Economic Growth in Indonesia

Introduction

Indonesia, officially the Republic of Indonesia, is an equatorial archipelago located in Southeast Asia between the Pacific and Indian Oceans. This transcontinental state consists of more than 17,500 islands spanning approximately 5,150 kilometers from the east to the west (“Indonesia Facts”, 2018). Indonesia is not only the 7th largest country in terms of overall area, but also the 4th most populous country in the world, containing more than 260 million people (“Indonesia Facts”, 2018). With English as the primary spoken language, the Indonesian people also speak many local dialects, including Bahasa Indonesia, Javanese, and Dutch (“Indonesia Facts”, 2018). As Indonesia contains the largest Muslim population in the world, there are also other followers who practice faiths including Buddhism, Hinduism, Protestantism, and Roman Catholicism (“Indonesia Facts”, 2018).

Located near the equator, the mountainous terrain of Indonesia has an abundance of rain forests, which leads to disparate climates throughout the island regions (“Climate of Indonesia”, 2018). The mountainous regions of Indonesia are relatively cool, while the climate on the rest of the islands is tropical, with year-round heavy rainfall with cyclones and monsoons (“Climate of Indonesia”, 2018). Indonesia is a country that is rich in natural resources and leads the world in the export of refined tin and steam coal (Dutu, 2015). The island nation is one of the primary exporters of metals, including bauxite, copper, gold, lead, and zinc (Dutu, 2015). In addition to being renowned as a leading exporter of natural resources, Indonesia is a leader in the production of fish products, robusta coffee and rubber, and is the top producer in the world of palm oil (Dutu, 2015).

The key events in the history of Indonesia include the 1670 to 1900 colonization of the Indonesian islands by the Dutch, when the country became known as the Dutch East Indies. The Dutch recognized Indonesian independence in 1949 after the Japanese invasion of the Dutch East Indies in 1942 and four years of guerrilla warfare (“Indonesia Profile: Timeline”, 2018). Soon after, Sukarno became the first President of Indonesia and started his dictatorship. In 1968, Suharto overthrew Sukarno and initiated the New Order administration, which encouraged foreign investment and stimulated economic growth in Indonesia (“Indonesia Profile: Timeline”, 2018).

Institutions

Indonesian society is shaped by several economic and political institutions that have greatly impacted economic growth, including property rights, corruption, and child labor. The profound influence of these institutions is reflected in the lives of Indonesians, regardless of socioeconomic status. Although, as with most institutions and their respective policies, the poor or other marginalized groups are usually the people who are most impacted in a deleterious manner.

One of the key indicators that a country is a strong, stable, reliable economic partner in business is the nature of its laws and policies regarding intellectual and physical property rights. A country known to have inefficient laws or lax enforcement of laws regarding property rights is not going to be favorably viewed as a viable trade partner on the global stage. In the 2017 International Property Rights Index, Indonesia is ranked 68th out of 127 countries worldwide (“Weak Property Rights”, 2017). This ranking is attributed to a lack of enforcement for legally binding contracts, the lack of emphasis on property rights, inaction from law enforcement and the court system, rampant corruption, and the complete absence of protections for intellectual property rights (“Weak Property Rights”, 2017). The combination of the negative factors prevents Indonesian-based businesses from growing, which in turn stifles economic growth throughout the country. The International Property Rights Index not only measures how strong intellectual and physical property rights are within a given nation, but it also measures the country’s political and legal environments (“Weak Property Rights”, 2017). Obtaining a high ranking on this index is ideal as it is an indication that the country cultivated an environment that is conducive to business expansion and overall economic growth (“Weak Property Rights”, 2017). According to the 2017 International Property Rights Index, it takes over a year to enforce a legally binding contract in Indonesia, and the lack of secure property rights laws and insufficient enforcement of existing laws make it especially difficult for socioeconomically disadvantaged Indonesians to start or maintain businesses that can elevate them out of poverty (“Weak Property Rights”, 2017).

Another serious issue that contributes to the deep socioeconomic disparity in Indonesia is rampant governmental corruption. In the 2018 Corruptions Perception Index published by Transparency International, 180 countries and territories are surveyed to ascertain the level of government corruption that existed there on a scale of 0 to 100, where a score of zero indicates the highest levels of corruption and 100 means corruption is practically nonexistent (“Corruption Perceptions Index 2017”, 2018). Indonesia’s score has improved slightly, going from a ranking of 32 to 37, attributed to the efforts of the primary anti-corruption agency in Indonesia, in spite of strong opposition from politicians and the Indonesian government itself (“Corruption Perceptions Index 2017”, 2018). To place these figures in the proper perspective, New Zealand ranked 89 and Denmark ranked 88 while Central Asia was ranked 34 and Sub-Saharan Africa ranked 32 (“Corruption Perceptions Index 2017”, 2018). As in most nations, public sector corruption benefits the upper classes of society and harms the most vulnerable members of society. It is nearly impossible for the poor to elevate themselves from poverty, which in turn hampers the ability of the Indonesian economy to lift Indonesia up from developing nation status to becoming a major player in the global trade enterprise.

