Indonesia Can Bridge Differences in the Infrastructure ‘Cold War’

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Indonesia Can Bridge Differences in the Infrastructure ‘Cold War’

Indonesia can create a model for the infrastructure dilemma: how to utilize resources on offer while managing geopolitical risks.

Indonesia Can Bridge Differences in the Infrastructure ‘Cold War’
Credit: CEphoto, Uwe Aranas

Indonesia’s infrastructure challenges are significant and unique, but there has never been a better time to tackle them. Its infrastructure needs encompass everything from those of a sprawling metropolis like its capital city Jakarta, all the way down to the most basic needs of a remote island. Highways, toll roads, seaports, airports, mass transit, telecommunications, and power generation all fall under this broad category. Indeed, the vast infrastructure needs of the archipelago are unlike those of any other country in the Indo-Pacific region. Perhaps most significantly of all, Indonesia’s economy cannot continue to grow without filling its infrastructure gap.

The infrastructure gap has held back Indonesia’s economic development for long enough, and solving this problem has had no champion more enthusiastic and active than its recently re-elected president Joko “Jokowi” Widodo. While his policy is founded on the domestic prerogatives for closing the gap, it has taken on an increasingly international element.

The infrastructure gap is not Indonesia’s problem alone; it is one endemic to the region. Lack of infrastructure and the other problems it causes, such as bad connectivity and high transportation costs, have emerged as one of the biggest barriers to trade in the Indo-Pacific region. The bill to fill Indonesia’s infrastructure gap is gigantic on its own, with one estimate placing it at $500 billion of needed investment per year until 2022.

Governments in the region have responded to the problem by establishing a number of new infrastructure and connectivity initiatives. These initiatives available to Indonesia take a variety of forms. Some are national programs led by major countries; these include China’s Belt and Road Initiative (BRI), Japan’s Partnership for Quality Infrastructure (PQI), and the United States’ International Development Finance Corporation (IDFC). Another source of much-needed capital and technical assistance are the multilateral development banks (MDBs). The World Bank and the Asian Development Bank have long worked on infrastructure development in the region, while the China-led Asian Infrastructure Investment Bank (AIIB) is a newcomer. There are of course many others. To address its infrastructure gap, Indonesia is going to have to draw on all of them.

While the whole country needs infrastructure investment, Indonesia has nonetheless identified a number of economic corridors in which it would like to see more infrastructure projects funded. These corridors include underdeveloped and isolated provinces like North Kalimantan and North Sulawesi. They also include North Sumatra, where the Indonesian government promotes the province’s spectacular Lake Toba as an emerging tourist destination, and the established tourism hub of Bali.

Indonesia is tacking its infrastructure gap at the same time that this issue has become a new front in the region’s geopolitical rivalries. Countries are using their initiatives to achieve geostrategic objectives and compete with each other for influence. China’s BRI has become the most controversial. It is criticized for deploying loans as a tool to gain diplomatic advantage through saddling smaller countries with “debt traps.” Reinforcing this competitive narrative, media and analysts often frame the PQI and IDFC as an effort for Japan and the United States to provide alternatives to the BRI.

As tension between the United States and China builds and both powers wield economic policy as a weapon, this “infrastructure cold war” shows no sign of abating. Indonesia now finds itself trapped in the midst of this competition. While it has skilfully avoided becoming a “battleground,” its strategic position in the Indo-Pacific region and its own infrastructure needs mean it will not be able to avoid the geopolitics.

While Indonesia is unlikely to fall into “debt traps” like other Indo-Pacific countries, its early engagement with the BRI has revealed some less obvious problems. Complications with the Jakarta-Bandung high-speed rail project illustrate the risks of pitting two countries in a bidding war, in this case, Japan and China. China eventually outbid Japan by promising extraordinary lending rates and unrealistic timelines for construction. Despite its status as the flagship BRI project in Indonesia, the high-speed railway has nonetheless suffered delays, much to the consternation of Indonesian policymakers.

However, another opportunity exists between Indonesia’s needs and its strategic location in the Indo-Pacific, affording it the opportunity to link some of these seemingly competing initiatives through complementary and synergistic projects. This is perhaps the best way to manage the geopolitical contests surrounding these initiatives.

For example, linking the financial resources of national programs like the BRI, PQI, and IFDC with the technical expertise of development banks (like the Asian Development Bank) and dialogues designed for intergovernmental cooperation will ensure projects are successful. Indonesia can offer infrastructure projects designed to encompass the different initiatives, which each contribute capital, expertise, and dialogue.

Already the AIIB is working closely with the World Bank to deliver projects in Indonesia. Another possible combination is using the AIIB to disburse funding for BRI projects, where they will have to be approved by AIIB board members who represent its member countries. Matching initiatives to projects based on their strengths and also integrating projects that different initiatives are developing simultaneously is another method to ensure valuable projects are delivered. Encouraging cooperation between them will help lead to outcomes.

As tensions escalate in the region, Indonesia finds itself in a strong position to guide relations, by promoting collaboration between initiatives. It may be that Indonesia can create a model for other countries grappling with the same infrastructure dilemma: how to utilize the resources these initiatives have to offer while managing the geopolitical risks.

No matter how Indonesia chooses to tackle its infrastructure gap, there must be progress on the issue for the nation’s development to continue. With 250 million people, over 60 million of them between the ages of 16 and 30, and one of the fastest growing economies in Southeast Asia, newly re-elected President Jokowi and his administration have another five years to both implement domestic programs and to navigate how regional programs can be coordinated for Indonesia’s benefit. Indonesia has both a unique challenge, and a unique time in history to promote regional cooperation across the Indo-Pacific.

Kyle Springer is a Senior Analyst at the Perth USAsia Center.