Jawa Timur Average: Rp9.41
Naggroe Aceh Darussalam (-5.23%)
Papau (-2.27%) Kalimantan Selatan Sumatera Utara
Sumatera Selatan Jawa Barat
Bali Papua Barat
Kalimantan Barat Sumatera Barat
Dl. Yogyakarta Sulawesi Tengah
Sulawesi Utara Jambai
Rp5 Sulawesi Selatan Jawa Tengah Sulawesi Tenggara
Lampung
Sulawesi Barat Bengkulu
Nusa Tenggara Barat
Maluku Maluku Utara
Nusa Tenggara Timur Gorontalo
Weighted Indonesian Average: 4.82%

Rp0
3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
Growth of GDP per Capita (Constant Market Prices, 2000), CAGR 2003 to 2007
Note: Since population only available for 2000, population held constant when calculating per capita levels.
Indonesian Provinces
Action Priorities
• Strengthen logistical and communications infrastructure linking the
provinces to expand trade, encourage economic specialization, and
open internal competition
• Reduce internal administrative and policy barriers to inter-provincial

trade and investment
• Improve the capabilities of provincial governments to improve policy

formulation and implementation, and to reduce corruption
• Support provinces in creating distinctive economic strategies
• Create rules that limit destructive competition among provinces for

investments, such as large subsidies
• Create a structure and incentives to align and harmonize national and

provincial policies
Geographic Influences on Competitiveness
Neighboring
Neighboring Countries
Countries
Nation
Nation
Regions
Regions and
and Cities
Cities
Economic Integration with Neighboring Countries
South East Asia
• Economic coordination among neighboring countries can significantly enhance

competitiveness
Economic Strategy For Cross-National Regions
Traditional View
• Regions as free trade zones
Emerging View
• Regional strategy as a powerful tool to enhance competitiveness
across countries
– Expand trade and investment within the region
– Attract more foreign investment to the region
– Capture synergies in improving the business environment
– Accelerate the rate of domestic policy improvement
– Enhance interest and investment in the region by the international
community
Economic Coordination Among Neighbors
Capturing Synergies
Factor
Factor Context
Contextfor
for Related
Relatedand
and Regional
Regional
Demand
Demand Macroeconomic
Macroeconomic
(Input) Strategy Supporting Strategy
Strategy&&
(Input) Strategy Conditions Supporting Competitiveness
Conditions and Conditions Competitiveness Governance
Conditions andRivalry
Rivalry Industries
Industries Governance
• Improving regional • Eliminating • Harmonizing • Facilitating cross- • Coordinating • Creating a

transportation trade and environmental border cluster programs to regional strategy
infrastructure investment standards upgrading, e.g. improve public and marketing
barriers within safety program
• Enhancing regional • Harmonizing – Tourism
the region
communications product safety • Coordinating • Sharing best
– Agribusiness
and connectivity • Simplifying and standards macro-economic practices in
harmonizing – Transport & policies government
• Creating an efficient • Establishing
cross-border Logistics operations
energy network reciprocal
regulations and
consumer – Business • Creating regional
• Linking financial paperwork
protection laws services institutions
markets • Coordinating – Dispute
anti-monopoly • Opening resolution
• Harmonizing
and fair government mechanisms
administrative
competition procurement – Regional
requirements for
policies within the region development
businesses
bank
• Opening the
movement of • Developing a
students for higher regional position
education with international
organizations
Indonesia and ASEAN
• ASEAN has set ambitious policy goals but there is limited

implementation
• ASEAN’s agenda is focused on a reciprocal trade liberalization,
rather than upgrading regional competitiveness
• ASEAN is moving too slowly towards greater economic
integration
• Indonesia has played a largely passive role in ASEAN

• Indonesian firms have been slow to penetrate regional markets
• Indonesia can be a leading force in driving ASEAN forward
Developing an Indonesian Economic Strategy
National
NationalValue
ValueProposition
Proposition
• What is the unique competitive position of

Indonesia given its location, legacy, endowments, and
potential strengths?
• What is Indonesia’s value proposition for business?
• In what clusters can Indonesia excel?
• What role can Indonesia play in its region?
Developing
DevelopingUnique
UniqueStrengths
Strengths Addressing
AddressingCrucial
CrucialConstraints
Constraints
• What are the key strengths that • What weaknesses must be addressed to
Indonesia must build upon? achieve parity with peer countries?
• An economic strategy requires rigorous prioritization and sequencing
Toward an Indonesian Economic Strategy
Unique Strengths Implications
• Significant natural resources Political and Legal Stability