In addition to the prior two political institutions, child labor is a persistent economic institutional challenge in Indonesia. According to official statistics, there are more than 2.4 million children in Indonesia working in different economic sectors, including mining, seafood processing, and agriculture (Bessel, 2007). Conditions in many of these industries are unfavorable: agricultural work is hazardous with exposure to pesticides and the use of dangerous tools and machinery (International Labor Organization, 2018); work on fishing platforms is subject not only to harsh conditions, but also often various kinds of abuse from the adult employers (Bessel, 2007). Since a large percentage of the Indonesian population is still living in extremely poor circumstances with limited income and resources, children frequently enter the workforce out of necessity. As a result of their participation in the workforce, many children either forego schooling or eventually drop out (Bessel, 2007). Lack of education combined with prevailing economic conditions and child labor participation create a self-perpetuating cycle: untrained and uneducated young workers who begin work early are never able to improve their employment prospects and thus are never able to escape poverty or make significant contributions to economic development in the country. Therefore, all these negative factors of child labor would directly result in challenging economic conditions.

Current State

Indonesia is a lower-middle-income developing economy with a Gross National Income (GNI) per capita of 3974.10 US dollars, ranking as the 92nd in the world (“2018 Index of Economic Freedom”, 2018). For 2017, Indonesia’s GDP growth rate rose to 5.1 percent from 5.0 percent in 2016” (World Bank, 2018). Indonesia’s economic growth has been holding steady in an upward trend through 2016 to the current, influenced by net exports and supported by improved global trade (World Bank, 2018).

In 2015, Indonesia’s human development index (HDI) was 0.689, ranking it 113 of 188 countries and territories (“Indonesia’s Human Development Index”, 2017). Indonesia’s HDI has shown improvement in part because of advances that have been made in improving health outcomes for women in childbirth, and the number of school years completed (“Indonesia’s Human Development Index”, 2017). Despite advances in these areas and the country’s efforts to be more inclusive, Indonesia lags behind in improving the disadvantaged status of people who live in remote areas of the islands, women, and ethnic minorities (“Indonesia’s Human Development Index”, 2017). Such inequality can be statistically shown by the high inequality human development index of 0.563, representing the need for improvements for chronically disadvantaged populations (Dustan, 2017).

Moreover, the economic inequality in Indonesia can also be reflected by the Gini coefficient, which measures the degree of income inequality within a country and represents the distribution of wealth on a scale of zero to 100. According to the World Bank collection of development indicators, the 2013 estimated Gini coefficient for Indonesia was 39.5, which indicates a high level of inequality (“Gini Index”, n.d.). Based on the World Bank’s reports, the inequality of Indonesia has four main drivers, including “inequality of opportunity, inequality in the labor market, high wealth concentration, and unequal resilience to shocks” (Indonesia's Rising Divide, 2015). In order to close the income gap within the nation, Indonesia’s government should focus on addressing these four main drivers of inequality.

Today, Indonesia is the largest economy in Southeast Asia, and is being targeted for the next phase of globalized economic inclusion (Indonesia Investments, 2016). Trade within Southeast Asia has increased significantly in the recent decades, which helps to boost Indonesia’s export levels (“Indonesia - Economic Forecast Summary”, 2017). Since inflation in the country remains relatively low, the currency has experienced increased levels of stability, which has induced banks in Indonesia to reduce their policy rates on at least two occasions in 2017 (“Indonesia - Economic Forecast Summary”, 2017). The quantity of loans banks in Indonesia extend to consumers when compared to GDP is low, but this is a positive sign as it means the macroeconomic risks to financial institutions is also low (“Indonesia - Economic Forecast Summary”, 2017). Indonesia’s fiscal policies support the economy’s growth by increasing government expenditures on initiatives such as social, health, and educational programs, and infrastructure improvements (“Indonesia - Economic Forecast Summary”, 2017).

Theory

In this section, I am going to discuss the application of the Patterns-of-Development Analysis in Indonesia, which I believe is uniquely suited to an examination of the specific factors associated with the broader development in the country. As Todaro and Smith (2015) argued, the Patterns-of-Development can be viewed as an empirical model that evaluates several distinct components as indicators of a developing nation’s relative economic growth. These factors specifically include the domains of the transition from an agrarian to an industrialized economy, the steady accumulation of human capital, the nation`s broader patterns of urbanization, growing and evolving consumer demand, and the relative decline in terms of family size. Applying these measures to the Indonesian context yields the following set of findings.

