Saving not Spending: Indonesia’s Domestic Demand Problem

Indonesian income per capita has risen rapidly in the past 10 years. The growth in income, combined with an expanding middle class, has corresponded with strong growth in retail sales. Recently, however, this trend has started to change. Consumption growth has been relatively stable, but retail sales are growing more slowly than in the past. In order to develop a clearer picture of consumer spending in Indonesia, we discuss differences in spending behaviour across two income groups—lower-middle income and upper-high income. Consumption varies across income groups, so saving and investment patterns may also vary. We find that the upper-high income group, despite having more income than in the past, is less willing to invest and borrow than previously, and that the lower-middle income group continues to suffer from a lack of purchasing power. Meanwhile, investors are simply postponing investments, preferring to take a ‘wait and see’ approach. Excess saving can be economically problematic. If effective demand is too weak, it can have negative consequences for long-term economic growth. We begin, however, by surveying recent economic developments in Indonesia, focusing on the third quarter of 2017. Indonesia’s current rate of economic growth (5.1% year on year) places it among the world’s fastest-growing large economies, but the lack of acceleration is a concern: growth has not exceeded 6.0% since the second quarter of 2012. Despite this lack of acceleration, Indonesia has achieved macroeconomic and financial stability. The balance of payments has been improving since early 2016, with a narrow current account deficit—well below 3.0% of GDP—and a surplus trade balance. Exports grew by 17.3% in the third quarter of 2017, owing to rising commodity prices (which boosted export growth in both value and volume), while imports grew by 15.1%, although the impact on economic growth has so far been more moderate than in the commodity boom of 2000–2011. The growth in commodity exports has also benefited Kalimantan, Sumatra, and other commodity-rich regions. However, rising commodity prices come with some caveats. They might boost growth for a short period, but they raise the challenge of making this growth sustainable. We have seen this many times in the past. Increasing institutional capacity to better implement policy initiatives, for one, will help to deliver sustainable, high-quality economic growth.     

Understanding the role of trade agreements in Indonesia’s FDI

In this paper, we develop the hypothesis that trade agreements influence foreign direct investment (FDI). We extend the conventional model of FDI determinants to accommodate the role of trade agreements. Fitting Indonesian data to this model, we discover strong evidence that, while both bilateral and multilateral trade agreements positively influence Indonesia’s FDI, multilateral agreements have a larger effect. We further distinguish FDI by sector and find sector-specific trade agreements play an active role: these agreements positively influence FDI in the primary and service sectors, but not in the manufacturing sector. We also find that trade agreements positively influence FDI through the export and total factor productivity channels, and less so through the economic growth channel.     

Europe’s Demographic Deficit A Plea For A Child Pension System

Summary This paper considers the economic implications of the stalling birth rates and demographic development in Europe. To remedy for this it proposes a child pension system. This system allows additional pension facilities depending on the number of children raised. It should be a PAYG pension financed with an income tax. The main motivation for this is that parents have invested resources which also benefit society.18th Tinbergen Lecture, Amsterdam, October 22, 2004Ifo Institute for Economic Research at the University of Munich.I am grateful to Lans Bovenberg and Peter Cornelisse for useful conversations about the Dutch pension system and Tinbergens views on children and pensions. I thank Robert Koll, Regina von Hehl and Elsita Walter for careful research assistance, and Tobias Seidel, Michael Stimmelmayr, Martin Werding and Markus Zimmer for useful comments.     

Implications for Indonesia of Asia’s Rise in the Global Economy

This article projects Indonesia's production and trade patterns to 2020 and 2030 in the course of global economic development under various growth and policy scenarios. We support our projections of the global economy by employing the Global Trade Analysis Project (GTAP) model and version 8.1 of the GTAP database, along with supplementary data from a range of sources. Our baseline projection assumes that trade-related policies do not change in each region, but that endowments and real GDP do change, at exogenously selected rates. We use this baseline and its assumptions to analyse how potential global changes may affect the Indonesian economy over this and the next decade. We then consider the potential impacts of three policy reforms by 2020: an increase in global rice exports, associated with the opening of Myanmar; the recently imposed export taxes in Indonesia on unprocessed primary products; and the implementation of Indonesia's new food law.     

Migrating for children’s better future: Intergenerational mobility of internal migrants’ children in Indonesia

Internal migration dominates population mobility in Indonesia; according to the 2010 census, there were almost 30 million permanent migrants, around 12.5 percent of the population. The effects of this internal migration on the second generation continue to be under-explored. This paper investigates the long-term impact of parents’ migration on their children’s intergenerational per capita expenditure when adults. We argue that parental migration affects the human capital investment on their children, which has a direct impact on the children’s outcomes when adults and on their deviation from the parents’ economic status, hence their intergenerational mobility. We pooled the five waves of data from the Indonesian Family Life Survey (IFLS), and we tackled the self-selection of parents’ migration using an endogenous treatment regression. Our findings show that despite the fact that parental migration increases the education level of children and their per capita expenditure, it increases intergenerational mobility of the children as adults compared with non-migrants’ children when they live in urban areas as adults, come from the poorest parents, or had migrated during childhood. The left-behind children have more intergenerational mobility only if their father migrated, while there is no significant impact on intergenerational mobility if their mother migrated. The results are consistent with the persistence of Indonesian individual inequality.     

