Indonesia has experienced impressive growth in recent years. On the basis of purchasing-power parity (PPP), the gross national income per head doubled to US$4,730 during the decade to 2012.

The proportion of the population living in poverty fell by almost half, from 24 per cent in 1999 to 12 per cent in 2012 (World Bank).

The booming young population joining the workforce created huge demand for real estate and brought foreign investment in construction and consumer goods.

Yet Indonesia’s growth has been quite uneven and perhaps unsustainable in the long run.

Real consumption grew by about 4 per cent a year on an average in 2003-2010. More alarmingly, for the poorest 40 per cent of households it grew by only 1.3 per cent.

In contrast the consumption by the richest 20 per cent grew by around 5.9 per cent. In other words the income disparity between rich and the poor is rising rapidly. Indonesia’s Gini Coefficient, a measure of income inequality, jumped from 0.29 in 2000 to 0.38 in 2011. High income inequality in the long run, hurts higher growth potential and disrupts social cohesion.

Growth momentum in the Indonesian economy has moderated somewhat over the past several months due to a weaker performance by the export sector, together with the impact of tighter monetary policy as the central bank has hiked interest rates to control inflationary pressures. This has resulted in GDP growth rate lowering from a 6 per cent a year ago to around 5 per cent year-on-year (yoy) till the end of 2014.

Although Indonesia made considerable progress in macroeconomic stabilisation under former president Susilo Bambang Yudhoyono, a key challenge for the present administration will be to implement crucial microeconomic reforms.

In other words, the crucial symptoms of a country falling into the so called ‘middle income trap’ are quite apparent in all corners of the economy.

Over 3 million migrants from the countryside arrive each year in Jakarta and other cities. Many of them take recourse of jobs in low-end services, hawking food by the roadside or selling things from handcarts. They are part of Indonesia’s vibrant informal economy, which accounts for nearly 70 per cent of the country’s GDP.

The “local content” restriction is acting as a deterrent for many manufacturers to open factories in Indonesia.

A large workforce engaged in the informal sectors rarely earns the minimum wage or gets access to government benefits.

The World Bank estimates that labour productivity in Indonesia’s low-end services is about double that of agriculture but it is still one-fifth of that in manufacturing.

In nutshell, it means that poverty will fall much faster if agricultural labourers shift to manufacturing instead of low-end services.

However, the manufacturing sector in Indonesia still remains highly uncompetitive due to decrepit infrastructure, rigid labour laws and the government’s protectionist policies.

Even though the share of Indonesia’s labour force in agriculture has been in decline for decades, manufacturing share has not changed really much at all from the 13 per cent in 2012. Local manufacturing remains mostly confined to palm oil and a few other primary commodities.

To a large extent, the “local content” restriction is acting as a deterrent for many manufacturers, especially in the consumer goods category, to open factories in Indonesia. In contrast services now employ about 44 per cent of the labor force, up from 37 per cent a decade ago.

Although it is too early to predict, it can be stated with a reasonable degree of certitude that Indonesia is likely to miss the bus in manufacturing if infrastructure and human skills continue to remain the biggest challenges. A very high level of energy subsidies (on fossil fuel and electricity), around 300 trillion rupiah (US$23 billion) in 2013 equivalent to 3 per cent of GDP, also pose a significant burden on the taxpayers.

Already under implementation, a phased and sequenced approach to energy subsidy reform, while protecting the most vulnerable consumers, will encourage energy efficiency, shift consumer behavior and free up resources for critical social investment.

Widening access to affordable housing, clean water, sanitation, education and healthcare might slowly start to trickle down the benefits of rapid economic growth to the less fortunate and create adequate purchasing power to sustain the next generation of industrialisation.

But the defining question remains if the current level of investment (as a percentage of GDP) is adequate to support the next level of strong growth. Historical precedents reveal that sustained higher levels of investment are crucial, along with the improved efficiency of investment. China is a golden case in point with investment to GDP ratio being 46 per cent in 2012.

Fortunately, Indonesia, among other middle income countries of East Asia (excluding China) is maintaining a nearly 33 per cent investment rate which is above the 25 per cent threshold prescribed by the Growth Commission as the necessary condition for robust and high growth.

Apart from creating world-class infrastructure — roads, airports, power plant, telecom and information super-highways, a significant proportion of investment and budgetary support should also be channelised into R&D, innovation and enrichment of human capital through high quality technical education and modern skill building.

Reforming the investment climate is essential; so are the conditions for innovation, to attract leading companies and a world-class talent pool.

The present government should play a decisive role in determining Indonesia’s future economic policies: whether to pursue a strategy of globalisation by encouraging greater international integration or adopt a more nationalist, protectionist approach. Each approach has its own pros and cons.

But what is apparent is that, the government needs to undertake a bunch of crucial policy and institutional reforms bundled with critical investment in hard and soft infrastructure.

All these should be accomplished with a sense of utmost urgency before it gets too late for the country to get out of the middle-income trap and graduates into a high income, industrialised nation providing a better quality of life to its citizens
http://www.asianewsnet.net/news-72625.html

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