Indonesia’s power economy: between stability and growth

guest article

guest article

Views of the Indonesian economy oscillate between optimism that it is set to become the world’s next economic giant and fear of global insecurity. Such views, however, get the story backwards. Indonesian policymakers have consistently prioritised stability over growth. The more concerning issue is that the economy is now heading into its fifth consecutive year of subdued growth. Although growth is solid at about 5 per cent a year, it is inadequate in terms of the job creation and economic modernisation required to meet Indonesia’s development needs and ambitions. The problems are structural. Indonesia is hemmed in by the need to protect stability while its growth model has struggled to deliver the productivity gains necessary to grow faster within this constraint. Left unaddressed, even the ‘new normal’ of slower growth will not last.

As President Joko Widodo begins his 2019 re-election bid, he takes with him an unfinished agenda to transform Indonesia’s economic future. His program of infrastructure development and economic reform has made progress but so far has only stabilised Indonesia’s trajectory, rather than boost it. Doing better will require more than just pressing on. Indonesia cannot ignore the trade-off between growth and stability, but it needs to make it less binding, especially with the global economic backdrop becoming more difficult as liquidity tightens and protectionism potentially escalates. Infrastructure investment needs to be substantially higher, public saving increased through a more comprehensive tax strategy, and business climate reforms recalibrated towards liberalising markets rather than just cutting red tape.

Read more about Indonesia’s future as a tiger economy

Indonesia is widely seen as a future economic giant. Today, it is the world’s seventh-largest economy by purchasing power parity. Consistently solid economic growth has some analysts arguing it could be the fifth-largest economy in the world by 2030 and fourth soon after. On a market exchange rate basis, Indonesia ranks 16th in the world but will likely enter the top ten by 2030. Yet fear of financial instability perennially lurks beneath the surface, raising its head whenever market volatility strikes, as it has in recent months.

Prevailing views of the Indonesian economy tend to oscillate between these two extremes. However, such views increasingly get the story backwards. Since the 1997–98 Asian financial crisis, Indonesian economic policy has consistently prioritised stability over riskier pathways to rapid economic growth. Conversely, with the waning of the China-fuelled commodity boom, the adequacy of economic growth has become the bigger concern. Indonesia is now looking at its fifth consecutive year of subdued growth at about 5 per cent, down from more than 6 per cent during the commodity boom and well below government ambitions to reach 7–8 per cent.

While such a ‘new normal’ is solid by international comparison, it is inadequate for Indonesia’s economic objectives. Moreover, the slowdown has proven stubbornly persistent despite a strengthening global economy and the pro-growth efforts of President Joko Widodo (Jokowi).

 

 


Article source: https://www.lowyinstitute.org/publications/indonesia-economy-between-growth-and-stability

 

Share this post

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on pinterest
Share on print
Share on email
invest islands magazine

Free Download

WAIT! Do you know which questions you should ask before investing in Indonesia?

Download our investment guide to find out how foreigners can purchase property in the fastest growing island tourism economy in southeast Asia!