RI risks falling into middle-income trap
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Indonesia risks falling into a so-called middle-income trap if it fails to improve infrastructure needed to sustain faster economic growth, says the International Monetary Fund (IMF).
“This [middle-income trap] is going to happen sometime from now. It is essential to focus on how to sustainably release capital and infrastructure spending in Indonesia,” IMF Asia and Pacific department director Anoop Singh said on Friday.
Singh said like most emerging economies, Indonesia would have to sustain its economic growth in the medium term or be exposed to a situation in which the economy remained at a middle level of income.
Emerging Asian economies, according to the IMF, are estimated to grow by 6.1 percent this year and 6.8 next year, well above the global outlook of only 3.3 percent this year and 3.6 percent next year. Meanwhile, Indonesia is projected to grow by 6 percent this year and 6.3 percent next year.
Indonesia is struggling to implement its master plan on infrastructure development due to a number of issues, particularly those pertinent to land acquisition, which is complicated by overlapping ownership claims and rampant speculation.
President Susilo Bambang Yudhoyono issued a new regulation in August aiming to add certainty to the process of land acquisition. The regulation provides a maximum of 538 days after an intention to acquire land is filed with the provincial government to settle any land disputes. The regulation is set to enter into effect next month.
Business associations, however, are not satisfied with the new regulation, saying the period for dispute settlement is still too long and involves “too much bureaucracy”. The Indonesian Chamber of Commerce of Industry (Kadin) also regretted that the regulation would not affect stalled infrastructure projects that were launched prior to the issuance of the regulation.
Among the stalled projects are 24 toll roads, including sections of the Jakarta outer ring road project and the trans-Java toll road. The entire project, which will cover 605 kilometers, is worth around Rp 160 trillion (US$16.96 billion).
Failure to develop adequate infrastructure would in turn hurt competitiveness following higher costs of production and increasing wages, Singh said.
The illustrated situation is already apparent in Indonesia, Southeast Asia’s largest economy, where labor unions have continued to demand significant raises of the minimum wage, especially in industrial centers.
Labor unions in industrial areas in Bekasi, West Java and Batam island, which host thousands of factories, have proposed adding new components to the index used to establish annual minimum wages, which could result in demand for a 100 percent increase for the 2013 fiscal year. The proposal is expected to dominate mediated negotiations scheduled to begin next month with employers.
Negotiations with employers turned sour in January, leading to tens of thousands of workers to block toll road access to Bekasi, effectively halting the operations of some 3,000 factories.
Infrastructure aside, the IMF advises Indonesia to allow a more inclusive economic policy, such as through encouraging more private sector-led investment, reforming goods and labor markets and addressing challenges of rapid demographic change.
The IMF also warns that Indonesia’s economy is at risk of overheating as indicated by a record $6.9 billion current account deficit in the second quarter, or equivalent to the country’s gross domestic product, as the value of imports exceed exports.
Perry Warjiyo, the director for monetary policy research at Bank Indonesia (BI), brushed off concerns of economic overheating, saying that Indonesia’s GDP was still expanding within its capacity.
“Our economic growth of 6.3 percent is actually lower than our potential capacity. Based on our calculation, our economic growth potential is actually 6.7 percent,” Perry told reporters at the central bank’s office in Jakarta on Friday.
Perry also highlighted the fact that Indonesia’s macroeconomic indicators did not show any signs of overheating, citing the country’s inflation and credit growth, which remained at the convenient level.
“If the economy grows beyond its capacity, then consequently there will be pressure on the price level. Our inflation, meanwhile, remains manageable — or even low, I must say — at 4.1 percent,” he added. (Sat)