A Paper on Growth Diagnostics of Indonesia

February 6, 2013


I. Introduction

The goal of every country is to achieve not only sustainable development but
also inclusive growth. Sustainable development, as defined by the Brundtland
Commission, is a "development that meets the needs of the present without
compromising the ability of future generations to meet their own needs". Inclusive
growth on the other hand, pertains to an equitable allocation of resources to every
sector of the society which in effect decreases the rapid growth rate of poverty, at the
same time increasing the involvement of its people to the growth of the country.
To be considered as an industrialized and developed country, one must take
consideration on the political, social and most importantly the economic aspect in order
for the country to be competitive in the market and also promote a high standard of
living. Those prerequisites can be achieved by determining first the factors that trigger
the economic growth of a country and that include infrastructures, human capital,
literacy, safety, and other indicators.
In laymans term, an economy can be defined as the system that is used to
manage the resources in a country. It is often used as an indicator to measure how rich
or poor a country and its people are. When an economy is doing well, the government is
able to meet the needs of the people and its country.
In this paper, we will study the growth diagnostics of Indonesia to determine how
far the developing country has grown and improved over the past few years and to
know its current economic state.


II. Economy of Indonesia

Indonesia is considered as one of the largest national economy in Southeast
Asia. In fact, according to Bloomsberg, Indonesia has surpassed other Asian countries
aside from China in terms of gross domestic product which expanded 6.17 percent on
the last quarter of the year compared to last years GDP (Marunung, 2012).
The country is a member of the Group of Twenty Finance Ministers and Central
Bank Governors, also known as G-20. The group studies and reviews policy issues
regarding the promotion of international financial stability. According to the International
Monetary Fund, the G-20 economies account for more that 80 percent of the gross
world product, 80 percent of world trade, and two-thirds of the worlds population.
Indonesia has a market based economy wherein the government plays a
significant role. In fact, the central government owns more than 160 enterprises and
administers the price on several basic goods such as fuel, rice and electricity. In mid-
1997, the Asian Financial Crisis affected Indonesia which triggered an economic and
structural reform. As a result, the government took custody of a substantial part of
private sectors. Since 2004 the economy has gained back its stability and growth has
accelerated to over 6% in recent years.
The four main industries of Indonesias economy are: sale of natural resources,
agriculture, manufacturing of goods and tourism. The largest industries include oil, gas
and mining. In addition, Indonesia is one of the largest suppliers of natural gas.
On the other hand, agriculture sector still employs the most number of people. It
includes small farms owned by families as well as larger plantations that produce
products for export. The manufacturing sector has improved over the years. Foreign
companies are attracted by low wages and highly skilled workers in the country.
Tourism industry has its fair share as well. Foreigners are fond of Indonesia not only
because of cheap cost of living there but also for its history and variety of wildlife.
Furthermore, some of Indonesias major exports include crude oil and natural
gas, plywood and timber products, textiles and rubber. The country also has tea, coffee
and spices which it sells overseas.

