Will Indonesia rise to its challenges?

This article is reprinted with permission from Perspectives@SMU, the public outreach journal of  Singapore Management University which holds the copyright to this content.

In 2013, when the US economy started showing signs of recovery, the 'hot money' that flowed from the US Federal Reserve's quantitative easing program into emerging markets started moving in the opposite direction.

At the same time, the global economy slowed significantly, due in large part to slowing growth in China that led to softer demand for commodities.

"Because 65% of Indonesia's exports are commodity-based, we felt the pain of low commodity prices on top of all the hot money leaving Indonesia," explains Mari Pangestu, Indonesia's Minister of Trade from 2004 to 2011 and now a professor of international economics at the University of Indonesia.

"As a result, we had a current account deficit and the weakening of the rupiah, so much so that we became part of the 'Fragile Five'."

That group of "Fragile Five" countries – Brazil, South Africa, India, Turkey and Indonesia – are characterised by a high current account deficit and/or a high fiscal deficit. To address its economic challenges, Indonesia embarked on a conventional economic policy: choosing stabilisation over growth.

"To prevent capital outflow, we increased the interest rate," says Pangestu, a speaker at Singapore Management University's Presidential Distinguished Lecturer Series event, Indonesia: Resilience and Going Beyond the 'New Normal'.

"We allowed the rupiah to move in line with fundamentals. The rupiah depreciated by 17% in 2013, and it depreciated another 2% to 4% in 2014. 

'Fifty percent of Indonesia’s 250 million people are less than 29 years old – is that a demographic dividend or a time bomb?'

MARI PANGESTU

"For fiscal consolidation, we raised the fuel price; switched expenditure to infrastructure and social welfare; and we did some structural reforms. All this is Reform 101. Crisis leads to good policies. We streamlined permit applications and removed import restrictions. As a result, we grew by 5.8% [in 2014], and things stabilised."

However, Indonesia is expected to grow less quickly in 2015. The World Bank projects a 5.2% growth, lower than a previous estimate of 5.6%. 

The need for 6% growth

Pangestu pins the slowdown on supply-side constraints – inadequate infrastructure, low productivity, lack of cutting-edge technology – but points out the pressing need for her country to maintain a growth rate of 6%.

"Fifty percent of Indonesia's 250 million people are less than 29 years old – is that a demographic dividend or a time bomb? It's the latter if you cannot offer them employment," Pangestu warns.

"Open unemployment is down from 7% to just over 6%, but underemployment – that means people who work less than 35 hours per week – is about 40%, so it's still a big challenge."

On the significance of growing at 6%, she adds: "We want to reduce the poverty rate from 11% to about 7% to 8%. Here's the challenge: the number of near poor (those who are just above the poverty line) is about 40%. The moment the economy fails to grow at least 6%, the poverty rate goes up."

There is also the issue of inequality in Indonesia, which has risen like it has in many countries. Poverty, according to Pangestu, has fallen to 10.9% from 16% during the past decade, but the GINI coefficient has spiked from 0.33 to 0.41. There is also the urban and rural divide.

"Those who say they have poor access to healthcare in rural areas is 40%; in urban areas, 8%," Pangestu says.

"For education, it's 41% versus 7%. For transport, it's 50% in rural [areas]. So getting your infrastructure right is not just about efficiency and competitiveness – it's about reducing the inequity that is happening in Indonesia." 

'There might be a lot of protests in Indonesia, but they are not protesting about policies'

MARI PANGESTU

A good neighbourhood

While the challenges appear daunting, Pangestu, who was also the Minister of Tourism and Creative Economy from 2011 to 2014, highlights Indonesia's membership in the Regional Comprehensive Economic Partnership (RCEP) as a reason for optimism.

Consisting of the ten countries in the Association of Southeast Asian Nations (ASEAN) and Australia, China, India, New Zealand, Japan, and South Korea, the RCEP accounts for nearly 50% of the world's population.

"It generates 28.8% of world output, and 27.9% of world trade," says Pangestu.

"Compare it to TPP-12 (Trans-Pacific Partnership), where the population is 800 million people or 11% of world population; GDP is 37.6% of world GDP; trade, 26%.

"What I am saying is: Indonesia and those in ASEAN are in a good neighbourhood. And it's a growing neighbourhood."

So how will the Indonesian economy do in 2015? And what about the dramas involving the Indonesian Corruption Eradication Commission?

"I don't expect exports to grow a lot this year because of external demand and soft prices," predicts Pangestu.

"Investment numbers look good for last year, and [they] continue to look good this year. Investors – foreign direct investors – look medium term, and they continue to come into Indonesia.

"There might be a lot of protests in Indonesia, but they are not protesting about policies. They are protesting about political appointments and personalities. It's noisy, but that's democracy."