Indonesia's economic performance in comparative perspective and a new policy framework for 2049

This is the first paper of a planned ‘Indonesia 2049’ project, which asks how far Indonesia's economy will have developed 100 years after actual political independence in 1949. We compare dimensions of Indonesia's economy with those of two oil exporters (Mexico and Nigeria), three large populous developing economies (China, India and Brazil) and three Southeast Asian neighbours (Malaysia, Thailand and the Philippines). Under Soeharto, Indonesia's economic performance was better than it had been under Soekarno, and above the average of the eight comparator countries, but below that of the East Asian economies. Our view is that Susilo Bambang Yudhoyono's second administration must adopt a new economic policy framework to ensure successful transition to knowledge-based growth. This proposed new framework goes beyond the Washington Consensus of ‘getting prices right’ and ‘getting institutions right’ to include ‘getting the role of science right’ and ‘getting the conception of the reform process right’.     

ECONOMIC REFORM WHEN THE CONSTITUTION MATTERS: INDONESIA'S CONSTITUTIONAL COURT AND ARTICLE 33

Article 33 of Indonesia's Constitution requires the state to ‘control’ important branches of production and natural resources. The meaning of ‘control’ has been a matter of significant debate since Indonesia's independence: does it require the state to manage directly, or is regulation enough? The government has recently sought to break down government monopolies and attract private investment in key sectors. To this end it has enacted a raft of new statutes, but they have been challenged in Indonesia's new Constitutional Court. The Court has opted for the ‘direct manage ment’ interpretation of article 33, striking down statutes that implicitly interpret it as requiring government regulation only. This paper discusses these decisions and, more broadly, problems arising from judicial intervention in economic policy formation. It also considers how the government has sought to circumvent the decisions, and the possible consequences of state non-compliance for the Court's future.     

The Demography of Indonesia in Comparative Perspective

Having reduced its fertility rate over the past 40 years, Indonesia has reached a new demographic crossroad. Its fertility rate is now around 2.5 births per woman, which, if sustained, would add substantial numbers to Indonesia's population in the future. There are concerns within Indonesia that the present level of population growth is an obstacle to continued economic development and, accordingly, that fertility should be reduced to the replacement level of 2.1 births per woman as soon as possible. Yet a comparative perspective indicates that countries such as Singapore, Japan, and Thailand are concerned about the effects that their very low rates of fertility are having on their labour forces and their rates of population ageing. This article suggests that with the right policy settings Indonesia can avoid this outcome yet continue to reduce its fertility. It discusses the implications of Indonesia's population growth and distribution for its economy, as well as the poor quality of demographic data.     

Post-crisis export performance: The Indonesian experience in regional perspective

This paper examines post-crisis export performance in Indonesia against the backdrop of pre-crisis experience and the comparative export performance of other Southeast Asian countries. It surveys trends and patterns of export performance, focusing on comparative experience in major commodity categories and changing revealed comparative advantage. It also examines the implications for Indonesia's export performance of China's emergence as a major competitor in world trade, considers market prospects for textile and garment exports following the demise of the Multi-fibre Arrangement, and explores the factors contributing to the post-crisis export slowdown. The findings support the view that Indonesia's poor export performance in the post-crisis era is largely supply driven. They strengthen the case for reversal of recent backsliding in macroeconomic policy reform, and for speedy implementation of the unfinished reform agenda. Prudent macroeconomic management, while necessary, is not sufficient to achieve rapid and sustained export growth in an era of rapid economic globalisation.     

Does Economic Growth Really Benefit the Poor? Income Distribution Dynamics and Pro-poor Growth in Indonesia

We explore the nexus between poverty, inequality, and economic growth in Indonesia between 2002 and 2012, using several pro-poor growth concepts and indices to determine whether growth in this period benefited the poor. Our regression-based decompositions of poverty into growth and redistribution components suggest that around 40% of inequality in total household expenditure in Indonesia was due to variations in expenditure by education characteristics that persisted after controlling for other factors. We find that economic growth in this period benefited households at the top of the expenditure distribution, and that a ‘trickle down’ effect saw the poor receive proportionately fewer benefits than the non-poor. If reducing poverty is one of the Indonesian government's principal objectives, then policies designed to spur growth must take into account the possible impacts of growth on inequality.     

