Tempering retail: A moratorium on the construction of malls in Jakarta has split opinion

Alongside Indonesia’s emphasis on the importance of economic development, the country is at the same time working to protect itself from some of the unintended consequences of that development, especially in the retail sector. The emerging middle class will continue to help drive the economy forward, but the retail sector that serves it has the potential to damage the physical environment as it builds the infrastructure needed to meet the demands of new consumers. The consumers themselves, meanwhile, can alter the country's current account and trade balances as they buy an increasing number of products from overseas.

Moratorium

The most visible effort to address the downside of consumerism has been a moratorium on malls in Jakarta, in place in one form or another for three years. The first mall moratorium was issued in late 2011 by the then-Governor Fauzi Bowo and was set to expire at the end of 2012. Jakarta has experienced a boom in mall construction, leading to concerns that an increase in retail space was taxing the city's infrastructure and adversely affecting quality of life, for instance through greater traffic congestion. It was also widely believed that malls were being built at the expense of parks and public space. According to press reports in 2011, only 10% of the city was green space despite the 2000-10 Spatial Bylaw calling for an increase to 13%.

However, the mall moratorium was quickly met with scepticism, especially in the press. The Jakarta Post wondered at the outset whether it would be effective at all. While generally supportive, pointing to the city’s need for more green space, the paper also claimed that the moratorium would be unable to stop new construction, given that it was only set to last for a single year. Moreover, the paper noted that certain areas, such as Jl. Dr. Satrio, South Jakarta and East Jakarta, would even be exempt from the ban. The bottom line, the paper suggested, was that the moratorium would not make a difference to the city’s overall quality of life.

Disagreements

In public comments, the Indonesia Retailers Association said that the 2011 moratorium had also been problematic for other reasons. For example, the regulations were not clear, making it difficult for developers to plan accordingly. The association also found the entire concept of the moratorium at odds with the goals of the administration to transform Jakarta into a centre for services. Others, however, have expressed support for the mall moratorium. Max Pohan, deputy of the Department of Regional Development and Local Autonomy of the National Development Planning Board, has argued that malls lead to dangerous imbalances in the country, contributing to migration into cities from rural areas partly due to the promise of employment offered by malls. Pohan said that new mall construction should be banned in Jakarta and that it should be encouraged in areas outside the capital city. This would reduce internal migration, reduce congestion and result in development elsewhere. Even the industry saw some good coming out of the moratorium. In general, new malls in Indonesia receive a lot of traffic, but that older malls are not as popular and because of that not well maintained.

The moratorium would encourage developers to invest money in older establishments, according to Stefanus Ridwan, national chairman of the Indonesian Shopping Center Association (APPBI). The battle against modern retail is part of a longer-term fight to save traditional retail. In recent years, a raft of regulations have been issued in an attempt to protect wet markets and hawker stalls. For instance, Regional Regulation 2/2002 says that modern retailers cannot be too close to traditional retail outlets, while Presidential Regulation 112/2007 requires modern retail outlets to be on main roads. Moreover, Presidential Decree 111/2008 prohibits foreign investors from developing department stores smaller than 2000 sq metres.

Extending The Moratorium

In 2013, Jakarta Governor Joko Widodo (known as Jokowi) said that the mall moratorium would be extended. For the governor, the city currently lacks the environmental capacity to support new large retail outlets. He conceded, however, that malls could continue to be built in areas that are not yet well developed, such as East Jakarta.

Controversy Remains

Some observers suggest that better planning could allow for more retail space without taxing infrastructure. They say that downtown Jakarta is not yet overcrowded with skyscrapers and that more large buildings are possible if transportation is better organised. Industry representatives recommend that rather than an outright ban, the government should institute more flexible policies adjusted to achieve an efficient and pleasant urban area.

The governor said that permits from the old administration are valid but that new requests for permits will be rejected if submitted. According to press reports, Jokowi's moratorium has been relatively effective and mall projects have been put on hold. The governor has a long history of working to balance business concerns with the broader public interest. While he was mayor of Surakarta, he prevented the demolition of Fort Vastenburg by developers. The fort, which dates back to the late 18th century, had been sold to the private sector in the 1980s and, despite protests by architects and historians, had been under threat of demolition for years. Jokowi, while in favour of traditional retail, has always promoted a balance of interests. In Surakarta, his support of street vendors was in part intended to allow for the transformation of areas that had been occupied by informal traders. He has gained a reputation as a sound administrator, and so his moratorium is likely to be more effective than those in the past.

Luxury Tax

In August 2013, a higher tax on imported luxury cars was included in the government's fiscal package to temper the fiscal boom, and later in the year the Ministry of Finance said that other items would also be subject to higher taxation, such as clothes, handbags and mobile phones. There was very widespread concern that higher imports were leading to trade imbalances and balance of payments problems, causing a fall in the value of the currency.

The import tax on mobile phones was raised from 2.5% to 7.5% in March 2014. In the same month, President Susilo Bambang Yudhoyono confirmed that the luxury tax on cars would be increased by 50% in April 2014. At the time, the tax ranged from 10-75%, and it was expected that the higher rate would go to 125%. The government also stated in April that all mobile phones would attract a higher tax, though earlier the Ministry of Trade said that only phones selling for more than Rp5m ($500) would be hit with the 20% duty from October 2014. The government estimates that $3bn worth of phones were imported in 2013 and that 15% of these were smartphones.

Industrial Policy

The government believes that the higher taxes will not only reduce consumption but that they will also encourage local production. Across the board, it has been pursuing broad policies designed to help in the development of domestic industrial capacity. But critics wonder whether higher taxes will reduce imports or result in additional investment in domestic production. They say that the new policies will probably encourage more smuggling, especially of mobile phones from Singapore and Malaysia, and could ultimately result in less local value added. It hopes to cut the importation of the higher end phones by 50%.

As the situation currently stands, distributors are getting a share of the business and are able to reinvest at a local level. However, in the event that they are disintermediated, all the value will go overseas and companies based within Indonesia will lose business. In terms of automobiles, the higher tax has been seen resulting in an increase in the number of used car sales.

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The Report: Indonesia 2014

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