What is Indonesia's Outlook If It Shifts Capital



Indonesia recently announced that pending parliamentary approval, it is moving its capital from Jakarta to an area near the existing urban centres of Balikpapan and Samarinda in Kalimantan on Borneo island. By around 2024, the Government expects to start moving some of its 1.5 million civil servants to the new bureaucratic centre.


A reason is that the land of Jakarta is sinking. Poor urban planning on land that was swamp, along with the unregulated draining of aquifers, has left 40% of Jakarta under sea level.


The greatest challenge is that environmentalists are unhappy with the move of capital to Kalimantan. They have raised concerns on the impact of the new city on nature on the forests and wildlife and the resulting pollution. Kalimantan is currently almost untouched.


The Government is currently conducting a strategic environmental study. The study is to ensure that the construction of the new city doesn’t entail the destruction of rainforests. It is expected to complete in November this year.


 

Growth is expected to intensity in Kalimantan


There is imbalance of growth among regions in Indonesia. Jakarta is located on Java island which is currently home to 60% of Indonesia's population and more than half of its economic activity.


Kalimantan, Indonesia New Capital, Borneo, East Kalimantan
East Kalimantan is currently largely untouched (Source: Asian Nikkei Review)

Kalimantan is almost four times bigger than Java island, but accounts for less than a tenth of gross domestic production. Despite presence of a few major cities, its population density is 38 times lower than that of Java.


It is currently home to major mining activities as well as rainforests. It is one of the few places on Earth with orangutans in their natural habitat.


 

The new capital is intended to be a Smart City


The President announced that Indonesia’s new capital city will be modeled on Silicon Valley, a base for tech and creative companies, besides hosting the government apparatus.


Silicon Valley (Source: Brookings Institution)

Authorities have identified about 180,000 hectares of land in East Kalimantan, the center of government will require only about 10,000 hectares and about 30,000 hectares will be put up for sale to individuals and companies at a fraction of the price it costs in Jakarta.


Currently, there is little to no infrastructure in the area. It contains lushgreen forest. Thus, developing the area within five years requires a mammoth effort and will be very costly. The city planning needs to be proper, otherwise the new capital may end up like Jakarta and will need to shift again.


Human capital is also scarce in Kalimantan, thus it needs to attract talent from other cities/ places to the area. Talent is crucial to make a smart city a success. But, attracting talented individuals to the area will not be easy, as there is lower economic competitiveness in Kalimantan as compared to Java island.


 

Cross-border activities may increase between Indonesia, Malaysia (Sabah and Sarawak) and Brunei


Currently, there are informal cross-border activities that takes place through a 'Weekend Market' in the city of Serikin. There is no formal Checkpoint of Immigration and Quarantine that exists in Serikin. Indonesian traders and Malaysian consumers gather on weekends to carry out transactions.


We expect that there will not be much impact on formal cross-border activities in the short-run (that is in the next five years) with the shift in capital. It is difficult to tell for the long-run. Future growth will depend on the development of the new capital city and surrounding areas (especially establishment of industries).


If most factories or economic activities continue to be concentrated on Java island, cross-border activities will not grow significantly in Kalimantan over the long-term.


 

Jakarta is congested, but growth is not likely to happen overnight in the new capital. Economic and financial activities will continue to take place in Jakarta.


It requires huge Government effort and focus to bring growth to the new capital if parliamentary approval is obtained. In our view, Indonesia's re-location of capital will have minimal impact on companies and economy in the short-term.


This is similar for example, in Myanmar. Myanmar shifted its capital city from Yangon to Naypyitaw in 2005. Yet, after 14 years, economic activities still very much remain in Yangon. This is due to its strategic location, existing businesses and infrastructure. There are much fewer activities in Naypyitaw besides hosting the Government offices.



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References


The Guardian, Indonesia announces site of capital city to replace sinking Jakarta, https://www.theguardian.com/world/2019/aug/26/indonesia-new-capital-city-borneo-forests-jakarta, published on 26 August 2019


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