Indonesia’s Riau Islands turn the corner: A deep dive into its post-pandemic emergence and growth

An essential determinant of a region’s resilience to the pandemic is its socioeconomic composition. A recent study by ACI evaluates Indonesia’s Riau Islands’ emergence from the pandemic by tracking the province’s socioeconomic development vis-à-vis the provincial government’s Regional Medium-Term Development Plan (RPJMD). It finds that Riau Islands “emerged relatively unscathed due to its reliance on manufacturing”.

Riau Islands is Indonesia’s closest province to its major trading partners, Singapore and Malaysia. It is situated on one of the world’s busiest shipping routes along the Malacca Strait and the South China Sea. The primary industry of the Riau islands is manufacturing. Owing to the capital-intensive nature of the industry, most of the manufacturing is concentrated in Batam island to leverage its proximity to the financially-developed economy of Singapore, ensuring an easy access to monetary capital.. Over the years, this exclusive focus on Batam has widened the economic gap between Batam and other regions in the province – which is being addressed by the Central government. To diversify Riau’s industrial composition, the Provincial government has taken initiatives to boost the fish and agricultural outputs. However, the province faces several challenges, including limited human capital, minimum technology utilization, and a lack of supporting infrastructure. The upcoming RPJMD for the 2021-2026 period rightly emphasizes optimizing natural resources and improving infrastructure development – the two drivers for post-pandemic recovery. 

To deeply understand the source of Riau’s economic resilience in the face of the pandemic, it is imperative to get a stock of its economic performance. The biggest industry in the region, manufacturing contributes the most to the gross regional domestic product (GRDP). It is closely followed by construction, and mining and excavation. Although total GRDP had been increasing, its growth fell in the wake of the pandemic. As a result, the GRDP growth rate trailed far behind the targets specified in the RPJMD. Inflation has been well below the targets since 2016. Exports have not been able to meet the targets since 2018 despite several export-boosting programs. Both domestic and foreign investors invest the most in mining, manufacturing (transportation vehicles and electronic equipment), and chemistry and pharmacy industries. A wide range of other sectors also receive foreign direct investment (see figure 1).

Externally, the US-China trade war and the passage of the Omnibus Law on Job Creation which strives to attract investments and create employment by streamlining licensing processes, resulted in a hike in inward FDI to the province, surpassing the RPJMD targets. Internally, the Provincial government has launched several programs to bring in more investments. Among others, the establishment of the Bintan, Batam, Karimun free trade zone in 2017 successfully attracted investments by incentivizing investors with stimuli such as the 5 years of land rental waiver. Singapore stands out as the primary source of investments in the Riau islands. In 2018, Indonesia and Singapore signed a bilateral investment treaty to improve cooperation between the countries. Since then, both governments have actively participated in the development of several big-ticket projects such as the Nongsa Digital Park in Batam – set up exclusively for digital businesses and data centers. In addition to strengthening bilateral relations, such cooperations also become a source of knowledge transfer and employment creation. Endowed with natural attractions  and traditional culture, the islands have great potential for tourism, which has been increasing since 2012. The government has drawn out the Riau Islands Province Tourism plan to boost investments in the tourism industry.

Even as Covid-19 ravaged the islands and caused a contraction in the GRDP in 2020, domestic and foreign investments in the secondary sector were at a record high. There was a significant increase in employment in manufacturing in August 2020 and September 2021. The authors believe this has helped the Riau islands stay afloat during the pandemic. On the contrary, a comparison of targets specified in the RPJMD and the actual performance reveals an over-optimism on part of the Provincial government in driving economic growth. The evaluations in this study contain important lessons for the Provincial government and other policymakers on various levels who are responsible for the province’s development. As the province’s economic growth fell short of achieving its targets over the years; the government was prompted to initiate policies addressing these shortcomings. It also helps the policymakers effectively manage the investors’ expectations who have a stake in the province’s development.

By Shubhangi GUPTA

Researchers: LIEW Wan Yin, Doris, Xuyao ZHANG

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