Economic and Trade Growth of Indonesia

Introduction-

Indonesia is an emerging economy that has the 4^th largest population and the sixteenth largest economy which is the largest in the South-East Asian region. It has strong growth but is stained by its history of poor governance of economic policies surrounding development and growth of the economy. This poor governance has caused the economy to be volatile and lose investor confidence.

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Indonesia has a optimistic goal of joining the ranks of the top 10 world’s economies and being classified as a ‘developed economy’. Indonesia will not make this goal if it continues to operate in the way it does, but if Indonesia is governed very well with sound economic policy surrounding their downfalls it should be able to take advantage of its growing region, large domestic market and large low pay workforce to reach its goal.

Economic Growth-

Previously Indonesia was considered a developing economy but now with it’s recent industrialisation and integration into the world economy complemented by its strong growth and prospects is now considered an emerging economy.  Since 1980 Indonesia has growth at an average rate of over 5%, although it is not as quick as some of it’s East Asian neighbours it still places Indonesia well above most of the Economies in the world. In 2011 the government of Indonesia set goals of becoming one of the world’s 10 largest economies by 2025, to achieve this Indonesia would have to rise its annual growth by 2%. If this is achieved Indonesia would be among the world’s greatest emerging economies known as the BRIC economies.

International and regional business cycle has had extreme impacts on the Indonesian economy. For example, during the rise of global oil prices most economies experienced downturn, but Indonesia had an acceleration of growth due to its major oil exporting industry. This was upturned in the 1980’s with the oil prices pushed down by over supply and with them the growth rates of the Indonesia’s economy. The greatest impact of the International business cycle in Indonesia was shown in the 1997 Asian Financial Crisis which saw the in Indonesian economy contract by 13% in one year.

Due to the affects of globalisation Indonesia’s inflation rate has been very volatile because increases in fuel prices(2005,2013) and increases in food prices(2008). Inflation rates are expected to remain stable in the foreseeable future due to stagnant growth reducing demand pressures.

• GDP of 1.016 trillion USD
• GDP per capita 3,846.86 USD

GDP graph

Source: World Bank

Income distribution

– Globalisation has boosted economic growth and income per capita. This has led to millions of people being brought out of poverty and a higher amount of disposable income with a wealthier middle class which can boost domestic markets due to higher domestic demand. However since globalisation income distribution has been becoming more unequal, this can be seen by the shift of the Gini coefficient from 0.3 in 1990 to 0.4 in 2016. This rapid shift to inequality is due to a range of reasons, some of which is due to entrepreneur’s being able to take advantage of new markets, and new technologies in today’s globalised economy.

-Rich getting richer: As Indonesia integrated into the world Economy it’s businesses gained access to massive markets, this allowed for Indonesia’s best entrepreneurs to make billions which benefited everyone through economic growth, investment in domestic manufacturing and domestic employment but the income from employment was nothing in comparison to the billions given to entrepreneur’s. And after the creation of these corporations as the world’s population grew and the world reduced it’s trade restrictions these tycoons gained immense wealth further creating the divide between wealth. A recent report found that 1% of Indonesia’s population owned 49.3% of the country’s wealth.

-New skills demanded: As the world has become more dynamic and globalised it has become more reliant on new technologies to access remote markets, conduct research and create efficient and cost effective products. This leads to a structural change in the demand of the type labour to higher skill. Due to the rich having better access to education they are more likely to be able to work in these high skill, high demand jobs they will usually gain more pay and work than lower income families. This leads to further income disparity. This is shown in Indonesia’s structural change from agricultural employment to services in the globalisation period.

Quality of life

-GNI per capita is US$10,355, it is still behind 115 other countries in terms of living standards.

-The World Bank classifies Indonesia as a lower-middle-income country, suffers from a relatively high incidence of poverty, low economic development and Poor performance of other key indicators.

