Govt Action, Not Talk, Is Needed to Further Indonesia's Economic Growth


APRIL 19, 2015

In order to significantly boost economic growth, economists point to accelerating development of infrastructure projects. (Antara Photo/Joko Sulistyo)

Jakarta. Leaders from across Asia and the rest of the world are convening for the World Economic Forum on East Asia in Jakarta, and they come at a time when Indonesia has made significant strides in its economy, with room for improvement.

Gross domestic product in nominal terms has grown more than threefold in the past 10 years to become an almost $1 trillion economy, and within reach to meet former president Susilo Bambang’s goal to be among the top 10 economies in the world by 2025.

Lana Soelistianingsih, a University of Indonesia economist, said Indonesia’s economic growth was “pretty significant” in the past 10 years. She mentioned some indicators, including how Indonesia’s banking sector had successfully dodged the global crisis in 2008, higher earnings per capita, and a lower unemployment rate.

“If we look at the earnings per capita, it has been better and will keep progressing, from only $300 to $3,000. Of course, things like these can’t be ignored,” she said.

Indonesia’s unemployment rate stood at 5.94 percent of the country’s labor force of 183 million people in August 2014, according to data from the Central Statistics Agency (BPS), down from 11 percent in 2005.

Indonesia’s unemployment rate fell rapidly amid fast economic growth in the past decade, but then started to slow from 2011 due to slower economic expansion.

As millions more Indonesians enter middle-income status, that should help boost growth further. Economic indicators such as car sales — projected at 1.2 million this year — show that consumer spending remains robust. Foreign direct investment also remains strong, and Indonesia’s stock market is setting record highs.


But Lana said the government still had to face many challenges ahead as corruption cases keep piling up and little is done to boost infrastructure spending. The government needs to focus on other areas of Indonesia, such as the eastern region, to help expand the country’s economy.

“Public infrastructure, the ones that are supposed to be free for the public, haven’t shown any progress. Many companies also haven’t gotten enough electricity. The development is clustered on Java, as is with urbanization. There’s an imbalance in national development,” Lana said.

She expressed disappointment with how infrastructure development was kept on hold due to various reasons.

“Infrastructure is the key,” she added. “Once infrastructure development is on its way, then [our economy] can grow.”

Slower economic expansion is not entirely a bad scenario, according to M. Chatib Basri, a former finance minister under the Yudhoyono administration, adding that a broader perspective was needed to view such issues.

Indonesia, India and China were the only countries among the Group of 20 nations that managed to grow at more than 5 percent in 2014. By comparison, Singapore’s economic growth was 2.9 percent in 2014, South Africa 1.8 percent, and Turkey at less than 5 percent.

“For me, 5 percent [economic] growth was OK because other countries grew less than that,” Chatib said, noting that Brazil’s economy faced challenges such as a weakening currency and slowing economic growth.

“My point is, economic growth tends to be slower in the future. We don’t need to expect too high at 6 percent, let alone 7 percent, in a short period. It merely shows that we’re in a state of denial about the global condition. Be patient. Fixing the fundaments in stages may lead us to a more sustainable 7 percent [economic] growth.”

Lawrence H. Summers, president emeritus of Harvard University and a former US Treasury secretary, was quoted as saying by the International Monetary Fund, which held its semiannual meeting in Washington last week, on its website on Friday that Asia should expect much slower economic growth as the region was likely to revert to levels of average growth.

“There is a tendency, particularly in discussions of China, but also in discussions of Asia, that there is a presumption of continuity. That is, maybe the countries will continue to grow at the abnormally rapid rate that they have,” Summers said.

The government is pushing to build more seaports to further facilitate trade between  islands. (Antara Photo/Sahlan Kurniawan)

Slow growth

Indonesia’s economic growth slowed to 5.02 percent in 2014, which was the slowest pace in five years, and the government expects that growth to be at more than 5 percent this year. President Joko Widodo is embarking on the some of the same plans as his predecessors in trying to boost economic growth, such as a focus on infrastructure spending.

“I think if we look at the last 10 years, there are two angles from which we can look at Indonesia’s development,” said Sushant Palakurthi Rao, senior director and head of Southeast Asia at the World Economic Forum.

