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Jakarta Post

The economy is improving, but is it sustainable?

  • Winarno Zain

    The Jakarta Post

Jakarta   /   Thu, February 13, 2014   /  09:17 am

The depressing state of the Indonesian economy for the last several months has all of a sudden gone. There is optimism and hope that the worst is over, and that the rebound of the economy is already underway.

Inflation has been contained and set on the downward path. The rupiah'€™s exchange rate has been steady and has even made slight gains against the US dollar.

Foreign exchange reserves are still on the rise, surpassing the US$100-billion mark at the end of January. The sell-off of stocks on the Indonesian Stock Market (IDX) has abated. The Indonesian Composite Index (IHSG) has gained 9.2 percent between the start of January and Feb. 7, a significant rebound from the December 2013 lows.

Foreign funds that fled from the country last year are now coming back in droves, hunting several
blue chips on the IDX, driving up the share price of Bank Rakyat Indonesia (BRI), Astra International, Telkom, Semen Indonesia and others.

The trade balance in the fourth quarter of 2013 returned to surplus after suffering deficits for the previous four quarters. But it must also be noted that the trade balance for the whole of 2013 posted a deficit of $3.9 billion, three-and-a-half times the deficit in 2012.

However, if we scrutinize in more detail the gross domestic product (GDP) growth for 2013, which has just been released by the Central Statistics Agency (BPS), it is doubtful that these rosy pictures of the
economy will be sustained unless policymakers take some drastic steps.

Tighter monetary conditions have impacted most of the tradable sectors: Growth in agriculture,
mining and manufacturing were slightly down from their growth in 2012.

After negative growth in first half of 2013, the mining sector grew nearly 4 percent in the last quarter of 2013, but that was because mining companies rushed to produce and export their unprocessed minerals before the ban on exporting raw ore took effect on Jan. 12.

Higher interest rates and more stringent conditions for down payments have considerably impacted the construction sector, whose growth fell significantly from 7.5 percent in 2012 to 6.6 percent in 2013. But the biggest drop in growth was in the trade, hotel and restaurant sectors, which together fell from 8.1 percent to 5.9 percent.

The impact on employment could be significant because these sectors were the second-biggest jobs generator after agriculture.

On the expenditure side of the GDP, while growth of private consumption was steady despite higher inflation, there were huge jumps in the growth of exports and government spending.

But the overall GDP growth will not hold up, because of the dramatic fall in investment growth from 9.8 percent in 2012 to 4.7 percent in 2013. Investment growth simply cannot be allowed to keep
shrinking.

It is investment growth that generates employment, income and economic growth. So, it is critically important that the continuing slide in investment growth be stopped.

The clear message from the 2013 GDP figures was that if GDP growth is to rebound, increasing investment should be the number one priority for policymakers.

Unfortunately, this is the hardest thing for policymakers to implement, due to domestic as well as external forces. The investment climate, poor infrastructure, bureaucratic inertia and a still weak and uncertain global economy are all hurdles to overcome.

But if investment is to become a more significant force in driving up GDP growth, then it might not be enough to talk about quantity. It is time to talk about the quality of investment as well.

Policymakers should focus more on the expansion of investment to industries that give more value added, with higher technology transfer, because it is these industries that can accelerate growth more than basic and simple manufacturing, which currently dominates Indonesian industries.

Most high-tech, high value added industries are foreign-owned.

As competition among countries to lure these industries is fierce, the current approach used by the government (for example, tax incentives) is not enough.

A more proactive approach by government institutions is required. After all, the responsibility of attracting foreign direct investment does not rest with the central government but also with the regional governments.

Regional government heads '€” governors and district heads '€” should be encouraged to actively seek and persuade firms to invest in their regions.

The current effort by Jakarta Governor Joko '€œJokowi'€ Widodo to lure Foxconn, the world'€™s biggest electronic manufacturer, to invest in Jakarta, is one example that other regional heads should emulate.

Foxconn, which produces the devices used by electronic giants such as Sony, HTC and BlackBerry, is working out a plan to build a factory in Marunda, north of Jakarta.

Jokowi took the time to meet the Foxconn chairman himself, and if Foxconn started to invest $1 billion, it would be a '€œcoup'€ for the Jakarta Governor.

But there is a long way for Indonesia to go to equal Vietnam, for instance, in attracting high-tech industries. Samsung recently announced a plan to build a $2-billion smartphone plant in Vietnam that would produce 40 percent of Samsung cell phone sets. US-based Intel, the world'€™s biggest chip maker, has already built a $1-billion plant in Ho Chi Minh City.

also has a factory in Vietnam, and LG is building its $1.5-billion plant to produce TVs and appliances. Indonesia is ahead of Vietnam in total foreign direct investment, but clearly, Vietnam has beaten Indonesia in attracting investment from high-tech industries. Reversing the score against Vietnam is
an uphill battle indeed, but it has to be done.

The challenge is immense because promoting investment has a lot to do with removing structural restraints, and unfortunately, it would be beyond the capability of the present government or the next government after the election in April to do this.

The inability of policymakers to remove structural restraints come from within the government itself and from the outside. Structural reforms need political consensus, but with competitive politics now on the way, it is difficult to reach a united stance on the need for reform.

Besides, the role played by non-political actors (NGOs, business associations, mass media) in influencing policy making is getting bigger.

All these could undermine government efforts to mobilize more investment, which is urgently needed for the revival of Indonesian economic growth.

The writer is an economist.

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