In a world economy with a clouded outlook,
Indonesia impresses as one of the few bright spots, attracting investors and
traders from the eight winds. Indonesia is increasingly a necessary part of any
market portfolio for players with global aspirations, owing to a projected
share of 3.4 per cent of world population by 2015, ascent to middle-income
status (with GDP (PPP) per capita of almost US$5000 in 2012), and recent growth
of 4–5 per cent per annum
Numerous other indicators suggest Indonesia may soon
graduate to upper middle-income status. These include favourable demographics
in a generally ageing East Asia, an increased per capita stock of human capital
(defined as the product of health, education and entrepreneurship), positive
experiences with open trade and investment policies, relative success in
democratisation and decentralisation, substantial goodwill among friendly
countries, and earnings from natural resources.
Yet caution is in order when dealing with prospects for
long-term transition. Indonesia has experienced rapid growth more than just
once, only to be disappointed when growth episodes ended in deep falls. The
journey to upper-middle income status — and from there to the high-income world
— is a very long one, strewn with barriers and concealed traps. The experiences
of earlier champions like Japan, South Korea and now possibly China suggest
that to reach the higher ranks of development an escape velocity — and no small
degree of luck — is needed.
One critical constraint on Indonesia’s growth potential is
geography. The popular belief in the natural richness of Indonesia is, after
all, not shared by ecologists, who occasionally call the equatorial belt a
fragile ‘Grand Canyon’. Scattered across thousands of islands, the Indonesian
nation is a logistical nightmare, with high-speed maritime connectivity a far
costlier connection than land and air routes. It is more expensive to transport
North Sumatran oranges to Java, for example, than substitutes from China.
This scattered geography instills among many Indonesians an
insular and ethnocentric mindset. Eighty-five years after the ‘Youth Oath of
Unity’, ethnic dialects still thrive in government offices and ethnic natives
frequently reestablish political privileges in their respective cities and
towns. The phenomenon of fragmentation along cultural lines runs very deep in
Indonesia, perennially affecting labour unions, the business community and
civil society groups, who regularly fragment over the slightest disputes. In
post-Suharto Indonesia, this has meant that party politics is fragmented into
‘dwarf minorities’ where the largest party typically enjoys only 20 per cent or
so of the popular vote, making horse-trading a constant feature of policymaking
and bold decisions politically unthinkable.
Additionally, the country’s resource endowment may yet be
remembered as a resource curse too. Using foreign exchange as its unit of
account, the resource sector is ‘naturally’ shielded from devaluation. As a
result, the resource sector has attracted the lion’s share of Indonesia’s
limited pool of entrepreneurs and professionals. But while the resource sector
grows steadily the rest of the economy has been exposed to ‘Dutch disease’,
with an expensive local currency inhibiting manufacturing development by
driving up the cost of local exports and retarding economic transformation.
With globalisation and contemporary society’s rapid rate of technological
change, a strong resource sector is insufficient to pull an economy all the way
to developed status.
Of equal concern as a barrier to long-term growth is
Indonesia’s low stock of human capital. In this regard, Indonesia looks
somewhat out of place in East Asia, having spent less on human capital
accumulation than its neighbours. While the recent initiatives to raise the
health and education budgets to a new level are heartening they are not
panaceas — human capital accumulation initiatives take a long while to bear
fruit. Raising the ability of an average Indonesian manual worker to that of a
South Korean competitor — or increasing Indonesia’s Programme for International
Student Assessment scores on science and mathematics from the current level of
371 to Shanghai’s level of 600 — is a decade-long undertaking. Much
supplementary effort is then needed to translate human capital increases into
higher productivity.
Finally, persistently bad institutions constitute a serious
barrier to Indonesia’s long-term growth. These will also be difficult to deal
with but less so than the barriers hidden in geography and culture. Of the
countless institutions that are relevant to long-term growth, those dealing
with positive-sum interactions — such as the bureaucracy, which mediates most
business initiatives — are the most crucial. In contrast, the deeply rooted
tendency towards fragmentation is a formidable zero-sum force, and the speed of
growth risks being severely reduced when fragmentation combines with a weak and
corrupt bureaucracy, as can be seen at present.
Political leadership is critical to overcoming the sticky
barriers to long-term growth and avoiding the notorious middle-income trap. But
followers are of equal importance too, as it is they who nurture shared
commitments by organising themselves better.
To hold such a coalition together a rallying project is
needed. By recognising Indonesia’s demographic quasi-constants and recent
shifts in East Asia and the world economy more generally,
‘focussed-industrialisation’ of a few key metropolises with good connectivity
to the world’s commercial centres and their own peripheries could be a strong
way forward. Sustained success in such a program may allow Indonesia to reach
an escape velocity and climb gradually nearer to the technological frontier
where the most rewarding gains are contested.
Djisman Simanjuntak is
Professor of Business Economics at Prasetiya Mulya Business School, Jakarta.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Indonesia’s choices’.
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