How Robust Is Indonesia’s Poverty Profile? Adjusting for Differences in Needs

Poverty profiles showing how the magnitude of poverty differs across subgroups of a population are important tools in designing effective social protection programs. Using data from the March 2013 round of the National Socio-economic Survey (Susenas) and the fourth round of the Indonesia Family Life Survey (2007–8), I explore the sensitivity of Indonesia’s poverty profile to different assumptions about the relative costs of individuals, taking into account differences in age, gender, body weight, and physical activity levels. I adopt parameter estimates for my simulation exercises from various Indonesia-specific publications, as well as from a joint intergovernmental consultation on nutrition. I compare my estimates with the per capita scale used by Statistics Indonesia (BPS), the central statistics agency. My findings suggest that the age–poverty relationship in Indonesia is sensitive to assumptions about the relative costs of individuals, with all alternative scales showing substantially lower poverty incidence among young children than by BPS’s estimate. Overall, however, I find that Indonesia’s poverty profile is relatively robust.     

Risks,Resilience, and Reforms: Indonesia’s Financial System in 2019

Indonesia has managed the complex challenges of the global economy well. The country's capital outflows were smaller in 2018 than during the Taper Tantrum in 2013; the rupiah had regained most of its lost ground by January 2019; the Indonesian stock market has outperformed its peers; growth is forecast to remain stable; inflation is low; unemployment remains below its five-year average; consumer and business confidence are robust; and the government budget has improved through a smaller deficit and cheaper borrowing costs. But significant risks remain. This paper assesses these risks and evaluates the adequacy of Indonesia's crisis management framework. It finds that the framework has serious deficiencies that could see liquidity challenges become systemic solvency crises. The framework effectively removes Bank Indonesia as the lender of last resort, risks politicising the process of crisis response, and could mean slower, less effective responses to crises. This paper explores how the framework could be improved and what reforms could be undertaken to deepen Indonesia's financial system, strengthen financial resilience, and boost the long-term growth outlook.     

Indonesia’s Year of Democratic Setbacks: Towards a New Phase of Deepening Illiberalism?

This article suggests that 2017 has been a year of distinctive democratic setbacks in Indonesia. It offers a tentative framework that explains how democratic regression is likely to continue by virtue of the further mainstreaming of conservative Islamic morality and reactionary hyper-nationalism in Indonesian political discourse and practice. It contends that such mainstreaming has been a growing feature of intraoligarchic competition in Indonesia, the effect of which is to accentuate longstanding illiberal features within Indonesian democracy. While the article focuses on the conflicts surrounding the highly polarising and emotive Jakarta gubernatorial election of 2017 in order to expand on this framework, other controversies are also discussed, including those regarding corruption eradication and continuing impediments to a national ‘reconciliation’ with former Indonesian communists. Developments in Indonesia are set against a global background characterised by growing threats to liberal democracy and the emergence of anti-pluralist political impulses in a range of societies.     

The Services Sector as a Driver of Change: Indonesia’s Experience in the ASEAN Context

By various performance indicators, the Indonesian services sector ranks below those of its main ASEAN neighbours. This is concerning for Indonesia, given the the increased attention worldwide on the services sector as a likely source of growth, the contribution of the services sector to the competitiveness of other sectors, and the opportunities available for capturing the gains from innovation and change in services. There is scope, we argue, to increase the number of formal jobs in the sector and to dispel its reputation as the employer of last resort. We find that a restrictive policy regime contributes to the sector’s poor performance, leading to an argument for reform. We discuss a potential strategy for such reform, focusing on four factors: increasing transparency and policy information; capturing the opportunities from international commitments; and exploring the potential of, one, new technology, and, two, urbanisation.     

Consistency between Sakernas and the IFLS for Analyses of Indonesia’s Labour Market: A Cross-Validation Exercise

This article assesses the consistency between Indonesia’s National Labour Force Survey (Sakernas) and the Indonesia Family Life Survey (IFLS) for analyses of the country’s labour market. I show that Sakernas and the IFLS depict different levels of and changes in labour-market indicators. My estimates of the labour-force participation model, the sector-choice model, and the Mincer model are all statistically different between the two surveys, although the magnitudes are similar for labour-force participation and sector choice. The IFLS shows a much higher return to education than Sakernas, according to the Mincer model. In addition, I find that the cross-sectional sample of the IFLS and the panel sample of the IFLS corrected for attrition yield similar coefficient estimates from all equations. The findings in this article provide an important reference for researchers interested in using Sakernas and the IFLS—either individually or combined—to analyse labour-market issues in Indonesia.