Saturday, November 21, 2009

Of Yudhoyono, Sarkozy and the Indonesian economy

Indonesian President Susilo Bambang Yudhoyono, in his inauguration address, said he wanted greater quality economic growth to raise the quality of life. He said he wanted real growth, not just growth on paper.

This differs from his counterpart, French President Nicolas Sarkozy, who has proposed ending the use of the gross domestic product (GDP) figure to measure economic growth in favor of other indices (The Wall Street Journal, Sept. 28, 2009). He wants not only economic variables in the reckoning, but also other qualitative variables, such as happiness, to be taken into account. Thus he proposed the gross domestic happiness (GDH) index. He wants to redefine economic growth.

Sarkozy's critics say the use of the GDH could be considered an attempt to hide the poor performance shown by the GDP. Statistically, it is very difficult to quantify leisure and happiness into the GDH. Even to arrive at the GDP is often difficult because there are problems with completeness of raw data (to collect complete data is considered difficult).

There is an old Javanese proverb that says Sugih tanpa bandha (Feeling wealthy without tangible assets). Referring to this philosophy, how do we convert GDP to GDH? It is true that poor people can be happier than the wealthy.

In his speech, Yudhoyono expressed satisfaction with the considerable economic growth achieved during his 2004-2009 term. People's purchasing power had increased, but he was less satisfied with the quality of growth. Poverty remains high. There are several causes for this problem.

First, in Yudhoyono's first term economic growth was higher than the population growth. That means the real per capita GDP increased and so did purchasing power. Even in the global financial crisis, Indonesia's economy grew significantly. However, the growth was limited to a small part of the population. Higher growth in cities, such Jakarta, caused urbanization. Higher growth among certain groups of people triggered greater inequality.

Second, as shown by GDP figures, the economic growth was due more to increased consumption rather than real investment. This is not healthy for the economy.
Third, government spending increased significantly to attain economic growth, so the expenditure structure fit the needs of the whole country.

Fourth, in the economic structure, the contribution from the agricultural sector increased over the last five years. This means growth in other sectors was less than in agriculture. This condition is dangerous for the economy. Economist Faisal Basri has called it the deindustrialization of the Indonesian economy.

Fifth, the use of the gross national product (GNP) to measure Indonesia's economic growth is more suitable than the use of the GDP, because the GDP plus the net income factor from abroad gives us the GNP. So if Yudhoyono proposes using the GNP to measure economic growth, that would be better than Sarkozy's proposal.

Sixth, based on GDP figures, Indonesia's economy is growing at a rate approaching 6 percent a year. This is medium-high growth. However, poverty remains high because this is pseudo-growth. It implies that efforts to raise productivity among the poor have not yet succeeded.

The direct cash aid program for the poor as good, but did not give them access to the factors of production. Indonesia's poor need more credit to access it, such as the so-called community business credit. Lack of access to the factors of production means no economic value is contributed by them, and they remain poor. Bambang Heru, Jakarta, director for livestock, fish and forestry statistics at the BP.

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