Biden Can Learn from Indonesia’s Infrastructure Experience – Analysis
By Ronny P. Sasmita
US President Joe Biden unveiled a roughly $2 trillion jobs proposal focused on infrastructure and the climate crisis in a speech in Pittsburgh last Wednesday, stressing his support for labor unions and his hope that such investments would lift the middle class. The president’s next major legislative push, the American Jobs Plan, would heavily invest in rebuilding the nation’s crumbling infrastructure and shift to greener energy sources over the next eight years. Biden plans to pay for his proposal by raising corporate taxes and eliminating tax breaks on fossil fuels, which was one of his core campaign promises. According to the White House, this tax hike would raise more than $2 trillion over the next 15 years
In re-building US infrastructure networks, Joe Biden can learn from the experience of Indonesia, a country that has seen average consumer goods rise by 27-30% and imports of capital goods and auxiliary raw materials recording similar spikes despite massive infrastructure investments as per Jokowi’s platform. In other words, infrastructure investment is indeed not simply a straight line to an increase in national productive capacity, and as such – intermediary policies must be deployed in a strategic manner.
Toll roads or highways, for instance, don’t necessarily help increase the production of Indonesia main commodities, because such investments neglect to address the production side of the equation. A new port does not automatically mean more exports because said production does not necessarily increase. Similarly, chilies planted by farmers do not necessarily yield sixfold because the government builds new rural infrastructure. The same can be said for onions, rice, grain, corn, sugar cane, and manufacturing products.
The thesis is quite clear: if the mode of domestic production is not addressed, infrastructure can actually become a “curse” for domestic productive capacity. Should reworked distribution channels actually increase the competitiveness of imported goods to the country by lowering their distribution costs, it could erode the competitiveness of domestic production.
Therefore, if US policymakers are not careful, they will just increase the market appeal of imported products, especially from China, whose prices are very competitive globally.
Just look at village inflation in Indonesia for a telling example. The Central Bureau of Statistics repeatedly asserted that village inflation was often high because of exposure to consumer goods from cities. This suggests that infrastructure unfortunately paves the way for imported products to enter remote villages. In other words, if the capacity of the community, the capacity of human resources, and institutional capacity, at the remote level does not participate in the upgrade of productive capacity, then the market for the products that distribution costs discounted will be greater, even to the full geographical extent of Indonesia.
Moreover, the low inflation that the Jokowi administration is proud of has also played down the “dignity” of the country’s own domestic goods. Onion farmers shout at the government while they self-congratulate on low inflation. In Brebes and in Alahan Panjang, West Sumatra, onion farmers are forced to release their product at below-market prices. The same will be experienced by other domestic producers as low inflation crushes those who cannot compete with imported goods, whose transportation is now further facilitated by new infrastructure.
Generally, there is nothing wrong with infrastructure projects so long as the capacity and governance of domestic production is also developed, thus allowing for domestic production to take advantage of new avenues of distribution. So, what’s the problem? In the perspective of political economy, infrastructure is a project. It could have been built without being linked to the interests of increasing national production, instead being linked to the interests of “project rent.”
Take a look at Indonesia’s SOE data. It shows that, first, infrastructure projects actually become a market for various foreign financial products, which are ultimately shouldered by SOEs. According to S&P data, the average debt of 20 of Indonesia’s SOEs is 4.5 times EBITDA. Then there’s the construction SOEs with 6.5 times EBITDA worth of debt.
Second, infrastructure projects become markets for imported capital goods and their supporting raw materials. That’s why the increase in imports of two materials (steel and cement) is dramatic in the case of Indonesia. Unfortunately, production from the country’s domestic steel SOEs is in terminal decline. About 90 percent of Indonesia imports for infrastructure projects are capital goods and supporting raw materials. Thus, the central contradiction faced by Indonesia is that export-oriented domestic production is reliant on an increase in capital goods and raw materials from abroad.
If the conditions and governance of domestic production are assumed to be “constant” or “moving naturally,” then distribution is facilitated by infrastructure projects; it will not be the domestic producers that receive benefits, but the foreign producers. And the vulnerability of national production capacity is further accentuated by inflation, which suppresses on the supply side. Inventories of staple goods are abundant, no matter where they come from. Thus, domestic products that were previously untouched by government policy are left increasingly unable to compete.
Third, if the capacity and governance of domestic production are not addressed, new infrastructure will increase the competitiveness of imported products as their transportation cost margins are cut. The more dependent Indonesia is on consumer goods, capital goods, and supporting raw materials from abroad at a time of chaotic governance of domestic production, the more vulnerable its economic security will be moving forward. It is only natural that the Indonesian currency would be exposed to the same vulnerabilities.
Lessons learned
What lessons can Joe Biden learn from Indonesia? First, infrastructure projects worth $2 trillion must be funneled into increasing domestic production capacity as well as improving competitiveness. Second, policymakers must ensure that the majority of capital goods for infrastructure projects and labor come from within the country, and are indeed available domestically. And third, financing infrastructure projects with an increase in corporate taxation will not damage the performance and growth prospects of businesses in the coming years. In other words, it must be ensured that infrastructure projects do not undermine the ability of US corporations to absorb a larger workforce at a later date. It also must be ensured that their production doesn’t spur inflation.
On the other hand, in realizing his grand plan, Biden will be trapped by large amounts of new debt and ongoing efforts to pump capital into the system to keep the US economy moving. But the $1.9 trillion dollar stimulus and the $2 trillion job proposal will increase US domestic demand without a commiserate increase in domestic production capacity. Why? Because infrastructure projects are long-term projects, which on the one hand can increase employment (increase in demand) but on the other hand do not guarantee an increase in domestic production capacity down the line.
This will result in two things: firstly, inflation and secondly an increase in the trade deficit, particularly with China, because increased demand will be met by imports. These risks should not be dismissed, as they represent the potential for a new economic crisis in the future. The more inflation increases, the more purchasing power of Americans will be depressed, without being followed by a significant increase in labor absorption and wages. The end result is more stimulus and more debt, which will inevitably bring about an overheating of the economy and inevitable contraction.
The views expressed in this article are those of the authors alone and do not necessarily reflect those of Geopoliticalmonitor.com
