Enhanced Cooperation and Integration Between Indonesia and Timor-Leste: Scoping Study

ENHANCED COOPERATION AND INTEGRATION BETWEEN INDONESIA AND TIMOR-LESTE

SCOPING STUDY

JULY 2019

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Publication Stock No. TCS190259-2

DOI: http://dx.doi.org/10.22617/TCS190259-2

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ADB recognizes Hong Kong as Hong Kong, China; Korea as the Republic of Korea, China as the People’s Republic of China; and East Timor as Timor-Leste.

On the cover: From Timor-Leste, the Mota’ain-Batugade Border Control Post provides view of Indonesia (photo by Glen Wood).

Contents

Tables, Figures, Boxes, and Maps

Foreword

The Indonesian economy is rich and vibrant. Poverty has been more than halved since 1999, amid sustained economic growth. But the gains have not been shared equally. Nusa Tenggara Timur (NTT) in the border of eastern Indonesia, is among the country’s poorest provinces and has a poverty rate twice as high as that of Indonesia as a whole.

Indonesia seeks to address these regional disparities through strategies based on local potential and distinct sociocultural features. Improvements will be made in connectivity and accessibility, basic service provision, and local governance, as well as in the sustainability of local resource use and cross-border economic collaboration.

President Joko Widodo’s Nawa Cita (nine national priorities) agenda emphasizes social, economic, and human development in the border regions. To correct regional imbalances and promote this agenda, the Fiscal Policy Agency is working toward better use of intergovernmental transfers, more local revenue generation, and local government funding from alternative and supplementary sources. In addition, government has enhanced cooperation with neighboring countries.

The Fiscal Policy Agency supported the study with the President’s agenda in mind. The study called for a comprehensive context-specific analysis of opportunities for economic growth and development in the border area between NTT and Timor-Leste.

By paying close attention to possibilities for mutual gain through cross-border cooperation, the study also conformed to Indonesia’s intent to offer friendship and support to Timor-Leste. Stronger cross-border collaboration between NTT and Timor-Leste will not only boost economic growth in NTT but also help prepare Timor-Leste for greater engagement with the Association of Southeast Asian Nations (ASEAN).

The findings and recommendations of this report—specifically the connectivity, trade facilitation, tourism promotion, and livestock trade initiatives proposed here—should therefore be seen as a call to action. It is hoped that the Government of Indonesia, and Government of Timor-Leste, in partnership with the Asian Development Bank and other entities, will take these initiatives forward and thus improve the lives of the people of NTT and Timor-Leste.

Suahasil Nazara

Head of the Fiscal Policy Agency

Ministry of Finance, Indonesia

Foreword

Timor-Leste has developed significantly since independence. Poverty is declining and school participation rates are rising. But this progress has been fueled in large measure by the Petroleum Fund; it will stall unless the economy continues to grow and diversify. The domestic economy must strengthen further and be integrated more closely into the world economy.

The Fiscal Reform Commission is committed to a national reform program designed to boost revenue from domestic sources. Reforms will be made in the business climate, fiscal policy and the tax system, and legislation, to support economic sectors with strong potential.

This study advanced the goals of the commission and of the Government of Timor-Leste in two important ways. First, it took a comprehensive approach to prioritizing the sector reforms needed to diversify the economy and ensured that the real economic impact of those reforms could be clearly understood.

Second, the focus of the study on cross-border cooperation with Indonesia accorded with Timor-Leste’s aspirations for greater integration into the world economy. Mindful of the need for access to global markets to keep the domestic economy growing, the country has already applied for membership in the Association of Southeast Asian Nations (ASEAN) and is taking steps to join the World Trade Organization (WTO). Integration with Timor-Leste’s closest neighbor, as recommended under the study, can complement such efforts at global market access and further the country’s development aspirations.

The findings of this report should be embraced across government, and its recommendations implemented in partnership with the Asian Development Bank and other development organizations. Making the required bold reforms today holds the promise of an even brighter tomorrow.

Fernanda Borges

Fiscal Reform Commission

Office of the Prime Minister and Ministry of Finance, Timor-Leste

Foreword

Recent decades have seen tremendous economic growth in Asia and the Pacific. Increased integration of regional markets has been an important driver of that growth. Poverty, however, is still high, and in many parts of the region, inequality is rising. In efforts to deal with these persistent challenges, the role of regional cooperation and integration will remain vital.

The region is a global leader in regional cooperation and integration, as demonstrated by the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and ongoing negotiations under the Regional Comprehensive Economic Partnership. Both Indonesia and Timor-Leste have embraced cross-border cooperation and integration to boost economic growth in disadvantaged areas and generate mutually beneficial gains from trade. This open and collaborative approach is critical at a time of escalating global trade tensions and protectionism.

Recognizing the importance of regional cooperation and integration for sustained and inclusive growth in Asia and the Pacific, the Asian Development Bank (ADB) has made it a corporate priority area under its Strategy 2030. The study on enhanced cross-border cooperation between Indonesia and Timor-Leste, on which this report is based, was noteworthy for several reasons. First, it endorsed the laudable aspirations of Indonesia and Timor-Leste for greater cross-border cooperation in promoting inclusive growth and reducing inequality. Second, it demonstrated the kind of cross-sector and multifaceted analysis needed to identify opportunities for collaborative action. Finally, it showed ADB’s commitment to strengthening inter-subregional cooperation and to directing resources toward disadvantaged regions.

