In order to be prosperous and answer challenges of the future, Indonesia needs an economic growth of more than 6 percent.
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Kompas/Totok Wijayanto
Deposit Insurance Corporation (LPS) Board of Commissioner chairman Halim Alamsyah (left), UOB Indonesia economist Enrico Tanuwidjaja (second left), Institute for Development of Economics and Finance (Indef) economist Ahmad Heri Firdaus (pictured from rear), and University of Indonesia lecturer Faisal Basri (center, back) attend a Kompas newspaper economics panel discussion in Jakarta, Wednesday (6/12). The discussion was themed “Improving High-Quality Growth in 2018”.
JAKARTA, KOMPAS – Without an innovative strategy, Indonesia will continue to underachieve. In order to be prosperous and answer challenges of the future, Indonesia needs an economic growth of more than 6 percent. Current policies are crucial in determining the future of the nation.
“Old ways will be useless in the face of current and future challenges. Formulation of public policies needs to be more innovative. Challenges will only get harder, with the digital revolution in full swing,” Indonesia Deposit Insurance Corporation (IDIC) board of commissioners chief Halim Alamsyah said in an economic panel discussion held by Kompas in Jakarta on Wednesday (6/12/2017).
Also speaking at the discussion were UOB Indonesia economist and senior vice president of communications Enrico Tanuwidjaja, University of Indonesia senior economic lecturer Faisal Basri and Institute for Development of Economics and Finance (Indef) researcher Ahmad Heri Firdaus.
Indonesia’s economic growth has been slowing in the past few decades. In the 1970s, the country enjoyed an average of 8 percent economic growth. This average annual growth decreased to 7 percent in the 1990s, 6 percent in the 2000s and 5 percent since 2012.
With an average annual economic growth of 5 percent, Indonesia will face a number of complex and interlinked issues in the future, including the middle-income trap.
Many Indonesians will get old before they get rich in the 2030s. Job creation is unable to absorb new members of the workforce, of which there are between 2 million and 3 million a year.
Halim said the issue was that Indonesia was trapped by its own national economic structures that impeded economic growth from going beyond 6 percent. This is despite the huge potential the country has.
Every time the country’s economic growth is about to reach 6 percent, the country automatically creates vulnerabilities, including the widening of the current-account deficit of up to around 3.5 percent against the gross domestic product (GDP).
Consequently, when the rupiah’s exchange rate against the US dollar is pressured, the inflation rate crawls up and interest rate is pushed upward. In such a condition, economic growth has nowhere to go but down in a stabilization period toward economic growth recovery.
“This goes on and on and on. I think the cycle will not end without a new strategy,” Halim said.
Current-account deficit is a structural problem in Indonesia. It is caused by huge oil and gas imports and export that is too orientated on natural resource commodities. Balance of services is a weak point due to consistent deficits.
Apart from that, capital goods and relief goods industry has yet to develop. This way, every time the economy grows, import of capital goods and relief goods also swells.
A focused and properly targeted industrial policy, Halim says, is one of the keys to improving this structure. In the context of mid-to-long term outputs, improving the quality of human resources is a main prerequisite. Such a plan must be executed right now. In order to increase foreign exchange, improving tourism and the quality of migrant workers (TKI) can be done.
Halim said that, in the past 10 years, capital flow in portfolio form had been around US$10 billion a year. Net direct investment is around US$11.5 billion a year.
With increased tourism and migrant worker remittance, Indonesia can gain foreign exchange of US$35 billion. With GDP of around US$1 trillion, a current account deficit of 3.5 percent against the GDP can be funded by this foreign exchange.
“If we can induce capital inflow, both in the short and long runs, our tourism and migrant worker remittance can grow toward seven percent despite the current account deficit reaching 3.5 percent,” Halim said.
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Implement the agenda
Enrico said the government should implement its short-term agenda to improve the national economic structure. The agenda includes improving migrant worker remittance and promoting tourism.
The Philippines, with its population of 95 million, obtains migrant worker remittance of around US$20 billion. On the other hand, Indonesia with its 260 million people only gets migrant worker remittance of around US$8.85 billion in 2016.
In this context, the Philippines’ central bank ensures that the peso’s exchange rate would gradually depreciate but remain stable. Therefore, the dynamics will be predictable.
Infrastructure development as the current administration’s priority, Enciro said, was key in improving the national economic structure. “In this aspect, we are on the right track,” he said.
Responding to a question on global economic slowdown, Enrico said that this was the new normal. However, in the case of Indonesia, an economic slowdown is not the new normal. “With its potential, Indonesia must be able to achieve better,” Enrico said.
Heri reaffirmed that the government should be focused on increasing the growth of the manufacture industry as, at 20 percent of GDP, it is GDP’s largest contributor. Manufacture industry’s growth has been consistently slow in the past few years and even falling below the economic growth. “This has potentials to be increased,” Heri said.
In terms of developing domestic industries, Heri said the government’s goods expenditure must be designed to purchase domestic products. This can be done by implementing non-tariff measures to avoid accusations of non-tariff barriers. “This will affect labor absorption and increase investment,” he said.
Meanwhile, Faisal said that improving the industrial sector was a necessity in improving the national economic structure. The government’s industrial policies remain unclear right now.
He said that he had suggested the government be focused on four priorities, namely food and beverage industry, optics-computer-electronics industry, chemicals and pharmaceutical industry and transport vehicle industry. A system for electric vehicles must also be prepared.
