Challenges in Indonesian Economic Development

ES_17 Mar., 09 - south side of Saddle - 49

Arianto A. Patunru, LPEM-FEUI

In my paper for the PECC conference earlier this year on Growing APEC Economies:  New Challenges & Approaches  (all the papers are available here and my chapter is at page 45), I observe that Indonesian growth has been reasonably good in recent years.

Indonesia is still growing quite well, although its growth performance is below that of the 1980s. During the Asian financial crisis, Indonesia was the most severely hit country in the region, with a contraction of 13%. However, in the recent global financial crisis, its growth was surprisingly quite impressive with a resilience of 4.5%. (p. 47)

There are however some concerns.

One sometimes mentioned, but which I think is less important, is the value of the rupiah.  It generally falls in the range of 8000-9000 per $US and when it gets to the low end of that range, some people become concerned.  But I think a rate of around 8400 is manageable.

A more important issue I argue is the presence of subsidies in the national budget, especially subsidies for fuel.  These are not only not productive and not environmentally friendly but they are also mistargeted since ‘almost 50% of the subsidy is enjoyed by the 10% highest income group, and only less than 2% is enjoyed by the bottom 10%’ (p. 48)

Another important concern has the short-term capital inflow due the interest rate differential. But I observe that:

in recent months, FDI has been growing again and the proportion of short-term capital inflow (even though it is still quite big) is decreasing compared to the proportion of FDI. This is a good sign as it shows that investors have confidence in Indonesia and is investing in the economy.  (p. 48)

Other concerns which I discuss in the paper include

  • the capacity of the manufacturing sector to provide employment (the service sector is growing but can it provide enough jobs?  Meanwhile it appears to be the more capital not labour intensive part of manufacturing which is growing faster);
  • the lack of a social security system and the implications of that situation for the sorts of people in the pool of those unemployed.

My main concern however is the poor quality of infrastructure in Indonesia, and as a consequence the lack of integration among its regions.  There are wasted opportunities from these barriers to integration.

Comparing to other countries, I find that

Indonesia lags behind (in infrastructure quality) many of the other economies. To improve on this aspect, new developments in infrastructure are required. As the government’s capacity for infrastructure development is (limited), there is a need for private sector participation. In order to encourage the private sector to invest, it is necessary to have in place a good investment climate and good public-private partnership schemes (p. 52)

The design of these arrangements is a priority in Indonesia.

I conclude by saying that:

while Indonesia’s economic progress has been relatively stable in the past few decades, it seems that the achievement thus far is still sub-optimal. In order to reach its potential, Indonesia needs to tackle its most binding constraints: infrastructure and logistics (p. 52).


1 Comment

Filed under Economic development, Energy, Financial market, Indonesia, Infrastructure

One response to “Challenges in Indonesian Economic Development

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