Survey of recent developments

There is a growing confidence in policy, business and finance circles about Indonesia's ability to withstand global economic and financial shocks, and a renewed belief in domestic sources of growth. Despite uncertainty in Europe and slower than expected recovery in the US, Indonesia is well placed for moderately high growth in the medium term, and economic stability in the shorter term. At the end of June 2011, foreign reserves were at a record high, inflation was down, annual growth was steady at 6.5%, and investment – especially foreign direct investment (FDI) – was up significantly.

Consumer price inflation had fallen to just below 5% by August, from double-digit levels earlier in the year. This was due partly to low food prices and success in sterilising the effects of capital inflows. However, turmoil in international markets led to a sharp fall in the Indonesia stock exchange index and a mild currency depreciation in August– September, prompting central bank intervention in the foreign exchange market. Fiscal policy has remained conservative, aiming for a balanced budget by 2014. However, the government has still not moved to reduce growing fuel and energy subsidies.

While the service sectors have continued to record high rates of growth, there has been a revival of manufacturing in 2011. This is partly underpinned by strong inflows of FDI, and is especially evident in the labour-intensive textiles, clothing and footwear industries after a decade of stagnation. Multinationals have announced plans to expand operations in Indonesia in the past six months to take advantage of new tax incentives. Overseas investors have also been attracted by Indonesia's growing middle class – a result partly of higher rural incomes driven by the commodity boom outside Java.

Some recent ministerial announcements about initiatives to promote domestic industry have a protectionist flavour. A cabinet reshuffle in October may signal a more dirigiste approach to industrial policy – especially the shifting of internationally respected economist Mari Pangestu from the trade portfolio to that of tourism and creative economy.

One important outcome of recent growth has been falling unemployment rates. However, youth unemployment remains a major problem, and efforts to overcome it have been fragmentary. A recent ban on overseas migration of domestic helpers (maids) seems certain to add to labour supply pressures among young people.

The government is now considering how to mobilise its large population base, abundant natural resources and strategic location to play a greater role in the world economy. These assets are central to the ambitious ‘Master Plan’ for longer-term development (2011–25), announced in May. It focuses on developing the resource-rich Outer Island regions, with massive investments in energy and ‘connectivity’ to link the major centres and islands with each other, and centres with their hinterlands. Funding (to come mainly from the private sector), implementation and coordination are all major challenges.     

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.     

Towards a Healthy Indonesia?

Abstract

During his first presidential term, Joko Widodo increased expenditure on, and the coverage of, several social protection policies, including the conditional cash transfer program. These policies began in the aftermath of the 1997–98 Asian financial crisis and have proliferated in recent years. This Survey will examine these policies, paying particular attention to implementation problems, including effective targeting through the construction of a unified database. It will also examine both food policy and broader health policy issues. It is widely agreed that health problems, such as those relating to early childhood development, must be addressed in Indonesia in a wider context, including through the provision of clean water and sanitation facilities, food security, and social assistance. The Survey will also examine recent discussions of trends in inequality and poverty, several of which claim that inequality has been increasing. Using recent figures published by Statistics Indonesia, it is argued that expenditure inequality has in fact been trending downward in recent years.     

Contract stability in European road infrastructure PPPs: how does governmental PPP support contribute to preventing contract renegotiation?

In the last decade a considerable number of PPP contracts in Europe turned out to be instable and were renegotiated. This paper studies which combinations of conditions in terms of macro-level business environment and governmental PPP support and at project-level (remuneration scheme, risk allocation, project age and contract duration) contribute to avoid contract renegotiation, by conducting a qualitative comparative analysis of twenty five European road infrastructure projects. Results show that although the broader macro-level business environment has a clear contribution, contract stability can benefit from an availability-based remuneration scheme and a well-developed governmental PPP support in combination with other conditions.