US, EU suffering brings RI new challenges

According to experts, the current global economic instability presents new challenges and opportunities for Indonesia. The global economic instability has not seriously affected the Indonesian economy as it is mainly driven by domestic demand. Exports make up just 25 percent of GDP with the domestic economy accounting for 75 percent.

The recent downgrading of the US to AA+ and the weakness of the US and Europe in the face of the economic crisis has created a short term flow of capital into Indonesia.

According to Chatib Basri, executive director at the Institute for Economic and Social Research in Indonesia “The capital flow will find assets in Indonesia, because of the US downgrade to AA+, countries do not want US dollar assets.” But he warns that although the current global economic instability creates opportunities, “Indonesia needs a master plan to control and regulate these capital flows to prevent overheating or the creation of an economic bubble.”

Chatib said one of the major factors holding back the potential growth of Indonesia is the massive lack of infrastructure. “As long as capital flows cannot be distributed efficiently, capital will bubble or will not be invested in RI [Indonesia].”

Another problem, according to a World Bank report in March, is the increase in commodity prices. Although rising commodity prices may benefit the country’s GDP as a whole, the increase in living costs negatively affects many poor households in Indonesia. Relatively high food prices are especially concerning to the World Bank.

But according to World Bank president, Robert Zoellick, the worldwide high food prices are also an opportunity to improve production and productivity in the food sector. Currently the World Bank is encouraging deeper cooperation between China and Africa while Africa suffers huge losses in food production.

“It is a very different world economy than it was even 10 years ago. And we need to be alert to the possibilities but manage the downside risks”, he said, referring to the possibilities of South-South and South-North development, instead of just North-South development. Now all eyes are turned to China as an important player in the recovery of the global economy and as an example for other countries.