Indonesia economy 2012:
Bright, but can it be sustained?
Lili Yan Ing & Chatib Basri, LECTURERS AT THE FACULTY OF ECONOMICS,
UNIVERSITY OF INDONESIA
Sumber : JAKARTA POST, 29Januari 2012
The Indonesian economy has shown its resilience in the face of consecutive global crises since 2008 by maintaining growth at an average of 6 percent from 2008 to 2011. Even though the global economic outlook continues to deteriorate and financial markets continue to be volatile, Indonesia is not highly integrated into the world market and the real economy remains little affected. It is even expected to record growth of around 6 percent in 2012, but will it be sustained?
Please keep in mind that, firstly, the Indonesian economy is still heavily reliant on the domestic market and less on exports and investment, with around 60 percent of GDP attributable to domestic consumption. Secondly, Indonesia’s exports have been largely dominated by natural resource-intensive commodities. In fact, the contribution of such exports (agricultural commodities and mining and minerals) to total export value has increased from 18 percent in 2000 to 42 percent in 2010, while that of exports of manufactured goods has decreased from 35 percent to 20 percent over the same period.
Why could relying heavily on natural resources be a problem for sustained development even though Indonesia has a comparative advantage in those products?
First, relying on natural resource-intensive exports could lead to volatile growth as prices and production of these commodities are relatively volatile. Second, natural resources do not generate much employment, unlike manufacturing industries and related services.
Even though these enclave sectors typically operate at very high productivity, they cannot absorb the surplus labor from agriculture. Moreover, compared to these sectors, the agriculture and mining sectors offer relatively lower wages for secondary school graduates who make up the bulk of Indonesia’s labor force (World Bank Economic Quarterly, December 2011).
Last, there is little transfer of technology in resource-intensive sectors. Economies with a revealed comparative advantage in primary products have less of an advantage in the sense that development in the natural-resource sector brings less structural transformation compared to manufacturing industries. The larger the proportion of natural resources in exports, the smaller the scope of productivity-enhancing structural change (McMillan and Rodrik (2011).
Considering these reasons, it is time for Indonesia to revive its manufacturing sector as it cannot always rely on its abundant natural resources. Indonesia should put more effort into developing its high-value added and employment-generation sectors such as the manufacturing sector and leave other businesses to go on as usual.
A decade of slow growth which was just 4.5 percent from 2000 to 2010 down from 12.8 percent in the decade prior to the Asian Crisis deserves special attention from both the Indonesian government and the private sector to work together to ensure manufacturing regains its growth and development. Manufacturing is the key sector in creating high-value jobs as well as technology transformation.
This year is actually a good moment for Indonesia to regain its competitiveness in the manufacturing sector. The Indonesian economy is not only a growing market but also an attractive investment destination. This allows firms to operate at economies of scale and thus improve competitiveness.
Indonesia is not only a growing market but also one of the most promising investment destinations in the coming decades. Indonesia has a growing domestic market with an annual income per capita of US$3,000 in 2011 and a rising middle class. This is coupled with the fact that 65 percent of the 237 million population constitute a labor force with unit labor costs lower than that of China and Vietnam, particularly since 2008 and 2011. On top of that, Indonesia has recently attained an investment grade of BBB- from Fitch Ratings.
While there are opportunities, there must be challenges. While we could name from A to Z challenges and things that should be fixed to increase investment in the manufacturing sector and improve manufacturing competitiveness, Indonesia could start the reform with easy and zero-cost steps.
First, simplify business registration. Second, speed up full implementation of electronic tax filing and payment systems. Third, incentivize labor training. Fourth, improve efficiency at the ports including customs and payment systems.
This is the time for Indonesia to articulate a master plan for developing the manufacturing corridor with real action, don’t let Indonesia just be a plan master.●
Please keep in mind that, firstly, the Indonesian economy is still heavily reliant on the domestic market and less on exports and investment, with around 60 percent of GDP attributable to domestic consumption. Secondly, Indonesia’s exports have been largely dominated by natural resource-intensive commodities. In fact, the contribution of such exports (agricultural commodities and mining and minerals) to total export value has increased from 18 percent in 2000 to 42 percent in 2010, while that of exports of manufactured goods has decreased from 35 percent to 20 percent over the same period.
Why could relying heavily on natural resources be a problem for sustained development even though Indonesia has a comparative advantage in those products?
First, relying on natural resource-intensive exports could lead to volatile growth as prices and production of these commodities are relatively volatile. Second, natural resources do not generate much employment, unlike manufacturing industries and related services.
Even though these enclave sectors typically operate at very high productivity, they cannot absorb the surplus labor from agriculture. Moreover, compared to these sectors, the agriculture and mining sectors offer relatively lower wages for secondary school graduates who make up the bulk of Indonesia’s labor force (World Bank Economic Quarterly, December 2011).
Last, there is little transfer of technology in resource-intensive sectors. Economies with a revealed comparative advantage in primary products have less of an advantage in the sense that development in the natural-resource sector brings less structural transformation compared to manufacturing industries. The larger the proportion of natural resources in exports, the smaller the scope of productivity-enhancing structural change (McMillan and Rodrik (2011).
Considering these reasons, it is time for Indonesia to revive its manufacturing sector as it cannot always rely on its abundant natural resources. Indonesia should put more effort into developing its high-value added and employment-generation sectors such as the manufacturing sector and leave other businesses to go on as usual.
A decade of slow growth which was just 4.5 percent from 2000 to 2010 down from 12.8 percent in the decade prior to the Asian Crisis deserves special attention from both the Indonesian government and the private sector to work together to ensure manufacturing regains its growth and development. Manufacturing is the key sector in creating high-value jobs as well as technology transformation.
This year is actually a good moment for Indonesia to regain its competitiveness in the manufacturing sector. The Indonesian economy is not only a growing market but also an attractive investment destination. This allows firms to operate at economies of scale and thus improve competitiveness.
Indonesia is not only a growing market but also one of the most promising investment destinations in the coming decades. Indonesia has a growing domestic market with an annual income per capita of US$3,000 in 2011 and a rising middle class. This is coupled with the fact that 65 percent of the 237 million population constitute a labor force with unit labor costs lower than that of China and Vietnam, particularly since 2008 and 2011. On top of that, Indonesia has recently attained an investment grade of BBB- from Fitch Ratings.
While there are opportunities, there must be challenges. While we could name from A to Z challenges and things that should be fixed to increase investment in the manufacturing sector and improve manufacturing competitiveness, Indonesia could start the reform with easy and zero-cost steps.
First, simplify business registration. Second, speed up full implementation of electronic tax filing and payment systems. Third, incentivize labor training. Fourth, improve efficiency at the ports including customs and payment systems.
This is the time for Indonesia to articulate a master plan for developing the manufacturing corridor with real action, don’t let Indonesia just be a plan master.●