Indonesia's missing multinationals: business groups and outward direct investment

Some countries produce more multinational enterprises (MNEs) than others. India and China, in particular, have produced a number of dynamic MNEs whose success abroad generates important economic benefits for the home economy. Motivated by this observation, we describe the internationalisation record of Indonesia's major business groups. Using an archival analysis method, we find that, with a few exceptions, Indonesia's largest business groupings focus predominantly upon the domestic market. We advance two explanations for this investment pattern. The first suggests that the apparent absence of Indonesian MNEs is an accounting error, because firms’ outward investment is under-reported in official statistics. The second suggests that Indonesian outward foreign direct investment is impeded by a combination of institutional and firm-level factors that arrest the internationalisation of all but the largest firms. We discuss the policy implications of these findings and reflect on their theoretical implications.     

Towards improved monetary policy in Indonesia

Indonesia's depreciation vastly exceeded that of all other countries hit by the Asian crisis. Indonesia also experienced far higher inflation. This paper argues that there is a close medium to long-term relationship between money growth and inflation in Indonesia, and that this has not been greatly disturbed by the crisis. It argues that the country's disappointing performance in relation to maintaining the value of the rupiah can be explained by the central bank's failure to sterilise the monetary impact on base money of its last-resort lending to the banks. The fundamental lesson is that Bank Indonesia would be well advised to adopt slow and steady growth of base money as the nominal anchor for monetary policy, now that the pre-crisis policy of slow and steady depreciation of the rupiah has been abandoned.     

Growth,Poverty, and Inequality under Jokowi

SUMMARY

The political authority of President Joko Widodo (Jokowi) was bolstered in the third quarter of 2015 by a cabinet reshuffle, his coalition's gaining a parliamentary majority, and several foreign-policy developments. Indonesia's request to rejoin OPEC, for example, after having left in 2008, seemed more about international relations than oil prices, while official visits to the Middle East and the United States allowed Jokowi to project his presidency on the international stage. He still faces resistance from within his own party, however.

Jokowi's politically bold reshuffle of economic ministers in August soon yielded a range of policy announcements. In September and October, his government introduced its first substantial set of reforms—a number of economic policy packages intended, among other things, to attract investment and stimulate domestic demand. If even half of these policies are put in place, the impact on Indonesia's economy should be tangible.

Few countries have escaped the effects of falling global commodity prices and China's growth slowdown. At 4.7%, year on year, in the third quarter Indonesia's rate of economic growth again fell short of the government's target. Slowing growth and a negative outlook have lowered market expectations and weakened the rupiah, which is also burdened by the large outstanding external debt held by corporate borrowers. Indonesia's real effective exchange rate has recently begun to depreciate, however, which may stimulate exports. Growth prospects will also improve if the substantial increase in capital and infrastructure spending allocated in the state budget is realised.

Against this backdrop, we focus on what has happened to poverty and inequality in Indonesia since Jokowi took office. The distributional impacts of the current macroeconomic climate are likely to be hardest felt by the poor. Indonesia is well known for its record on poverty reduction, but between September 2014 and March 2015 the share of the population in poverty increased, even though economic growth was close to 5.0%. Slowing growth, rising food prices, the falling real wages of farmers, and the delayed disbursement of fuel-price compensation all had an effect. Such impacts may be mitigated in the medium term by Jokowi's budget reallocations to infrastructure, if realised, and his expansion of social spending.     

An economic survey of northern Sulawesi: turning weaknesses into strengths under regional autonomy

The separation of North Sulawesi and Gorontalo into two provinces in 2001 complicated the issue of making regional autonomy work for northern Sulawesi, a region far removed from Indonesia's centre of power. Although the region had come through the economic crisis relatively well, the over-reliance on coconuts and the lack of a focus for dynamic development remained a challenge. Tourism, mining and services were the most dynamic sectors but, for different reasons, none of these sectors can be relied on for steady long-term growth. With the selection of the corridor from Manado to Bitung as one of Indonesia's 13 integrated economic development zones (Kapet), and given the new North Sulawesi province's potential role as a ‘gateway’ to Northeast Asia, the longer-term prospects for this province are brighter than those of Gorontalo. Nevertheless, capitalising on North Sulawesi's potential remains a formidable challenge.     

论贫益式增长与包容性增长的内涵及其政策要义

贫益式增长与包容性增长是人的发展经济学领域最新提出的两个概念,旨在重铸第三世界国家新世纪以来的发展目标。消除贫困,促进穷人的全面发展和倡导全社会机会平等、成果共享分别是贫益式增长和包容性增长的本质要求。第三世界各国政府可通过实施一揽子益贫式和包容性政策工具改变原有发展路径,彻底打破贫困恶性循环和两极分化的发展格局。     

Analysis and Management of Indonesian Money Supply Growth

This paper reviews Indonesia's record of monetary management over the last quarter century, showing that there has been a lack of stability in money growth, and that average growth rates have been higher than is consistent with low inflation. The source of monetary expansion is located primarily in growth of base money, which is here disaggregated into three components reflecting government policy in respect of the budget, the exchange rate, and interest rates, respectively. Exchange rate policy, through its effect on the balance of payments, is shown to have been the main cause of rapid and unstable monetary growth during this period. A contrast is also drawn between the author's preferred technique of analysing monetary movements and the 'accounting approach', based on money formation tables and favoured by previous writers in this field.     