“One is from the government side, and it’s been clear in the last decade that democracy has been firmly anchored into Indonesia that’s been a very positive development. And economically as I explained, we have observed that Indonesia has steadily improved competitiveness and become one of the successful economies in the entire report in improving in very large steps, so that’s been largely positive. Now, however, we have to remember that Indonesia is not immune.

“It’s not a country in isolation,” Rao went on. “It is impacted by global development such as energy prices, geopolitical conflicts like ISIS [Islamic State] and the global wave of extremism. So now the question would be, how does Indonesia build on this decade of success and prepare itself for the next 10 years of growth, which would be essential for a country which is demographically young. There would be jobs that need to be created for the young population that’s coming in. Also to become a stronger competitor in an environment of regional integration.

“This is the tipping point for its next wave of growth. What we have observed in the last months in terms of the commitments of President Jokowi, things like that are going to be facilitators for Indonesia to grow other industry,” Rao said.

“The lifeline of an economy is a strong infrastructure base. It will create the competitive environment for more companies to invest and manufacture in Indonesia as opposed to just buying commodities.”

Consumer spending, which accounts for about half of economic activity, so far has helped growth even as other sectors of the economy such as exports lag.

Prices for commodities such as coal, copper and gold have dropped significantly in the past few years, and that means fewer earnings for companies including state-owned miner Aneka Tambang and Freeport Indonesia that do business locally and abroad.

Expanding sectors

Some economists point out that in order to develop the economy, Indonesia must expand its manufacturing and services sectors. Companies such as Samsung Electronics have expressed interest in investing more, but are looking for tax breaks from the government as an incentive.

Whether the government decides to further fast-track policy reforms on investment remains to be seen during Joko’s administration. It has tried to make investment easier, with the Investment Coordingating Board (BKPM) reducing the process for investors to set up a business.

“Indonesia is one of the most respected leaders in Asean [the Association of Southeast Asian Nations], as well as the Asia and Africa region as a whole, but the past 10 years have been a repeat of the 1970s and 1980s, when we repeatedly missed the momentum,” said David Sumual, the head economist at Bank Central Asia.

“There was the oil boom in the ’70s, but we missed out on that. We’re typically very weak in rolling out structural reforms. The government has only put out a clear signal on this initiative this year. Hopefully, this will be followed by other reforms, such as infrastructure development, closing the gap between regions. In the past 10 years, we have been complacent. We’ve missed the momentum.

“Our growth has been one of the highest, but it’s been mostly driven by raw commodity exports. Going forward, we must develop our manufacturing sector. Developed countries grow through their manufacturing sector, before entering the service sector. Our economy is still in the primary sector right now, it’s not even touched the secondary sector,” David said.

“Right now, many businesses are eyeing our market for its potential. We have to monitor our business climate to attract both foreign and local investors. Local investors must also grow along with foreign investors. [South] Korea, China and Japan — all of them sought to attract foreign investment and eventually, they spun off the investment as their own.”

Challenges remain for the economy in the face of a slowdown among large emerging and developed nations alike. Australia, like Indonesia, faces challenges in its mining sector as fewer shipments of commodities such as iron ore and coal to nations such as China mean lower commodity prices. The rupiah is down 4 percent against the US dollar this year and continues to weaken, and the nation faces a current-account deficit for a third year.

Hariyadi Sukamdani, the chairman of the Indonesian Employers Association (Apindo), says Indonesia needs to act, otherwise opportunities will be lost.

“We have been wasting time so far. We missed many good opportunities for the last 10 years due to the unfocused government,” he said.

He also said the government had lost momentum in the past, devising many plans by executing them poorly.

The Yudhoyono administration in 2011 touted its ambitious Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development, or MP3EI, which called for, among other things, the construction of new ports, roads and railways. Few of those projects are under development today.

“The MP3EI — which featured dozens of infrastructure, energy, mining and agricultural projects that would each have a positive impact on the economy — is a good example,” Hariyadi said. “Port Cilamaya, too. It was such a good plan but then canceled.”

For the past 10 years the government has shown “unprofessionalism” and “inconsistency,” he said, adding that all the gestures made by the government to lure foreign investment would be ineffective.

“A thousand events like the WEF won’t do if the government is not serious,” he said. “The effectiveness of such an event is really up to us, to our government. It could be something if we’re consistent, but it could also be merely a trivial ceremony.”

GlobeAsia and the Jakarta Globe are media partners of the World Economic Forum on East Asia.


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