As Indonesia became more integrated into the world economy their quality of life has been significantly impacted, these impacts can be displayed by analysing the relationship of key indicators of quality of life with the growth of their economy as the economy became more globalised.

This first example shows the positive impacts of integration on quality of life as you can see through the relationship of the economies GDP growth and the growth of Indonesia’s HDI. Between 1990 and now the Economy has become more globalised growing its economy and consequently so does its HDI.

Indonesia’s GDP Source: World bank

                                                                                                                             Indonesia’s HDI Source: UNDP

My second example shows the negative impacts of becoming more globally integrated. Recently the overall unemployment rate has been improving(5%), however integration into the world economy has seen high volatility in unemployment due to their volatile globalised economy this is shown in the spike of unemployment following the massive 13% contraction of the Indonesia’s economy due to the Asian Financial Crisis.

Unemployment Indonesia

Indonesian GDP

Source: World Bank

Trade

The Indonesian Economy is less integrated into international trade than the average East Asian economies, therefore trade is less important for their economy. This means that Indonesia has fewer cyclical impacts through trade linkages. However, Indonesia is most closely integrated at a regional level, which is why the AFC had such a large impact on the Indonesian Economy.

Indonesia’s trade (% of GDP)

Trade in goods and services-

Liberalisation of trade has allowed Indonesia to access global markets which has led to stronger economic growth. Exports have grown substantially since the beginning of Indonesia’s global economic integration in 1985 peaking around 50% before the GFC, which had now significantly dropped recently due to protectionist measures, appreciation of Indonesian currency and poor commodity export performance. Another reason for weak trade performance is due to limited finance access, poor infrastructure, complex regulations and increased trade barriers, Indonesia’s manufacturing sector is not competitive in comparison to similar economies.

Trade Agreements-

As Indonesia has become more integrated with the world economy, they have participated in global, regional and bilateral trade agreements. This has allowed Indonesia to increase economic growth through mutual benefit agreements. One such agreement is the Association of South-East Asian Nations (ASEAN). This agreement which includes 10-member nations uses a Common Effective Preferential Tariff scheme which reduces tariffs between ASEAN nations by 5%. This was made in an attempt to make a single market of 600 million people with free flowing goods, capital and labour. This agreement shows how globalisation, through trade agreements, has allowed Indonesia to expand its’ market access immensely.

Structural Change-

To integrate into the global economy Indonesia had to remove trade barriers to allow for foreign trade and investment. This meant that the highly protected Indonesia in the 1980’s underwent massive change. Between 1987 and 1995 manufacturing tariffs were reduced from 86% to 24% and agricultural tariffs were reduced from 24% to 12%. The country continued to pursue trade liberalisation which has allowed it to thrive in an increasingly globalised economy. However due to this pursuit of global trade integration Indonesia’s agriculture sectors have fallen in importance due to their inability to compete well in a global economy. This has led to a structural change of Indonesia’s economy (as well as new technologies) away from agriculture to towards manufacturing and services.

Investment

A lacking domestic private investment in Indonesia means that Indonesia’s gains substantial benefits from integration into the global economy through foreign direct investment (FDI). FDI had been increasing and was USD32Bn in 2017, but this year have dropped significantly forecasted at USD12bn this year. These inflows are significantly lower than similar economies which is due to inconsistent and poor government policy.

During the AFC Indonesia’s central bank was unable to stabilise their currency, resulting in Indonesia letting it float freely, this caused the rupiah to suffer massive depreciation causing massive disturbance in financial markets and the economy.

Environmental Sustainability

The industrialisation and globalisation of the Indonesian economy has had an adverse effect on the environment. In the past decade and a half Indonesian forests fell by 15% due to logging and land clearing, water and air pollution has increased significantly. This is in part due to the massive increase of demand for natural resources such as coal or wood to continue servicing and supplying the world market. As you can see in this graph at the beginning of Indonesia’s integration into the world economy their Co2 emissions have increased as their economy gained the demand for natural recourses due to the increased stress on production industries.

