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View all search resultsOptimizing Indonesia’s dual engine of economic growth
This is not about finding the right economic sector, but how human capital quality can be improved to increase productivity and how structural reforms can generate a supportive business environment.
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efore the pandemic affected the Indonesian economy in the second quarter of 2020, the quality of its economic growth was evident. An indicator such as open unemployment decreased, showing that Indonesia's actual economic growth was higher than its minimum economic growth to create jobs. At the time, Indonesia's inflation rate was showing market optimism, with actual inflation higher than the expected inflation.
Besides, both indicators of income inequality and poverty rates were also declining. Public policy-wise, in addition to its large investments in infrastructure, Indonesia's focus has been on the endogenous factor, its human capital. Indonesia acknowledged that investing in human capital through education and health policies is key to development. It acknowledged that the economic transformation it is creating would not proceed optimally without developing human capital.
Nevertheless, in early 2020, a global virus outbreak turned strong economic performances upside down, including in Indonesia. The pandemic put the endogenous growth of development and human capita at very high risk.
According to Statistics Indonesia’s (BPS) latest macroeconomic data released on Nov. 5, the Indonesian economy did better in this third quarter than in the second. This reflects the significant government efforts to speed up budget spending to cushion the pandemic's impact on the economy.
Besides, it also shows Indonesia’s economic resilience and agility. The first is because the growth of major sources of the manufacturing sector, household spending, and Java Island in the third quarter improved over the second quarter. The latter because the total economic growth remains better than those of major sources of economic growth. Indonesia's minor economic growth sources have been experiencing product diversification to compensate for its major economic growth sources.
There is dual-engine economic growth in all countries, including Indonesia, which any country can optimize as we head for 2021. The first engines is consumer spending and government expenditure, while the second engine is investment and net export. To keep its saving rate, both engines work concurrently. If the first engine accelerates, then the second engine needs to be accelerating too.
In Indonesia's first engine of growth, consumer spending plays a major role. Its contribution to the Indonesian economy is around 59 percent of the gross domestic product (GDP). Household spending of basic needs is also the core of Indonesia's aggregate demand. The pandemic has decreased aggregate demand as seen in the consistent decline of the inflation rate from 2.96 percent in March to 1.42 percent in September 2020.
