So why hasn’t the country grown faster still and why does growth appear
slower in the democratic era than that of Soeharto?
Few countries have
experienced such dramatic changes in economic fortunes and political governance
as Indonesia. A ‘chronic economic dropout’ in the mid-1960s, it took a
remarkable turnaround and three decades for Indonesia to join East Asia’s
miracle economies in the 1990s. But having graduated to middle-income status —
when rapid, East Asian style economic development seemed assured — Indonesia experienced
another discontinuity: the Asian financial crisis (AFC). This collapse was
accompanied by, and indeed triggered, a political crisis, with the sudden end
of the 32-year rule of president Soeharto in 1998. The economy seemed in free
fall.
But, as in the mid-1960s,
the doomsayers were wrong. The economy quickly bounced back and Indonesia
quickly emerged as Southeast Asia’s most vibrant democracy, in which ‘big bang’
decentralisation devolved much administrative, financial and political power to
sub-national governments. It was one of the most comprehensive and rapid
reconstructions of a country’s political institutions and processes in recent
times, with only a brief loss of economic momentum.
With this record of economic
and political dynamism, the notion of a middle income trap
in Indonesia hardly appears relevant. If growth rates from the last 15 years
continue, Indonesia will graduate to the high-income group within half a
century.
At the same time, there are
some key, if unquantifiable, challenges holding back stronger growth in
Indonesia.
The Indonesian public has
long been reluctant to embrace liberalism and globalisation. On this issue, the
pendulum swung from global disengagement in the early 1960s to an open regime
in the late 1960s to growing state intervention during the 1970s oil boom
before major deregulation from the mid-1980s. With persistently pro- and
anti-reform currents, Indonesia has remained reasonably open since this time.
But the country’s rising
economic nationalism has intensified protectionist pressures. This policy
stance, combined with declining commodity prices since 2012, has resulted in
indifferent export performance in recent years. Meanwhile, Indonesia continues
to underperform in the crucial area of connecting to global value chains. These
account for almost half of trade within ASEAN, but Indonesia remains a
relatively minor participant.
The reasons for this
under-performance are well known and amenable to policy intervention.
Participating in these chains requires open trade and investment regimes,
highly efficient logistics infrastructure and competitive labour inputs. In
these three key areas, Indonesia lags.
In education, Indonesia has
achieved impressive gains since the 1970s. The country is now close to reaching
universal literacy for its school-aged population and there is a general
commitment to funding, with a 20 per cent mandate on the government’s budget.
But the country lags in terms of high post-primary dropout rates and according
to most comparative ‘quality’ indicators, such as international examinations.
Major challenges in
higher education will become more pressing as Indonesia progresses
through the ranks of the middle-income group. This sector is growing rapidly,
but the government only spends 0.3 per cent of GDP on its historically
state-operated universities. While most of the growth must thus come with
private involvement, the government remains ambivalent about deregulating and
internationalising the system. The quality of tertiary education is highly
variable, with no institutions featuring prominently in international
comparisons.
Educational challenges are
compounded by related labour market problems of weak formal sector employment
and skill mismatches. During 1966–96, formal sector employment and modern
sector wages grew strongly. The AFC resulted in a sharp fall in formal
employment and real wages. Democratisation unleashed powerful ‘pro-labour’
sentiments. Increased labour market regulation and slower growth resulted in
anaemic formal sector employment growth, especially in the manufacturing
sector, which had been a key source of dynamic growth. As a result, Indonesia
lost competitiveness in international markets for labour-intensive
manufactures.
Then there’s infrastructure.
Here Indonesia’s problems are intensively studied and of high political
priority. The problem is that inter-island transport costs are very high. This
pushes up the general cost structure, particularly for remote areas, leading to
large inter-regional price differences. On logistics performance, Indonesia lags all ASEAN
neighbours bar the Philippines.
Underinvestment has
contributed to the low quality and quantity of infrastructure. As a percentage
of GDP, Indonesia’s infrastructure expenditure is about half of that in the
Soeharto era and in other high-growth East Asian economies. Regulatory
constraints on competition and efficient service provision compound these
problems, as does a strong post-AFC aversion to foreign borrowing, which means
successive governments have not availed themselves of much of the long-term
concessional finance on offer.
From a longer-term
perspective, Indonesia is in the early stages of establishing a democratic
consensus around the institutions needed
for a prosperous, equitable and internationally-oriented economy. Substantial
challenges remain in the country’s legal system, which are closely tied to
fighting corruption, increasing bureaucratic efficiency and improving
local-level governance.
Indonesia has only recently
graduated to middle-income status. And while moderately strong economic growth
means that is not in any sense ‘trapped’, it will have to overcome the problems
holding back its growth as it moves up through the middle-income ranks.
Fortunately, all of these issues are amenable to relatively straightforward
policy reforms.
Hal Hill is a professor of
economics at The Australian National University. Haryo Aswicahyono is a
researcher in the Department of Economics at the Centre for International and
Strategic Studies (CSIS), Jakarta.
This article summarises a
paper prepared for the Pacific Trade and Development Conference.
No comments:
Post a Comment