III. Patterns of development
During the 1960s, Indonesia was one of the poorest countries in the world with
only a per capita income of 50 US dollar which was worst than India and Nigeria. Due to
oil boom, it become as one of the largest suppliers of natural resources especially gas,
evidently this sector helped Indonesia to maintain a steady growth in the economy with
lots of potential investments from foreigners. Even though it has gone through tough
financial times during the late 50s and early 60s because of high inflations and
mismanagement of government that resulted to deterioration of level of transport and
other public services (Beals, n.d.). Moreover, during those times, population is one of
the factors that caused this problem because it was not be able to balance out with the
allocated budget and the government needed to face foreign debts.
The financial crisis was resolved when a new administration takes place and
quickly established a program to strengthen the economy of Indonesia through foreign
investments and eliminating hyperinflation. Growth increased rapidly and Indonesia is
becoming an industrialized structure rather than an agricultural sector. Year by year,
agricultural trade decreases rapidly while the manufacturing, construction and mining
sectors increases. In fact, in 1960, the agricultural industrial origin were 53.9 percent of
the GDP and after two decades it decreased to 26.3 percent which is approximately
twenty five percent less and it was offset by the industrialized services.
Based on the graph shown above, Indonesias GDP has not grown that much in
years 1967 to 2000. But there is an impressive growth in share of GDP going to
investment that allowed the country to be known internationally by exporting domestic
products. One factor that hinders the vast growth of Indonesia on those years is the
inflation of prices especially oil price hikes which changes regularly depending on the
mining situations and expenditures. In response to this dilemma, the government step
into action and implement reforms for pricing policies.
As it was said, the government had a huge role in stabilizing the economy of
Indonesia; they focus more on better equity and income distribution by narrowing the
inequality of the rich and poor in the country. The government implemented family
planning programs that decreased the population growth and therefore improving the
standard of living, increasing the literacy rate and increasing the per capita income.
Moreover, they also focused on the social infrastructures not only in the urban areas but
also the rural areas where transportation of agricultural goods and services would be
more convenient and less costly.
The graph shown above illustrates the GDP growth rate from the years 2005 to
2012. Evidently, there exist a pattern of increases of growth rate during the first to third
quarters of the year and decreases during the last quarter of the year. Despite the
weakening global economy, Indonesia has been able to sustain growth and the
government forecasted that it would have 6.5 percent GDP growth for 2013. This target
rate is attainable because based on the graph Indonesia has been consistent over the
years and the Indonesian government has implemented tons of social programs that
benefited citizens through food, livelihood, health, education and safety aspects.


IV. Class Theories of Economic Development
A. Linear stages of growth model
The financial crisis of Indonesia resulted to double digit inflation. The key,
however, to its growth was driven mainly by domestic consumption which accounts
for three-fourths of Indonesias Growth Domestic Product. This is in contrast to
Harrod Domar Growth Model wherein savings is needed to boost investment and
growth.
The economic growth was primarily financed by private investment which
includes both foreign and domestic. The financial reform included reducing debt of
government, strengthening of corporate and banking sector, and reduction of bank
susceptibility.
B. Theories and Patterns of structural change
An international financial crisis greatly affected Indonesia which triggered
the structural change. The country moved towards industrialization rather than
focusing on agriculture. With relatively cheap labor and growing domestic market,
the manufacturing output and exports evidently increased.
Moreover, in May 2011, a master plan was launched which aims to increase
infrastructure, investment spending and level of innovation. The plan includes
sectors such as hydroelectric and solar power, new roads, mining, expansion of
internet industry and building several factories.
C. International- dependence revolution
As opposed to other third world countries which needed aid from an elite
nation, Indonesia has been able to stand alone amidst the global financial crisis
aside from the crisis that happened in the 1960s due to hyperinflation. The
government itself was able to encourage foreigners to invest in their country in
exchange for natural resources which Indonesia was known for. The country is
independent in a such a way that they prioritize the needs of the people first by
reducing inflation through having a reform on the basic needs such as food and
also they implemented various social programs such as employment opportunities
that enable the country to rise from poverty.
D. Neoclassical, free market counterrevolution
As in the case of Indonesia, Neo-classical dependence is decreased
because the government implement on better income distribution that narrowed
the inequality between the rich and poor. Although there still exist the domination
of the rich versus the poor, the government is persistent to achieve the ideal status
of the society. As a matter of fact, in less than one generation, the government was
able to lift 27 million people out of poverty which is approximately 50% of the total
poor. In connection to this, rural and urban poverty dropped to 14% and 17%,
respectively.


