Monday, 6 May 2013

Can Indonesia maintain its economic momentum in 2013?

In 2012, Indonesia deserved some credits in terms of economic performance. Almost all of the economic indicators remained steady, if not improved, despite deepening recession in Euro Zone and stagnation in US and Japan.

Indonesia’s annual GDP growth reached 6.2 percent, slightly lower than initial target of 6.5 percent. In spite of this, Indonesia still relatively fared better in South East Asian region. Its growth rate is higher than most of its neighbouring countries such as Malaysia, Thailand, Singapore and Philippines.
Indonesia’s remarkable growth was mainly underpinned by firm domestic demand (or private consumption). In 2012, private consumption grew by 5.3 percent, accounting around 55 percent of GDP, which made it the biggest contributor to economic growth.

Even though there were still some concerns regarding current account deficit that, to some extents, pressured Indonesian rupiah, most of other economic indicators performed relatively well.
For instance, inflation in 2012 was recorded at 4.3 percent (Year on Year), the lowest in 12 years. Manufacturing and services sectors also continued its rapid growth, giving higher contribution to GDP. In addition, real investment grew by 9.8 percent in 2012, higher than 2011 figure of 8.8 percent.

Even though Indonesia recorded relatively good performance in 2012, it has to face challenges and pressures to continue its rapid economic growth in 2013.
For instance, inflation has surged to 5.9 percent (Year on Year) in March 2013, pushed by higher food prices and electricity costs. Moreover, Statistics Indonesia (BPS) reveals that up to February 2013, Indonesia was still unable to lift its exports due to slow global economic recovery, which resulted in prolonged trade deficit. This problem will put further pressures on Indonesian rupiah, which has been depreciating against US dollar since mid 2012.

In spite of these escalating pressures, however, there is still a possibility for Indonesia’s to grow above 6 percent in 2013. The most important thing is to know how to face the challenges and tackle the obstacles that threaten the economy.

One of Indonesia’s biggest economic challenges is to improve its inadequate infrastructure.  Currently, Indonesia’s infrastructure condition is one of the worst in South East Asia. Moreover, infrastructure investment in Indonesia is also relatively low compared to its neighbours and has not shown any significant improvements in the recent years. For instance, World Bank’s Indonesia Economic Quarterly Report in QI 2013 suggests that infrastructure investment in Indonesia as a share of GDP is lower during the post-crisis era compared to the pre-crisis era.

In 2011, the government already established MP3EI (Master Plan to Accelerate and Expand Economic Development in Indonesia) to encourage increased investment in infrastructure projects. Nevertheless, so far this master plan has not been going very effectively due to several problems such as overlapping regulations and land clearing issues.

Hence, the government should confront these issues so that MP3EI can achieve its objectives effectively in lifting Indonesia’s infrastructure investment in the upcoming years.
In addition to improving infrastructure investment, it is also necessary to increase the quality of infrastructure through adequate budget to sustain operational and regular maintenance.

More adequate infrastructure will reduce logistic costs and, thus, minimize production costs. With low logistic costs Indonesia will able to attract more investment. In the end, this will increase productivity and create new job opportunities that can improve gross output and increase overall income level.

Unfortunately, currently many investors are concerned about Indonesia’s poor logistic condition, which increases the cost of running business. If this issue is prolonged, there will be a possibility that investors will shift its business to other countries that can provide cheaper logistic cost.

Better infrastructure also reinforces the process of urbanization in Indonesia that, if supported by sufficient employment opportunities, will create new households and drive demand up. In the end, this will ameliorate welfare and trigger economic growth.

Beside infrastructure issue, another important issue that needs to be handled is the perplexed bureaucracy. Indonesia’s complicated bureaucracy system is one of its major competitive disadvantages that discourage investors to start new businesses in Indonesia.

A study by Kaufman, Kraay and Mastruzzi in 2010 shows that the effectiveness of Indonesian government is one of the lowest in South East Asia, below Singapore, Malaysia, Brunei, Thailand and Philippines.

If this issue continues, then investors will be more reluctance in investing in Indonesia. In the long run, this may lead to capital flight, which will undermine the economy.

Therefore, the government needs to address this issue as soon as possible. Indonesia has much potential as one of the main investment destinations. By improving bureaucracy efficiency through bureaucracy reform, it will be able to realize this potential and propel economic growth.

In summary, out of several major obstacles that can harm Indonesia’s economy, infrastructure and bureaucracy issues are among the most urgent things that have to be addressed immediately. Improved infrastructure will be able to create multiplier effects that can benefit all economic sectors, promote exports, attract investments and increase productivity. More efficient bureaucracy will push investments even further; creating economic leap that can result in sustainable economic growth.

In other words, these improvements will not only help Indonesia to continue its rapid economic growth in 2013, but also improve the quality of economic growth itself.

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