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Early in 2012, Indonesia, for the first time since the 1997 economic crisis, regained investment-grade status by at least three international rating agencies. Globally recognized for its superb economic achievement on economic growth, ratio of budget deficit to gross domestic product (GDP) and public debt to GDP, Indonesia has turned out to be one of the world’s strongest emerging economies together with China and India.
The G20 meeting in Los Cabos, Mexico, on June 18-19, reminded the world that economic turmoil globally is still unfolding. This year, the global economy is estimated to be gloomier than last year. Not only does it affect the US and Europe, but it also distresses the Asian economy. Sluggish economic growth will occur not only in developed countries, but also in developing countries.
The World Bank (WB) in its Global Economic Prospects (GEP) estimates sluggish economic growth from 5.3 percent (2011) to 6.1 percent (2012) for developing countries and from 1.4 percent (2011) to 1.6 percent (2012) for high-income countries, with the eurozone tagged with the lowest estimation rate, from 1.6 percent to minus 0.3 percent. This decline in economic growth in developed countries will lower both the export demand and investment inflows of developing countries.
Following this, the WB also estimates that global export growth will go down from 6.6 percent in 2011 (down from 12.4 percent in 2010) to 4.7 percent in 2012. World trade volume is estimated to fall from 6.1 percent in 2011 (down from 13 percent in 2010) to 5.3 percent in 2012.
Furthermore, investments of net private and official inflows in developing countries is forecast to decline from 4.6 percent in 2011 (down from 5.8 percent in 2010) to 3.3 percent in 2012. This global economic downturn will cause Indonesia to experience slower economic growth, according to the WB, from 6.5 percent in 2011 to 6 percent in 2012.
However, 2012 still promises a brighter picture for Indonesia.
First, as one of the largest economies (nominal GDP) in the world, Indonesia’s estimated economic growth, according to the GEP, is still among the highest after China and India. This estimation is even higher than the average estimated economic growth of developing countries at 5.3 percent and global economic growth of 2.5 percent.
Second, East Asia and Pacific regions still account for the highest regional economic growth in the world with around 7.6 percent, higher than Sub-Saharan Africa at 5 percent; Latin America and the Caribbean at 3.5 percent; the US at 2.1 percent; Organization of Economic Cooperation and Development (OECD) countries at 1.3 percent; the Middle East and North Africa at 0.6 percent; and the eurozone at minus 0.3 percent. East Asia’s high economic growth estimation is an advantage for
Indonesia, given that its economy depends more on this region than on other regions.
The World Trade Organization (WTO) data base of intra- and interregional trade shows that most of Asia’s exports are traded within Asia at around 53 percent, followed by Europe at 17.2 percent, North America at 17.1 percent, and then the rest of the world. Asia’s export dependency on non-traditional markets, such as Africa, the Middle East and South and Central America, is still very low. In 2010, the proportion of Asian exports to these three regions was 3 percent, 4 percent and 3 percent, respectively, also reflecting Indonesia’s market orientation.
Asian Development Bank (ADB) statistical data shows that in 2010, around 52 percent of Indonesia’s products were exported to Asia, in particular East Asia (Japan, China and South Korea) at around 34 percent, and Southeast Asia (majority to Singapore, Malaysia and Thailand) at around 18 percent.
Similar to the export figures, around 60 percent of Indonesia’s imports come from Asia, primarily from East Asia at around 33 percent of total value of Indonesia’s imports, which mainly come from China, overlapping with Japan since 2006, and then followed by Southeast Asia at around 27 percent.
Regional economic integration in Southeast Asia has significantly increased ASEAN’s intraregional trade, which has grown by more than 200 percent in the last 20 years. An increase in intraregional trade will stimulate long-run investment (foreign direct investment/FDI) inflows from two sources: Regional member states (vertical FDI) and non-regional member states (horizontal FDI).
Before the global economic crises in 2008, ASEAN’s FDI inflows from its member states was around 15 percent of the total ASEAN FDI inflows, less than FDI inflows from non-member states at around 85 percent.
This figure is similar to the proportion of FDI inflows into Indonesia. Before the current global economic crisis, around 77 percent of Indonesia’s total FDI inflows came from non-ASEAN states and only 23 percent from the association’s member states. In terms of FDI, ASEAN depends more on non-member states than on member states.
Regional economic integration is effective in attracting horizontal FDI if its trade diversion is higher than the trade creation effect. However, the author’s independent research has found that the ASEAN Free Trade Area (AFTA) generates more trade creation than a trade diversion effect, thus is less effective in attracting FDI from non-member states. Furthermore, FDI from non-member states is predicted to decline due to the global economic turmoil.
In order to further attract FDI inflows, an FDI host country needs to optimally utilize its domestic economic factors, such as market size, skilled labor and low trade cost (Park & Park, 2008).
Several other domestic factors, such as good infrastructure, adequate electricity capacity and persistent domestic reforms including streamlined administrative services, appropriate tax incentives and a commitment to corruption eradication, are also very important.
One of the joint leaders’ recommendations at the G20 meeting in Mexico emphasized the need to increase infrastructure development and sustainable funding. Currently, infrastructure is the most vital requirement as it can boost both trade and investment.
Efforts to enhance international trade and FDI need intensive and strategic negotiations with partner countries. This work requires cross-institutional cooperation between related ministries, business associations and local governments. Indonesia’s central government must realize that to compete in this gloomy global economy, it needs two things simultaneously: Solid coordination and real-time decision making.
The writer is a lecturer at the School of Economics, University of Indonesia (UI), and a doctoral candidate at GSAPS, Waseda University, Tokyo.