The upgrade of Indonesia\'s status to that of an upper-middle income country is not enough. More reforms are needed to spur economic growth and reduce inequality.
By
KARINA ISNA IRAWAN
·5 minutes read
JAKARTA, KOMPAS –The World Bank has upgraded Indonesia’s status to that of an upper-middle income country from its previous status as a lower-middle income nation. The upgrade gives Indonesia not only new hope but also new challenges in reviving its economy.
The government has no choice but to accelerate reform in all fields. As reported by the WB on its website, Indonesia has been included in the group of upper- middle income countries as of July 1, 2020. The classification is based on gross national income (GNI) per capita in 2019.
GNI is the total income earned by a nation’s residents and business, including those from goods and services produced and sold abroad and foreign investment. GNI is different from gross domestic product (GDP) which is based only on the income of residents and businesses in the country.
Upper -middle income countries have a GNI per capita of between US$ 4,046 and $12,535, while the GNI per capita of the lower-middle income countries ranges from $1,036 and $4,045.
At present, Indonesia\'s GNI per capita has risen to $ 4,050 from $3,840 in 2018, enabling the country to enter the group of upper-middle income countries.
Nevertheless, Indonesia\'s GNI per capita is relatively low compared to other countries in the same group, including Malaysia ($11,200), Thailand ($7,260), Turkey ($9,610), South Africa ($6,040) , and Mexico ($9,430).
The head of the department of economy at the Center for Strategic and International Studies (CSIS) Yose Rizal Damuri, who was contacted in Jakarta on Thursday (07/02/2020), said Indonesia was lagging behind Thailand — a fellow ASEAN member — which has been included in the group of upper-middle income countries for five years now
"Indonesia should have been upgraded to an upper- middle income country. If not, we will be held back and being further left behind, "Yose said.
The new status as an upper-middle income offers hope and a big challenge for national economic recovery in the next two to three years. Incentives and facilities that have so far received by Indonesia as a lower-middle income country might be reduced.
Indonesia should have been upgraded to an upper- middle income country. If not, we will be held back and being further left behind.
One of them, said Yose, is the tariff exemption facilities under the generalized system of preferences (GSP) provided by the European Union and the United States. The possible cut in such incentives should be mitigated immediately, he said.
The mitigation efforts can be done by the acceleration of negotiations on the Comprehensive Economic Cooperation Agreement between Indonesia and the European Union (I-EU CEPA). If it is not carried out, Indonesia has the potential to lose 40 percent of its exports to the European Union.
"The classification of countries released by the World Bank usually used as a reference for international institutions or trading partners in providing affirmative facilities. So, the impact from the upgrade in the status can be felt at least in the next two years, "said Yose.
Yose added that the government must start introducing anticipatory strategies if the affirmative policies and facilities for Indonesia were reduced. Reforms in all sectors of the economy must be accelerated to improve Indonesia\'s competitiveness. Negotiations on trade agreements and their ratification must also be further prepared.
The classification of countries based on GNI per capita does not take into account the impact of the Covid-19 pandemic. Consequently, Indonesia can face greater challenges in the future because the situation in the post-epidemic era would not be easy. Moreover, the post-epidemic situation may cause Indonesia to return to its previous status as a lower-middle income country,
"There is a possibility that Indonesia falls back to its previous status. However, it is most possible that the World Bank will lower the minimum per capita income requirement for all economic classifications because the challenges of the global economy are now the same, "Yose said.
Contacted separately, special aid of the finance minister, Yustinus Prastowo, said that the reform agenda focused on human resources was an appropriate step. However, reforms still need to be accompanied by the development of primary sectors, including in the fields of industry, agriculture and health.
As the per capita income is used as the reference of the World Bank, extra efforts should be made to reduce inequality. Therefore, various inclusive and affirmative policies to address inequality in Indonesia should be further developed.
"The government needs to work harder. Moreover, in 2020, due to the pandemic, there is a risk of economic correction," Yustinus said. The vice chairperson of the Indonesian Chamber of Commerce and Industry (Kadin) for international relations, Shinta Kamdani, said business people should positively welcome the upgrade of Indonesia\'s status as an upper-middle income country with a commitment to work harder and to be more productive, competitive and efficient. "We (businesses people) are trying and hoping that Indonesia can become a high-income country in the next 10-15 years," Shinta said.
According to Shinta, Indonesia should not always depend on the GSP facilities. Trade and investment competitiveness must be improved despite the unfavorable situation lately. Increasing national competitiveness will be able to spur the national economic recovery more quickly and sustainably.
The head of the fixed income researches at PT Mandiri Sekuritas, Handy Yunianto, emphasized that post-pandemic economic recovery with a V-shaped growth scenario would be very challenging, because the handling of the Covid-19 transmission in Indonesia has not all run as expected.
According to him, the economic difficulties in almost all countries in the world, including Indonesia, will affect the level of the GNI per capita in the future.