Opportunities for Indonesia’s Services Sector: The Time is Now 

In the previous interview, Tom Lembong shared about how the services sector serves as an engine for growth for Indonesia in the wake global competitiveness. He goes on to expand on those points here with specific illustrations.

IEF: You have been, I think, one of President Jokowi’s deepest economic thinkers. You’ve helped to shape the current economic policy which led to the stable growth that we’ve had over the past 5 years. Looking ahead of the next 5 years, what is the outlook for the overall economy? And where do you think business and investors should be focusing on?

Tom: Let’s start at the most basic-level. Clearly the relocation of supply chains out of China to around the world is a natural course which would happen even without the threat of the trade war, because the Chinese labor force started contracting around 2013 and continues contract every year due to demographics and in particular, the one child policy.

So I think we’ll see continual relocation and for this reason, I expect a revival in demand for Industrial estates in Indonesia.

All those labor-intensive low-technology factories that China took away from us 25 years ago, is now coming back because China is moving on and upgrading to more high-tech industries and to more high-value services.

China will evolve from being a manufacturer to being a factory investor. Many of those factories relocating from China will still be Chinese-owned. So they will still collect dividends on those factories – it’s so much more high value being an investor than a manufacturer.

With this, there is also a continuing rise of hundreds of millions from the lower-middle class in China, in India, in Southeast Asia, and around the world.

One of the first things people do when they’re in the middle class is to travel. So, we fully expect travel tourism to continue to boom. Even if there is fear of a global slowdown or recession, there is still a lot of income growth momentum in emerging markets as people just want to travel.

What are the implications for Indonesia?

I think we’re already starting to reap the benefits of President Jokowi’s massive infrastructure building program from his first 5-year term. There are more high-rise buildings now in more places that are more conveniently accessible thanks to the President’s airport upgrades.

We also get more farmers that use to take 10 days to get from farm to table, now within  2 days with the new highways and new transport linkages in place.

The President announced that in the second 5-year term, our focus will shift to human capital.

The World Economic Forum ranks Indonesia 45 out of 140 countries in terms of overall competitiveness. We scored very high for market size – 8 out of 140 countries and came in very high for business dynamism, ranking 30 out of 140. Conversely, we always score low for skill and very low for health.

Calculations will show that because of this gap in public health and in public skills, any 1 dollar invested in those deficiencies will have a very high return on investment. Even a small improvement will probably generate huge multiplier effects for productivity.

In the past, we were suffering infrastructure deficits but it’s been increasingly obvious that we’re suffering from skill shortages and public health gaps today. So addressing those I believe will have very high returns of investment.

IEF: Right. And those sectors would it be open to foreign investors going forward?

TL: We’ve already announced that we will open the university sector – 67% for Marja Pulau outside the special economic zones, and 100% for those inside the special economic zones (SEZ). We could even have one in downtown Jakarta, if you want…

IEF: So this will be foreign universities able to setup full campuses here….

TL: Correct. And I think that it’s inevitable that we will similarly deregulate hospitals and clinics. In the same way we send our students abroad for education, we also send billions of dollars per year overseas every year for medical care. We go to Panang or Kuala Lumpur and rich, to Singapore. So if we could potentially claw back a portion of that, it would save the outflow of billions of rupiahs, and bring in more investment and jobs and domestic economic activity, plus public health as a whole improves as we benefit from high quality institutions which will create an alumni of doctors and nurses – offering a trickle-down effect from the leading  institutions to all the way down to the smallest clinic.

So opening up those sectors (internationalization), with fewer restrictions will trigger mini-booms in those narrow segments that will over time spill over into larger booms – to adjacent sectors and supporting industries.

IEF: And that in fact that would improve Indonesia’s economic competitiveness not just in the long-run but also in the near future right?

TL: Yes, because it would immediately start saving hard currency – a modern day version of import substitution. If our students can complete a portion of their 4-year programme for example inside the country and only have to go abroad for a year or a year and a half of their 4-year programme – that will immediately start saving hard currency.

IEF: Yes, and it might actually attract foreign students to come to Indonesia…

TL: Correct. Australia – one of the countries most “open” to immigration are at the maximum of immigration and foreign student inflow. But demand continues for an Australian education in higher education. So one way they can address that is by starting to build overseas campuses to for continuing growth without having to open up further what is already a very high immigrant and foreign student inflow.

People have approached me about attracting international students from the Middle East to attend universities here. Because we’re a Muslim country, there seems to be sensibility and affinity – the best of both worlds. They would be able to come to school in a Muslim country where all the restaurants serve halal food, and still get the Australian diploma.

So yes, and there’s an existing success story like that – namely Malaysia. They opened up to International universities 15 years ago, and apparently today they pull in something like 120 to 140 thousand international students every year. So can you imagine the amount of hard currency Malaysia earns from hosting all those international students every year.

IEF: Thank you very much for joining us at the Indonesia Economic Forum and sharing with us areas where you believe Indonesia can thrive in the global competitive era.