Batam: Life after the FTZ?

Abstract

Once an island of high-tech production and turbocharged growth, Batam has seen its economic fortunes decline of late. Traditional pillars of the manufacturing sector such as electrical goods, electronics and shipbuilding have contracted. Investment levels have fallen, the island’s growth rate is below the national average and unemployment has increased sharply. In response, policymakers are promoting the development of new sectors in order to diversify the island’s economic base, and are debating changing Batam’s status from a free trade zone (FTZ) to a new, more expansive regulatory regime in order to attract more investment. In two ways, this article contributes to the debate on how to revitalise the island’s economy. First, using data from the Manufacturing Survey of Large and Medium-sized Firms, it analyses the growth and performance of Batam’s three largest manufacturing sectors—electronics, electrical goods and shipbuilding—over 2004–15. These results are then compared with those from firms in the same sectors in other major industrial locations in Indonesia to establish which activities in Batam remain competitive. Second, the article carries out an econometric exercise to determine whether the island’s FTZ status is related to improved levels of output, exports, employment and efficiency. The results of these exercises are used to evaluate the policy choices available to Batam.