Since 1967, the Indonesian economy has undergone an important and gradual transition away from an agrarian-based economy towards an industrialized-based framework. Elias and Noone (2011) noted that between 1968 and 2009 specifically, the nation`s manufacturing-based GDP increased by approximately 19%, whereas its agricultural-based GDP also fell in the same period by 35%. However, the nation’s economy is not entirely industrialized as agriculture still represents 16% of its approximately annual GDP. These specific patterns of development also tend to relate to the nation’s uneven development between its urban-coastal and interior-agrarian population and social patterns: the former represents sites of advancement whereas the latter indicates lower-levels of growth and development (Rielveld, 1988).

The nation’s patterns of urbanization also indicate a high increase in its urban environments in a 50-year period. Between 1967 and 2010, analysts estimated that approximately 53% of the nation’s aggregate population lives in its urban coastal environments. This indicates the massive expansion of cities, such as Jakarta, that now function as the primary sites of younger people moving away from their homes in agrarian and lesser developed regions (Anantra & Afflin, 2014). These figures tend to derive from three critical factors: the expansion of jobs within urban environments, the cultivation of a professional workforce in these regions, and the growing demand for younger professionals to work in emerging fields and industries (Razdan et al., 2014).

As this latter point illustrates, the gradual development of Indonesian cities as a site for urbanization, increased employment, and growth has also sparked an increase in terms of the nation’s aggregate professional workforce and collection of specialized human capital. Anantra and Afflin (2014) noted specifically that Indonesian`s specialized workforce derives from its increasing participation in the ASEAN economic bloc. In particular, the nation’s emerging tech economy has significantly contributed to the development of microchips, microprocessors, and similar components that are driving ASEAN`s broader prosperity. A critical shortage of tech worker specialists to populate these fields has created a new demand for younger workers who are trained and competent in these capacities.

The trends of urbanization and the growing specialization of the Indonesian economy are also having an impact upon birth rates and family planning issues. While the nation`s growth rate is steady at 1.04% annually, younger families are also having fewer children. This tends to be the case, specifically, in major urban centers (World Population Review, 2018). Finally, consumer trends in urban centers reflect a growing sophistication and a demand for goods and services apart from basic necessities (Razdan et al., 2014). This includes an increased demand for specialty goods, brand names, and international products and offerings.

It should be noted, however, that these patterns tend to be more pronounced in coastal urban areas, meaning that the nation’s agrarian-based interior still tends to be underdeveloped. Therefore, as Indonesia’s economy expanding significantly, its government still faces the issues of income inequality.

Conclusion

Throughout the last five decades, Indonesia has experienced a great deal of economic and social change. As today’s 10th largest economy in the world in terms of purchasing power parity (PPP), Indonesia has become an increasingly important participant in the global economy (“The World Bank In Indonesia”, 2018). After the Asian financial crisis of the late 1990s, the economy of Indonesia continues to recover and government efficiency is progressively improving throughout the time. Indonesia has been diligently working towards making the island nation more advantageous for private business investments and public-sector investments in programs that are of service to the community and the nation as a whole. Overall, the economic growth in Indonesia can be largely explained by the Patterns-of-Development Analysis, as it steadily went through the process of urbanization, transition from agriculture to industry, and accumulation of physical and human capital.

The Indonesian economy nowadays is described by The Organization for Economic Co-operation and Development (OECD) as an emerging economy with a positive economic outlook for 2018 (“Indonesia - Economic Forecast Summary”, 2017). According to the OECD, Indonesia’s gross domestic product (GDP) is anticipated to continue growing with the support of a better business environment. The implemented government policies, including relaxed government regulations and a simpler monetary environment, will continue to attract more foreign direct investment and public capital investment (“Indonesia - Economic Forecast Summary”, 2017). Moreover, the export rate is anticipated to continue increasing in the future with the open market policies. Indonesia will continue to be a leading exporter of metals and other natural resources.

However, Indonesia still has work to do when it comes to issues of income inequality. For years, many of the economic and fiscal policies were designed to specifically benefit those occupying the highest socioeconomic levels of the nation with little to no regard for the plight of the poor, those in rural areas, women, and ethnic minorities. Because of deep-seated corruption at all levels of the Indonesian government, politicians enacted laws and procedures that benefited their own ranks and their wealthy benefactors. Therefore, in the future, Indonesia should put more effort on providing tangible assistance to socioeconomically disadvantaged Indonesians, implementing stricter enforcement of labor laws, and improving intellectual and physical property rights laws and the enforcement of such laws. Addressing these critical issues can help Indonesia achieve greater income and social equality among all of its citizens. 

Cite this page