After Indonesia Upgrades to the Upper Middle Income Group

KOMPAS/ PRIYOMBODO

Crowd of visitors at the end of the automotive event Gaikindo Indonesia International Auto Show (GIIAS) 2019 at the Indonesia Convention Exhibition (ICE) BSD City, Tangerang Regency, Banten, Saturday (27/7/2019).

Whatever the position of a country or corporation, any positive nickname should be welcomed with gratitude and accompanied by caution.

In this increasingly dynamic world, we must digest it slowly, while imagining some of the possible ends of enjoyment that will be found. I welcome the status of Indonesia, which has just been upgraded by the World Bank to an upper-middle-income country based on the calculation of gross national income (GNI) per capita.

The first thing to remember in welcoming this higher status of economic capability is the accumulation of deviation of movement among sectors, among social classes, even among regions of the economy which is aggregated to the top level, which is then reduced back to per capita size. The accumulation of these forms of relations will hold another value for the internal endurance of a country\'s economy to grow stable in a relatively long time. The neglect of seeing the solidity and vulnerability of internal structures, and being carried away by the limited expectations expressed by institutions that give the praise can suddenly see us hit by a wall that was unseen earlier. Indonesia\'s rise to the group of upper middle income country group is relatively limited, with per capita GNI of around US$4,050, just slightly above the lower limit of the middle per capita GNI group of US$4,049 to US$12,535. What does the position of the occupant of the floor, not the ceiling or ceiling line of the upper middle class mean for us?

With a very thin position above the lower limit, it is very possible for Indonesia to slip again.

The rise in the Indonesian class based on the GNI is clearly not yet worthy to be welcomed wholeheartedly. With a very thin position above the lower limit, it is very possible for Indonesia to slip again. Only by losing control of inflation or the depreciation of the rupiah, Indonesia\'s status could instantly return to that of a middle income country or below the upper middle income class. This event is usually experienced by a number of countries in the turn of a new calculation year, such as Sri Lanka and Algeria in 2019.

Read also: New Hopes and Challenges for Indonesia

However, the optimistic way to stay in the current position, even slowly get better, is still very open. Even if later the World Bank, or other institutions, make adjustments to income standards for each country, the optimistic path is still there. The reason is very easy, with growth above the average world growth, Indonesia still has the opportunity to be in this class. Therefore, the most interesting and more relevant issue for Indonesia is the level of progress that can be achieved from the largest available opportunity. The most appropriate benchmark for looking at progress is comparison with equivalent countries in the same class, not merely linear movement in the domestic economy.

Kompas/Priyombodo

Visitors to shopping centers in the Central Jakarta area, Wednesday (18/9/2019). The increase in the number of Indonesia\'s middle class has the potential to boost consumption which underpins Indonesia\'s economic growth.

Because, even if Indonesia survives in the upper middle income countries group, its meaning may not be felt because of two things: (1) a greater number of other countries, which are relatively the same in the main character of their economy, enter the upper middle income countries group, (2) there is the possibility that another country rises faster, which eventually oversteps Indonesia.

Share of GDP and exports

China is predicted to remain powerful and continuously seize the world export share. Another big Asian country that continues to increase its market share in the world export market is India. China has clearly shown a spectacular leap in the last 40 years, making it now ranked second in the world for the aggregate GDP measure from the eighth in 1995. However, in term of the jump, India also cannot be underestimated. This country which is often perceived as poor in the leap from the 16th position of the world in 1995 to the fifth position at the moment (2019). Meanwhile, Indonesia is still in 15th position.

Read also: Poverty and Inequality Worsening

The spectacular rise of the two Asian giants was marked by a significant increase in the share of GDP and export share to the world. In 1995, China was only 2.4 percent of world GDP. But in 2010 and 2019 it jumped dramatically to 9.2 and to 16.2 percent. India was also moving slowly but surely from 1.2 percent 1995 to 2.5 percent 2010, and 3.3 percent 2019.

The jump also occurred in exports. China\'s share of the world in 1990 was only 1.2 percent. However, in 2010 China took over Japan\'s position as the second ruler of the world\'s export share, namely 8.8 percent of total world exports. Less than a decade, China also took over the number one position, shifting the US. As for India, it rose from 0.6 percent in 1990 to around 2.0 percent in 2010 and 2.2 percent in 2018. In 1990 Indonesia\'s share was slightly better than India by 0.7 percent. However, until now, Indonesia has never penetrated 1 percent of the world share.

These two figure indicators of global competitiveness are certainly a reflection of the structure and institutions of the domestic economy of each country. China\'s success in taking over the export markets of Japan, South Korea, and Taiwan in electronic products, household appliances and other industrial goods is inseparable from China\'s success in transforming the economy from traditional and extractive economies to industrial economies and industrial services.

The same is true with India, though slowly. How about Indonesia? We must admit that our economic structure is still vulnerable. The share of the industrial sector is slowly shrinking. In 2006, the manufacturing portion was still 27.5 percent of total GDP. However, in 2019, that portion has fallen below 20 percent, namely 19.7 percent. At the same time, our exports are dominated by extractive raw resource commodities and primary sector commodities.

Awaiting economic transformation

Although we have drastically improved economic institutions in the aftermath of the 1997-1998 monetary, economic and political crisis, we must admit, the improvement is limited to strengthening institutions in the financial and banking sectors. The presence of the Financial Services Authority (OJK) and other guard institutions with a variety of regulations that are very prudent, but flexible enough, cannot be considered sufficient to keep Indonesia\'s economy as a whole to continue to grow stable in the long run.

However, each of these facts needs to be filtered, resettled at the domestic level, then compared with the solidity and vulnerability of countries that are relatively equal in economic potential to Indonesia.

The contents of the World Bank\'s praise elements are indeed in accordance with facts. However, the facts that are praised should be put into a more appropriate context. For example, the praise for annual GDP growth of 5.6 percent over 50 years, extreme poverty reduction, faster middle class growth than other classes, is indeed a fact. However, each of these facts needs to be filtered, resettled at the domestic level, then compared with the solidity and vulnerability of countries that are relatively equal in economic potential to Indonesia.

Even with any injection, if it is not disturbed by repeated political shocks, a country with a large population at the bottom of the GDP position will be easy to achieve a high average economic growth rate in the long run compared to countries that have entered the mature position and whose population is relatively few. The rapid growth of the GDP of China and India, which has been spectacular for the last 40 years, is inseparable from these demographic factors, which are then differentiated by their individual factors. Likewise, Indonesia and Brazil, aggregately their GDP has been seen to grow quite significantly above the countries in the world in the last 40 years.

We must be vigilant with GDP growth where the social class base relies too heavily on the middle class, let alone intersecting with other low quality bases, such as the extractive sector and the property sector. The middle class attaches certain lifestyles that are not necessarily compatible with macroeconomic stability.

KOMPAS/TOTOK WIJAYANTO

Andrinof A ChaniagoKompas/Totok Wijayanto (TOK)27-12-2013

Meanwhile, if our GDP growth is assisted by the extractive sector or the sale of natural resources, its contribution to real growth is substantially low because the country that receives direct or indirect rewards from extractive production activities is actually "selling assets", not creating added value.

Likewise, the property sector, even though its growth is rapidly ballooning, its products cannot be exported (non-tradable) and the value is vulnerable to collapse as we experienced in 1997 and experienced by the US in 2008. This is more important to be the main issue of Indonesia\'s economic development in the future.

Andrinof A Chaniago, Lecturer at the Department of Political Science, the School of Social and Political Sciences (FISIP), University of Indonesia; Author of Development Failure (LP3ES, 2001, reprinted in 2012)