Does Bulog Stabilise Rice Prices in Indonesia? Should It Try?

The intuition of economists is likely to be a poor guide to the social value of food price stabilisation, because of problems in modelling the impact of stabilisation on consumer behaviour, producer behaviour, and the macro economy, including the impact on economic growth. The potential for stable food prices to contribute to economic growth is especially relevant to the poor countries of Asia, where rice is important in macroeconomic terms. Indonesia's experience since 1959 presents an opportunity to test hypotheses about the design, implementation, and impact on social welfare of food price stabilisation. The model presented here explains Bulog's activities, and confirms that its interventions stabilise rice prices. Should Bulog try to stabilise rice prices? The answer is a clear yes in the 1970s and 1980s, but is less clear in the 1990s as Bulog's costs have risen and the share of rice in the economy has fallen.     

Pro-poor birth coverage and child health in Africa

This paper explores which African countries had relatively low rates of underweight children and relatively high birth coverage (percentage of births with a skilled attendant) in the poorest quintile. Swaziland and Rwanda emerged as relatively ‘pro-poor’ in that both measures were more than one standard deviation better than predicted by GDP per capita. Unlike Swaziland, Rwanda’s status as an outlier was eliminated in regressions controlling also for urbanisation, medical professionals per 1000 people and health spending, suggesting that its pro-poor outcomes were related to these factors. AIDS funding may have helped Swaziland provide primary health care to the poor, but its high birth coverage preceded the HIV epidemic. Although relatively pro-poor in international terms, Swaziland and Rwanda emerged as relatively unequal by the CIX measure of health inequality with regard to percentage of underweight children across quintiles. It is important not to conflate relatively equal with relatively pro-poor health outcomes.     

Structural Changes in a Reforming World Economy: Implications for Indonesia

How will rapid East Asian industrialisation and international trade policy reforms affect Indonesia's economy? Taking an economy-wide perspective and drawing on projections to 2005, based on a global applied general equilibrium model (GTAP), we show the impact of Uruguay Round implementation, and explore other international influences on Indonesia's and neighbouring economies. Trade reforms likely to accompany China's (and Taiwan's) membership of the WTO are projected to boost the competitiveness of Indonesia's primary sectors at the expense of light manufacturing and the overall economy, while failure by OECD countries to honour Uruguay Round obligations to open their textile and clothing markets would reduce industrialisation in the region, slowing growth in its net food imports. The benefits to Indonesia of APEC liberalisations are also reported. All projections were completed in 1997 before the enormity of the financial crisis became clear; follow-on research should quantify the growth slowdown's impact on these results.     

FOREIGN DIRECT INVESTMENT IN INDONESIA: FIFTY YEARS OF DISCOURSE

The topic of foreign direct investment (FDI) has been prominent in assessments of economic development in Indonesia during the past 50 years. In this article I review Indonesia's FDI record in a historical perspective; the current urge to control FDI inflows and the need to augment domestic savings and facilitate technology transfers are not at all new in Indonesia. I draw in particular on the discourse on FDI in this journal, the Bulletin of Indonesian Economic Studies, giving special attention to contributions by this journal to the international literature on FDI and its impact. The article demonstrates that the relation between FDI and economic growth has been less straightforward in Indonesia than elsewhere in Southeast Asia. Although FDI has grown in a restrictive investment climate, on occasion it has failed to do so despite more liberal conditions. This may be attributed to the sustained role of natural resources in determining Indonesia's attractiveness as a host country of FDI.     

Indonesia's Industrial Transformation 1 Part I

It is now possible to obtain a fairly complete picture of Indonesian industril development, based on the 1986 Economic Census and subsequent Updates, the mcorporation of the huge oil and gas sector, and die earlier industrial data base. The picture is one of dramatic growth and transformation since the late 1960s when Indonesia was one of the least industrialised countries for its size. In this paper we examine the pattern and changing structure of industry, focusing on industry composition, regional industrialisation, ownership, scale and wages. Indonesia's industrial transformation is evident not only in rapid Output and employment growth, but also in the transition to more capital and skill-intensive industries, a narrowing in the earlier very large (almost ‘dualistic’) productivity differentials, strong productivity and wage growth, a broadening of the industrial base outside Java, and a probable reduction in concentration levels (at least by establishment).     