• Pluralistic, diverse society increasingly
embracing democratic principles
Human Development
• Creative and energetic workforce
• Large domestic market with a growing
number of urban consumers Infrastructure
• Complex geography with thousands of
islands and long distances
Regulatory Reforms
• A central location in Asia, with
proximity to numerous foreign markets
Trade, investment and Regional integration
Cluster Development
Government Effectiveness and Organization
Organizing for Competitiveness
• Sustained improvements in competitiveness require coordination

among many parts of government
– Across different ministries to align all the policies that affect clusters
or aspects of competitiveness
– Across geographic levels of government
• Improving competitiveness requires collaboration with the private

sector
– Public-private dialogue to identify competitiveness priorities and
implement solutions
• While Indonesia has made progress on advancing competitiveness

policies at the national level, policy coordination within
government with the private sector remains a challenge
Organizing for Competitiveness
Action priorities for Indonesia
• Create a strategy unit in the Office of the President
• Strengthen the coordinating structure within the national

government
• Create a public-private National Council on Competitiveness

to build consensus on an overall economic strategy and track
implementation
• Foster Provincial Competitiveness Councils to drive

consensus on provincial plans, involving representatives from
both public and private sector and participation by the national
government
Agenda for the Second Term
• Improving macroeconomic foundations

– Intensify the fight against corruption
• Upgrading the business environment
• Clusters development
• Provincial economic development
• Economic coordination with neighboring countries
• National economic strategy
• Organizing for competitiveness

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Improving Indonesia’s Competitiveness

Presentation to President Susilo Bambang Yudhoyono

Professor Michael E. Porter

• Improving macroeconomic foundations

• Upgrading the business environment

• Provincial economic development

• Economic coordination with neighboring countries

• National economic strategy

• Organizing for competitiveness

$18,000 Poland Latvia

Source: EIU (2009), authors calculations

14% Improving Tunisia Deteriorating

Asian countries Albania Jordan Iran

Papua New Guinea

Source: EIU (2008), authors’ analysis

3.5% Processed Goods

Papua New Guinea Cambodia Georgia

Source: UNCTAD, World Investment Report (2009)

2.0 South Africa

• Solid growth rates over the medium term

• The second term is the time to move to a more ambitious economic

• Only competitive businesses can create sustainable jobs and attractive

Quality of the Sophistication

• Indonesia has made significant progress solidifying and improving

Panama Thailand Tanzania

• Sustain progress in improving the stability of the political system

 Vigorous local competition

• Many things matter for competitiveness

Median Ranking, Asia and

Source: World Bank Report, Doing Business (2009)

• Continue progress on regulatory reforms

Agriculture Cluster Tourism Cluster Specialized

• A forum for collaboration between the private sector, trade

Standard setting and

Market Information Natural Resource

• Clusters provide a framework for implementing public policy and

• Indonesia has potential strengths in a wide array of clusters,

Building Fixtures and Equipment (-3.76%) Textiles Plastics

Oil and Gas

• Indonesia has potential strengths in a wide array of clusters,

Stronger Fishing & Textiles

• Adopt cluster development as a central approach for organizing the

• Utilize cluster initiatives as a tool to engage the private sector in more

• Use clusters to organize export promotion and FDI attraction

Source: Wikipedia, Provinces of Indonesia

• Indonesia’s provinces are geographically dispersed and culturally diverse

Kalimantan Tengah Weighted Indonesian

Weighted Indonesian Average: 4.82%

• Reduce internal administrative and policy barriers to inter-provincial

• Improve the capabilities of provincial governments to improve policy

• Support provinces in creating distinctive economic strategies

• Create rules that limit destructive competition among provinces for

• Create a structure and incentives to align and harmonize national and

• Economic coordination among neighboring countries can significantly enhance

• Improving regional • Eliminating • Harmonizing • Facilitating cross- • Coordinating • Creating a

• ASEAN has set ambitious policy goals but there is limited

• Indonesia has played a largely passive role in ASEAN

• What is the unique competitive position of

• An economic strategy requires rigorous prioritization and sequencing

Unique Strengths Implications

• Significant natural resources Political and Legal Stability

Government Effectiveness and Organization

• Sustained improvements in competitiveness require coordination