Building an inclusive institution in IKN
This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Investor Daily - Pembangunan institusi yang inklusif di IKN
25 October 2024
By Prof. Bambang Juanda
The 2024 Nobel Prize winners for economics, Daron Acemoglu, Simon Johnson, and James A. Robinson, have highlighted the importance of inclusive institutions in fostering sustainable economic growth. They demonstrated that countries with institutions that allow broad participation in economics and politics tend to be more prosperous compared to those with exclusive institutions dominated by elites.
In line with the effort to develop Nusantara Capital City (IKN), it is important for the government to implement inclusive principles in its development, ensuring that the project provides long-term benefits for all Indonesians.
IKN is a megaproject that not only aims to relocate the centre of government from Jakarta to East Kalimantan but also aspires to be a model for modern cities that are sustainable, inclusive, and future-oriented. However, to ensure the success of the project, the development of IKN must be supported by inclusive institutions.
Inclusive institution for long-term development
In the book "Why Nations Fail," Acemoglu, Johnson, and Robinson explain how inclusive institutions can incentivise innovation and economic growth. Inclusive institutions provide fair access for all citizens to participate in political and economic decision-making, which encourages the equitable distribution of wealth.
On the other hand, exclusive institutions, where power and resources are concentrated in the hands of a few, hinder economic growth and tend to trigger social instability.
In the context of IKN development, this lesson is highly relevant. If IKN only benefits certain groups, such as large businesses, political parties, or economic elites, the development of this city will not provide long-term, widespread benefits.
On the contrary, with inclusive institutions, where locals, micro, small, and medium enterprises (MSMEs), and vulnerable groups receive fair access and benefits, IKN can become a symbol of Indonesia's economic and social success.
Involvement of domestic and international investors
One of the major challenges of IKN development is financing. This significant project requires substantial funding and cannot rely solely on the state budget (APBN) due to the limited fiscal space. Therefore, the involvement of both domestic and international investors is crucial for the success of IKN development.
International investors will be more inclined to invest in IKN if they see domestic investors, who have a better understanding of local conditions and dynamics, actively involved. The success in attracting investment also heavily relies on investors' perception of whether the development process of IKN is inclusive or exclusive.
If IKN development only benefits a handful of elite groups, international investors will likely be reluctant to get involved. On the contrary, if the development provides opportunities for many parties and is managed transparently, investors will feel more secure and be more interested in contributing to the project.
Avoid exclusive institutions
As learned from the theory of Acemoglu and his colleagues, exclusive institutions only benefit a handful of people, hinder innovation, and create economic inequalities. In the context of IKN development, the risks of exclusive institutions can also arise if the project is dominated by major companies or specific groups that monopolise access to resources.
To prevent this, it is important for the government to ensure transparency and public participation in the decision-making process for IKN. The involvement of locals, MSMEs, and vulnerable groups should be a priority.
Additionally, regulations that support transparency and equal access for all stakeholders are crucial to encourage inclusive growth.
One concrete example is to provide incentives for small businesses to participate in the development project, both in terms of supplying goods and services and as partners in infrastructure projects. This approach ensures that IKN development is not only a major project for the government and large companies but also includes the people. This will have a tangible positive impact on the local economy.
Symbol of social and economic progress
IKN is expected to be a model for future cities that are both sustainable and inclusive. If the development is supported by inclusive institutions, IKN can serve as a real example of how a city can function as a centre for innovation, openness, and economic growth. This will not only benefit IKN as a geographic entity but also provide positive impacts for all of Indonesia.
The experience from this project can serve as a lesson for other cities in Indonesia to establish more inclusive institutions that support equitable growth. Additionally, with the success of IKN development, Indonesia can demonstrate to the world that it is capable of creating government and economic centres that are modern and sustainable.
IKN and economic growth
The Nobel Prize winner for economics, Paul Romer, believes that IKN development can be a gateway to support Indonesia's economic growth, potentially surpassing 5% and even reaching 8%, in line with President Prabowo Subianto's target. This can be achieved if IKN development attracts major investors both domestically and internationally and creates an inclusive and innovative economic ecosystem.
If IKN is built with a focus on inclusiveness and sustainability, and supported by strong and transparent institutions, the project will not only enhance Indonesia’s international standing but also drive domestic economic growth. Therefore, IKN can be a key factor in achieving Indonesia’s vision of a more rapid and sustainable economy.