Lessons of Post-War Development Experience

Abstract: This paper traces the development process from the optimism of the post-war era to the present scenario of adjustment, retrenchment and stabilisation. What were the mistakes and the success stories, and the lessons that can be drawn from them these last 40 years ? The paper takes a hard look at the ‘Golden Years’ of the 1950s and 1960s; it analyses the ‘debt-led’ growth of the 1970s and the resulting lost decade of the 1980s in Africa and Latin America. It goes on to examine the successes and failures that emerge from the history of the development process, and argues in favour of learning these lessons by resuming a policy of ‘redistributionwith growth’ and re-establishing strong international institutions to ensure future growth in developing countries. Résumé: Le présent document retrace le processus de développement depuisl'optimisme de l'apres-guerre au scenario actuel de l'ajustement, de redressement et de stabilisation. Quels ont ete les erreurs et les SUCCCS et les enseignements que l'on pourrait en tirer au cours de ces 40 dernieres annees? Le document examine a fond la « belle epoque » des annees 1950 et 1960; il analyse la croissance guidee par la dette des annees 1970 et en consequence, la decennie perdue des annees 1980 en Afrique et en Amerique Latine. I1 continue en examinant les SUCCCS et les echecs provenant de l'histoire du processus de developpement et donne les raisons pour lesquelles ces enseignements doiventttre retenus en reprenant une politique de « nouvelle repartition et de croissance » et en creant de nouvelles institutions internationales assez solides capables d'assurer a l'avenir la croissance dans les pays en developpement.     

INTERNATIONAL PRODUCTION/DISTRIBUTION NETWORKS AND INDONESIA

This study examines the industrialization performance of Indonesia through a comparative evaluation with other East Asian economies. While neighboring countries actively formulated international production/distribution networks, Indonesia fell behind in utilizing the benefits of globalizing corporate activities. International production/distribution networks are supported by new economic thought such as fragmentation, agglomeration, and theories about corporate firm; and a policy package of development strategies should be designed to utilize such opportunities. The design of Indonesia's development strategies and “institutions”, however, does not conform to the globalizing world because the presence of network‐forming foreign companies is not large enough to make them influential “actors”. This author argues that the traditional comparative advantage argument for Indonesia's economic development is possibly misleading. Rather, Indonesia must learn the experience of its neighboring countries and introduce foreign companies as new actors to break the old “structure”.     

India and Indonesia: Lessons Learned from the 2013 Taper Tantrum

In May 2013, the US Federal Reserve began to talk about the possibility of ending its program of quantitative easing. This tapering talk had a significant impact on five main emerging-market countries—Brazil, India, Indonesia, South Africa, and Turkey (the ‘Fragile Five’)—whose exchange rates weakened dramatically and whose stock and bond markets were hit hard. This series of events is now known as the ‘taper tantrum’. In response to the tantrum, these five countries each took a series of macroeconomic policy measures to relieve pressure in their financial markets. Indonesia and India handled the problem in the shortest time (about seven months) and achieved macro-economic stabilisation. This article examines how Indonesia and India managed to remain relatively unscathed by the taper tantrum and escape the Fragile Five. It looks at which policies the two countries adopted at the time, and why they chose them, as well as why India's economy performed better than Indonesia's after the tantrum.     

Host countries’ growth opportunities and China's outward FDI

In 2014, China proposed the Belt and Road policy, which has pushed China's outward foreign direct investment (OFDI) to over tens of billions of US dollars. However, existing studies have not reached a consensus about the decisive factors in China's OFDI. To verify whether China's OFDI activities are motivated by profits, this paper applies a measure of country‐specific growth opportunities adopted by Bekaert et al. (2007) to measure the growth opportunities of the target countries for China's OFDI. A multinational panel data model, based on data from 51 countries from 2003 to 2012, is used to explore the relationship between host countries’ growth opportunities and China's OFDI. Overall, the analysis finds that China's OFDI does not follow the host countries’ growth opportunities but exhibits different features toward developed countries and developing countries. For developed countries, China's OFDI follows host countries’ growth opportunities to some extent. In the case of developing countries, China's OFDI does not follow host countries’ growth opportunities. When we consider factors such as a host country's financial development and political stability, improvement in these factors improves the attractiveness of the host country to China's OFDI. It is also found that the 2008 global financial crisis did not have a very significant impact on China's OFDI activities.