V. Critical Constraints
The country faces critical development constraints that are hampering the
governments efforts to achieve its development goals. These include inadequate and
inefficient infrastructure, weak government and institutions, unequal access and poor
quality of education, and insufficient mainstreaming of environmental concerns.
A. Inadequate and inefficient infrastructure both at national and sub-national levels,
Indonesia fairs poorly in the availability and quality of its infrastructure that
threatens to reduce economic returns to investment (ADB, 2010). With poor and
low quality of infrastructure, this constraints both existing and potential investors to
invest in Indonesia. A survey conducted by Japan revealed that 28.4% of the
respondent Japanese firms consider inadequacies in infrastructure to be a major
constraint in investing (ADB, 2010). These findings are an important measure for
the potential foreign investors of the attractiveness of a country, as businesses that
are not yet invested there have better options to locate elsewhere.
Indonesia is known to be one of the worlds richest countries in terms of
national resources and biodiversity. The economy of the outer islands of Indonesia
depends on agriculture but availability of irrigation services is also a constraint.
The irrigation infrastructure is inadequate, inefficient and poorly maintained and
this hampers crop productivity in the countrys agricultural sector.
B. Weaknesses in governance and institutions
Decentralization weakened governance and institutions generally. Of
particular importance are areas of control of corruption, government effectiveness,
and prevention of recurrent acts of terrorism and violence. Prevalence of
corruption and low government effectiveness, in particular, are reducing the
development impact of public sector investment and adding to investors cost of
doing business (ADB, 2010). The countrys control of corruption is still somewhat
perceived to be less effective.
It is believed that introduction of decentralization affected governments
effectiveness to deliver government services, especially at the subnational level.
Inequitable distribution of well-qualified personnel and poor effective coordination
among levels of government made it difficult to deliver high quality services and
infrastructure (ADB, 2010).
The occasional recurrence of acts of terrorism and violence, too, has
adversely affected the investment climate, deterring both domestic and foreign
investors (ADB, 2010). This has been caused by corruption which investment
climate surveys identify to be a major constraint to investment.
C. Unequal access to and poor quality of education
Education, particularly, secondary is a key to accessing economic
opportunities. Despite having a good rate of primary school enrollment, inequality
in access to secondary and vocational education is still rampant among rural areas
and less developed regions in Indonesia. Quality of education still needs
improvement in terms of its poor facilities, insufficient supplies and high
absenteeism among teachers.
D. Insufficient mainstreaming of environmental concerns including climate change in
development planning
Lack of understanding and awareness of local and global implications of
growth are weak. Sufficient policies are in place but there is lack of capacities to
implement and enforce. The resources are limited to implement mitigation and
adaptation measures and market failures are distorting incentive structure.


VI. Conclusion
Indonesia, despite steady economic growth in recent years and favorable
performance compared with other countries in Southeast Asia, faces formidable
challenges going forward. However, the countrys economic growth has not fully
recovered to the level that prevailed before the 1997 Asian financial crisis. Poverty and
regional disparities continue to remain rampant. Moreover, economic growth has not
been accompanied by significant employment generation, barely keeping up with the
pace of labor force growth.
Indonesias national development plan for 20052025 sets a vision of a country
that is self-reliant, has a highly educated population with capable human resources, has
no discrimination, and is prosperous enough to fulfill its populations needs. This will
require high levels of economic growth that is both socially inclusive and
environmentally sustainable. It is identified that in order to overcome the binding
constraints to this growth, Indonesia needs to improve its infrastructure, enhance the
education system to provide a more capable workforce, revive its manufacturing sector
to open up employment, and facilitate these efforts through substantially improved
governance and institutions. Furthermore, this growth must be accomplished in a
manner that is harmonious and not destructive to the environment and natural resource
base.

VII. References
Asia Development Bank (2010). Indonesia Critical Development Constraints.
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2010/indonesia-critical-development-constraints.pdf
Beals, R. (n.d.). Trade Patterns and Trends of Indonesia. Retrieved February 5,
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Economy of Indonesia (n.d.). In Wikipedia. Retrieved February 5, 2013, from
http://en.wikipedia.org/wiki/Economy_of_Indonesia
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Marunung (2012). Indonesia Holds Key Rate as Growth Withstands Global Risks.
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