Fellow at the ASEAN Studies Center, Gadjah Mada University
With the recent forecasts that growth in 2018 was between 5.1 to 5.2 percent, as well as projections of 5.1 to 5.4 percent growth in 2019, the question arose as to whether it was game over for President Joko “Jokowi” Widodo’s target of achieving 7 percent growth. The question was redundant because the game was never on.
Jokowi set the ambitious target when taking office in 2014 and reiterated the goal throughout his term. The figure was based on a number of factors, such as favorable international terms of trade, deregulation to improve the business and investment climate and significantly a massive infrastructure program. Between 2015 and 2018, however, growth failed to accelerate substantially and fluctuated between 4.74 and 5.27 percent.
Why has growth been steady yet underwhelming in 2018? Steady growth was driven by rises in household spending at 5.1 percent and government spending at 5.3 percent, as well as fixed capital formation growth at 5.9 percent, according to Bloomberg. Meanwhile, Southeast Asia is enjoying an investment boom and Indonesia saw 6.5 percent investment growth in 2018. While this data is good news for some, it does highlight that growth remains overly reliant on capital intensive production and fiscal stimulus.
Some have blamed underwhelming growth on external and internal pressures. The tariff war between the United States and China has hurt global trade, and the IMF has cut its global growth forecast in 2019 by 2 percentage points to 3.7 percent partly because of this. At home, the current account deficit has widened largely because of increasing imports, with Indonesia recording a trade deficit in 2018 of $7.52 billion as of November. These pressures have certainly curbed growth, however suggesting they are responsible for the failure to accelerate to 7 percent growth is folly.
Crucially, the foundation to support high growth was missing even before Jokowi came to office. Two areas are of particular concern: infrastructure and human capital.
Decades of underinvestment in infrastructure meant that a 2017 survey by the Indonesian Chamber of Commerce and Industry found that the ratio of logistics costs to GDP was 24 percent, far behind upper middle-income neighbor Malaysia at 15 percent and high income Japan at 10.6 percent. The high cost of logistics impedes competitiveness in the overall economy, constraining growth. Praiseworthy, however, was Indonesia’s jump in the World Bank Logistics Performance Index to 46 from 63, albeit behind neighbors Malaysia at 41, Vietnam at 39 and Thailand at 32.
The government has also sought to promote value-added production, particularly in high-tech industries. Supporting these industries, however, requires a highly skilled workforce and institutional setting that promotes innovation. Yet Indonesia faces chronic skills mismatches, while a lowly 0.3 percent of GDP is spent on tertiary education and 0.5 percent on research and development. What’s more, there are fears of a large proportion of the workforce falling into a skills trap, with the quality of jobs supplied to the economy persistently being of a low skilled nature.
Meanwhile, on Dec. 8 National Development Planning Minister Bambang Brodjonegoro suggested that Indonesia could become a high-income country by 2045 if growth was maintained at 5 percent. While Indonesia certainly has tremendous potential, the forecast was nothing short of nonsense and a distraction from the immediate issues at hand.
Moving up the income ladder is not simply a linear process. Since 1960, only 16 economies have made the transition from middle to high-income status. Out of the 16, six were small European countries who transitioned to high income after implementing significant structural reform upon accession to the European Union. Eleven of the 16 had populations below 11 million. Only South Korea and Japan, relatively small and homogenous countries, had populations above 50 million, while they engaged in export-oriented industrialization in a benign international environment.
This evidence does not bode well for a country as large and diverse as Indonesia, which is still a lower middle-income country. The country’s GDP per capita stands at US$3,600, below the threshold of upper middle-income status at $3,985. Given the country’s economic geography and structural political economy, in the medium term it may not reach the growth heights of the East Asian tigers. This is no bad thing, indeed it took the United Kingdom, United States and Germany over a century to fully industrialize.
Jokowi and his economic team have shot themselves in the foot by targeting 7 percent growth. But it is not all doom and gloom, indeed Indonesia is very much in an envious position among other emerging markets. Jokowi’s team would do better by instead promoting a narrative of quality and resilient growth.
This was marked by low inflation in 2018 at 3.13 percent, the fall in poverty to its lowest figure ever at 9.82 percent and the strengthening of the rupiah to Rp 14,105 per US dollar from 14,800 in November. These are commendable figures, given that inflation skyrocketed in the Philippines in 2018 to 6.7 percent, while the currencies of Turkey and Argentina, which also faced sharp depreciation, failed to match the recovery seen in the rupiah.
If Jokowi is successful in winning a second term, he must double down on building the foundations for high growth. He must not extend the regrettable reintroduction of fuel subsidies, which would free up billions of dollars for addressing the gaps in infrastructure and human capital.
If Jokowi can do this, while he may fail to post 7 percent growth under his own administration, he can claim it as his legacy if it is achieved under his successors.
The writer is a fellow at the ASEAN Studies Center, Gadjah Mada University, and the author of the forthcoming working paper Escaping the Middle Income Trap in ASEAN: Toward a Regional Strategy? Find him on Twitter @ShahSurajBharat
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.