Indonesia Co2 emissions per capita

Source: World Bank

Due to Indonesia being a cluster of islands coastal inundation and extreme weather events which are side affects of climate change will significantly affect them. So as the world continues to globalise and industrialise the world will produce more emissions. Thus if more environmentally changes are not made Indonesia will have to face terrible impacts from climate change.

Strategies for economic growth/development

Indonesian economic policy has been evolving since the beginning of globalisation in the 80’s Recently they have been attempting to, according to Indonesia’s 2017 growth strategy ‘promote growth and enhance people’s welfare supported by sustainable growth, resilient economic sector, inclusive economic development, and macroeconomic and financial stability. The Government remains committed to continuing structural reforms and accelerating infrastructure development to achieve these objectives’

-response to globalisation policies:

To create economic growth Indonesia’s government orientated their investment from import substitution to export manufacturing in the 1980’s. This has allowed Indonesia to increase its access to the globalising world hence increase access to investment and trade.

During this time Indonesia had also commenced a series of trade deregulations to increase competitiveness of their domestic producers against their global competitors.

Another focus by the Indonesian government in recent decades is the liberalisation of financial markets, beginning by shifting from a fixed exchange rate to a managed in 1978. The rupiah(Indonesia’s currency) was devalued in the 1980s to improve the competitiveness of domestic producers. This managed float backfired in the AFC due to the inability to control the currency during the crisis. This led to a massive depreciation causing extensive disturbance to financial markets and the economy.

-Recent growth policies:

Former President Yudhoyono presented a 15-year plan in 2011 that was designed to boost economic growth from an average of 6% to 8%, through the investment into infrastructure and education. This plan concentrated on developing economic corridors and development of export markets.

Later with the election of President Joko Widodo in 2014 the plan’s priorities shifted. Widodo government has mostly made minor changes to make businesses easier to run. Due to this Indonesia is struggling to maintain growth of 5% much less than Yudhoyono’s plan of 8%.

-Economic Development:

In order to further integrate with the global economy and have a say in global matters Indonesia has joined the UN. Due to joining the UN Indonesia along with all UN members had agreed on a plan to work together to meet the needs of the world’s poorest which was named 8 Millennium Development Goals (MDGs).

Source:UNDP

Indonesia failed to meet the MDGs target by 2015 but made serious advances in most areas The Indonesian government is still planning on completing these goals and is building on the progress of MDG’s.

Examples of Development policies:

-Environmental sustainability

Indonesia pledged to reduce emission by 29% by 2030 but is track to reduce emissions by just 19%. This average attempt at emissions reduction is due to a dependence on fossil fuels and deforestation. Indonesia is attempting to reduce emissions through the increase the supply of renewable energy through geothermal and hydropower. USD200m was used to fund geothermal generators.

-Education

Existing education policies are poor at best. The Indonesian government widened its Program Indonesia Pintar (PIP) policy which provided subsidies for poor children. But PIP fails to account for the increase in cost’s for secondary education, causing high dropout rates.

-Recent Anti-Globalisation:

Recently policies seem to be opposing integration with the global economy, through restrictions on investments and local content rules. These policies are created to boost domestic development but will weaken their economy overall and lower foreign investment confidence.

Conclusion

Indonesia is a showcase for taking advantage of Global and regional integration through trade, finance and investment liberalisation delivering massive economic growth and development. However, it is also a showcase for the extensive damage an economy can receive if their economic policies are not properly assembled.

In conclusion Indonesia has achieved strong growth but is faced with various challenges that it must plan for through well prepared financial and government institutions to create policies to boost the economy through Indonesia’s downfall’s such as infrastructure and education. This will create stronger economic growth and stability maintaining investor confidence and maintaining the recourses to help with economic development such as poverty and environmental sustainability. Whether Indonesia can make strides in these areas will decide on whether it can succeed in joining the worlds 10 leading economies by 2025

BIBLIOGRAPHY

All the information I gained came from these resources: