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Key economic challenges ahead of 2024 elections
Indonesia’s economy remains resilient despite the prevailing global uncertainties.
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Two children walk past a 2024 general election-themed mural in Pandeglang, Banten, on March 6, 2023. The mural is aimed at encouraging people to participate in the 2024 general election and avoid money politics. (Antara/Muhammad Bagus Khoirunas)
I
n the midst of the dynamic political landscape during the election preparation period, it is a good time to reflect on and assess the challenges and opportunities for the economy post-election, and what economic policies should be prioritized by the newly elected government.
Indonesia’s economy remains resilient despite the prevailing global uncertainties. The two largest economies in the world, the United States and China, continue to grapple with the looming threat of economic deceleration. The US economy, in particular, remains ensnared by high interest rates, while China's is expected to enter a phase of moderated growth in the medium term. These two largest economies have a substantial interconnection with the global economy, including with Indonesia. Consequently, the impact of the slowdown in these giant economies will inevitably impact Indonesia’s economy. We have already seen our trade performance deteriorate due to the slowing global demand and declining commodity prices. This year, exports have declined by 10 percent, resulting in a notably lower trade surplus compared with last year.
The current administration stands lauded for its pivotal role in orchestrating Indonesia's economic resurgence from the depths of the pandemic-induced downturn, into a phase of sustained recovery. This commendable effort is reflected in the resounding GDP growth rate of 5.17 percent achieved in the second quarter of 2023, which is quite an achievement against the backdrop of the global economic deceleration.
However, the main question remains: what is the future direction of the Indonesian economy in the hands of the next government? How do we navigate the economy through the increasingly complex global challenges? Are we still heading toward faster and sustainable growth for Indonesia to achieve its vision for 2045?
Indonesia is blessed with a number of advantages, including a young and growing population, which provides a demographic dividend and a large domestic market. Indonesia is also still a resource-rich country, with abundant oil, gas and minerals. Nevertheless, it is imperative to acknowledge that these advantages may wane over time.
Many countries have aging populations, where elderly people outnumber the youth, resulting in a high dependency ratio that will negatively impact on economic growth. Indonesia is not immune to this. According to the most recent population projection for 2020-2050, Indonesia's demographic bonus will end in 2041. This means that we have 18 years, or even less, to create a strategy that will enable the economy to reach its full potential.
A number of policy initiatives have been taken to steer the economy toward prosperity, albeit with some challenges. Indonesia's long structural problem lies in the perennial issue of economic competitiveness, from the global appeal of our export commodities to the competitive prowess of our human capital. The implication of this, is reflected in the balance of payments metrics, most notably in the persistent deficit in the current account, particularly in the absence of a commodity boom.
A number of policy reforms have been pursued to address this structural problem. Yet, this is not an easy task. Elevating our competitiveness needs a multi-pronged approach, encompassing the containment of domestic inflation, the provision of ample capital for financing and the cultivation of a high-skilled human capital base.
The first step has been taken with the massive infrastructure development. Infrastructure will improve connectivity, mobility and reduce transportation costs, which in the end will encourage the emergence of new growth areas.
The second step, which is also equally important, is reform in the field of institutions, regulations and legal frameworks. Regulatory reform can provide clarity and certainty in carrying out economic activities, which will support the potential for investment in the future. During the current government’s tenure, a number of institutional reforms have been taken i.e. the Job Creation Law, which aims to promote investment, align central-regional policies and overcome overlapping regulatory problems. Good regulatory implementation will have a positive impact on the economy and will strengthen domestic economic resilience in the real sector.
At the end of 2022, the government and legislators also successfully completed and passed the omnibus law on the financial sector, namely the Financial Sector Development and Strengthening Law. This law revises various regulations related to the financial sector with the major goal of strengthening the institutional authority of the financial sector, increasing public trust in the financial sector, encouraging the accumulation of long-term funds, strengthening consumer protection and improving financial literacy, inclusion and innovation. Both of these laws complement the efforts of Indonesia's economic institutional reform and will have a positive impact on the economy, as long as they are adequately publicized among the public and implemented well.
The reform steps are certainly not over. The foundations have been built. Efforts need to continue with implementable regulations, which can facilitate more investment toward raising competitiveness. To increase the competitiveness of exported commodities, aside from the current downstreaming commodity sectors, policies on other labor-intensive industries also need to be assessed and improved.
Further, one of the most important reforms is building and improving the quality and productivity of human resources. Increasing productivity will ultimately improve the competitiveness of the economy. For the next two years, the government has allocated a higher budget for education and infrastructure, which is imperative to improve the quality of education and eventually human capital. Therefore, regardless of who will win the election, it is important that the efforts and spirit of structural reform persist. Time is of the essence, as Indonesia steadily approaches the zenith of its demographic bonus.
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The writer is head of macroeconomic and financial Mmarket research at Bank Mandiri.
