Monday, 1 October 2012

Indonesia by 2030: Economic Euphoria or Utopia?


Last Tuesday (18 September 2012), a report by McKinsey Global Institute shows a jaw dropping news about Indonesia’s economy. The report, titled “The Archipelago Economy: Unleashing Indonesia’s Potentials”, forecasts that Indonesia’s economy will surpass Germany and UK. It also suggests that Indonesia, which is currently already the biggest economy and most populated country in ASEAN, will become the world’s 7th largest economy in the world.

The report cites that huge domestic consumption, rapid urbanisation as well as young population will propel Indonesia’s economy in the upcoming years. It predicts that by 2030, Indonesia will have 90 millions additional consumers that will underpin the economy through huge domestic consumption. Then, it estimates that 70% of Indonesia’s population will be within the effective working age in the next 18 years. Further, these advantages are also supported by stable economic growth, low inflation and low government debt as a share of GDP.

Meanwhile, the report also suggests that Indonesia will face four main challenges in order to achieve such a rapid economic growth. These include: 1) productivity to accommodate the huge consumer class; 2) improvements in agricultural and fisheries sector; 3) sustainable resource-intensive economic growth; and 4) investment in education and human resources. Of course, in addition to these challenges Indonesia has to tackle its fundamental problems relating to perplexed bureaucracy, difficult access to capital, inadequate infrastructure, and corruption.

Despite this euphoria, it is important to be aware that 2030 is still a very far future. The complexity of contemporary socio-economic behaviour has caused the future to be more difficult to predict. In this regard, Indonesia’s government can learn many lessons from the history in order to prevent making mistakes in directing its economy. For instance, in 1970s-1980s, many foresaw that Japan’s economy would surpass US economy within the next couple decades. Nevertheless, most of these overoptimistic predictions neglected the fact that forced economic development could lead to overheated economy. By the late 1980s Japan experienced bubble burst, followed by “a lost decade” in 1990s and prolonged economic stagnation in 2000s in line with the aging population.

Another good case study is the 1997 East Asian Financial Crisis. Aggressive deregulations without proper supervision and adequate financial infrastructure made many East Asian countries were prone to economic speculations. As the consequence, when the crisis struck in 1997, speculative actions, undermined further by inappropriate investment policy, had led to economic mayhem, ending the period of economic miracle.

Going back to the present, surely the government has learned many lessons from the past. Nevertheless, the continuity of careful economic planning is necessary to accommodate the changing economic needs. For instance, it has been proven that some industries such as mining and other natural resource sector are really prone to external shocks. For a long time, Indonesia’s economy has been very dependant on natural resource sector with little effort to improve the value-added of the products. Even though the paper suggests that the share of resource sector in terms of GDP has been declining in the last decade, it only declined from 12% in 2000 to 11% in 2010. As the consequence, the government has to carefully select the engine of growth that is less volatile and can be sustainable in the long run by promoting value-added products in the resource sector.

Several classical issues also have to be addressed and fixed as soon as possible such as inadequate infrastructure, inefficient government’s budget allocation, corruption, etc. As mentioned above, McKinsey admits that these are the key bottlenecks of Indonesia’s economy and its prediction can only be achieved by assuming that these problems can be solved soon. Unfortunately, the paper does not mention in details about how to deal with these problems by mentioning that these are beyond the scope of the paper.

In short, history has shown that optimistic economic forecast could end up in economic utopia due to reckless policy planning. Hence, this momentum has to be utilized carefully and meticulously to prevent another unwanted economic havoc. To achieve this forecast, consistent yet dynamic policy implementations are necessary in order to adapt the rapid-changing nature of the world’s economy. Through this style of policy planning, the government can impose “effective economic policies” that can result in robust economic growth. By doing so, hopefully Indonesia can achieve what the report predicts.

Arisyi Fariza Raz
MSc Development Economics and Policy Graduate
University of Manchester

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