Knowledge and understanding are vital for progress. But this report also sets a solid foundation for taking action. Readers should use it to focus on implementation. The growth that Indonesia and Timor-Leste seek to attain in their border areas can thus be more readily achieved.

Bambang Susantono

Vice-President

Knowledge Management and Sustainable Development

Asian Development Bank

Acknowledgments

The content of this report is based on the work of seven consultants: Bernard Tai, Transport Specialist; Glen Wood, Trade Facilitation Specialist; Mark Steenwyk, Business and Financial Services Specialist; Martin Mulik, Livestock Specialist; Patricia Sourdin, Trade and Investment Specialist; Peter Semone, Tourism Specialist; and Robert Haywood, Economic Zone Specialist. Adam Sendall also provided peer review and additional value chain inputs on livestock. Thanks also go to Adiwan Arientang for support for consultation missions and inputs to the report. Special thanks also go to the work conducted by Steve Cox and Christian Ksoll in Timor-Leste under the Trade and Transport Facilitation in the Pacific study, which has also been integrated into the study.

The report has been compiled by Anna Fink, Economist, of the Regional Cooperation and Integration Thematic Group (RCI-TG) of the Asian Development Bank (ADB), under the overall direction and supervision of Arjun Goswami, Chief of the RCI-TG, and with inputs and guidance from Kanya Sasradipoera, Senior Trade Specialist, ADB.

Grateful acknowledgement is made to Indonesia’s Ministry of Finance’s Fiscal Policy Agency (FPA), specifically Pak Adriyanto, Pak Widiyanto, Pak Ali Moechtar, and Pak Yasir Niti Samudro. The FPA was the focal point for the study in Indonesia and provided invaluable guidance on the direction and approach of the study as well as practical support for consultations. Equally, in Timor-Leste the Ministry of Finance, Fiscal Policy Commission, in particular, Fernanda Borges, has been the focal point in Timor-Leste and has helped shaped the study and steered it through wide ranging consultations in government and externally, which has been critical to its success.

We would like to thank all the individuals consulted throughout the course of this study (see Appendix 1 for the full list of consultations) including government officials, bank officers, transport officials, finance and business development service providers, business chamber officials, business leaders, representatives of micro and small businesses, and nongovernment organizations and representatives of development organizations. Thanks also go to the Timor-Leste–Indonesia–Australia Growth Triangle for constant collaboration, particularly the mission unit in Timor-Leste. As cofinancing partners of this study, we would also like to thank the Government of Australia for funding through the Sustainable Infrastructure Assistance Program for Indonesia and the Government of the United Kingdom through the Department for International Development.

Inputs and guidance on the report was gratefully received from many parts of ADB, particularly the Southeast Asia Department and the Pacific Department, the Private Sector Operations Department, and the Economic Research and Regional Cooperation Department. Finally, our sincere thanks go to the ADB staff in the Indonesia and Timor-Leste resident missions for their engagement and support throughout this study.

Abbreviations

Weights and Measures

Executive Summary

This Enhanced Cooperation and Integration between Indonesia and Timor-Leste—Scoping Study responds to requests by the governments of Indonesia and Timor-Leste made to the Asian Development Bank in February 2017. The request from the Government of Indonesia was driven by a desire to tackle spatial inequality and address poverty in the nation’s second-poorest province by emphasizing development from the margins. For Timor-Leste, the study supports Strategic Development Plan goals for economic growth and diversification, particularly Timor-Leste’s application for membership in the Association of Southeast Asian Nations (ASEAN). Cross-border collaboration between Timor-Leste and Indonesia’s Nusa Tenggara Timur (NTT) province in the form of trade, investment, and cooperative production provides a means of addressing national inequality, diversifying economic growth, and importantly, reducing poverty in the border areas.

The study is predominantly qualitative, based on existing research and consultations with more than 250 individuals in government, the private sector and civil society, both in Indonesia and Timor-Leste. The work has been developed broadly through two phases. The first phase looked at crosscutting issues such as transport connectivity, trade flows, access to business and financial services, and the business and investment climate. It also explored the rationale for supporting cross-border collaboration through a border economic zone, and identified sectors for cooperation with high potential. This forms the content of Part I. The second phase delved more deeply into those sectors identified as the most promising sectors for cooperation—tourism, presented in Part II; and livestock, presented in Part III.

Part I: Areas of Cooperation and Connectivity

Part I presents the conclusions and recommendations on (i) priority economic sectors for cooperation, (ii) challenges and bottlenecks to the cross-border movement of goods and people, (iii) areas to strengthen and coordinate on the business and investment enabling environment for small and medium-sized enterprises (SMEs), and (iv) the feasibility of a cross-border economic zone. Part II and Part III provide deeper analysis on tourism and livestock and offer recommendations for short- and medium-term interventions.

Major Conclusions

(i)Cross-border trade and cooperation in tourism and livestock appear to have the greatest short-term potential to benefit border populations, and tackle poverty and inequality.

(ii)Existing land, sea, and air transport connections between Timor-Leste and West Timor need to be strengthened to facilitate cross-border cooperation on a range of goods and services. Improving and standardizing the legal and regulatory frameworks for cross-border movement should be prioritized.

(iii)Establishing a geographically defined economic zone at or near the border is not a priority for cooperation between Indonesia and Timor-Leste. Instead, consideration should be given to low-intensity zones or legal and policy harmonization in specific areas to enable existing economic opportunities to grow. This would provide