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Pandemic holds back RI’s growth
Recession could hinder country's eff orts to escape middle-income trap
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ndonesia’s first annual economic contraction since the 1998 Asian financial crisis may have a long-term impact on the country, pushing back the government’s efforts to escape from the middle-income trap by 2045, a top government official has warned.
The country’s gross domestic product (GDP) shrank by 2.07 percent year-on-year (yoy) in 2020 as the COVID-19 pandemic suppressed social and economic activities, Statistics Indonesia (BPS) reported earlier this month.
As a result, the country’s GDP per capita – a universal measure of a country’s prosperity – fell by around 3.7 percent to Rp 56.9 million (US$3,911) in 2020 from Rp 59.1 million in the previous year, according to BPS.
“The long-term impact, if we keep going down like this or our economic growth rate stays only 5 percent, for example, is that it will be very hard to get out of the middle-income trap,” National Development Planning Minister Suharso Monoarfa said in a virtual briefing on Tuesday.
The middle-income trap is a development economics term that, in short, describes an economy being stuck at middle-income level without progressing to the status of a high-income economy.
Indonesia had just celebrated the milestone of moving into the group of upper-middle income countries from its previous lower-middle income status, as its gross national income (GNI) per capita reached $4,050 in 2019, slightly above the $4,046 threshold for the category, as the World Bank announced in July last year.
Read also: Indonesia now upper middle-income country, World Bank says
Avoiding this middle-income stagnation is crucial for countries with a large working-age cohort like Indonesia, where people between 15 and 64 years of age account for 70.72 percent of the population, according to the latest BPS census. The proportion is the highest since the decennial census began in 1961.
Read also: Do or die as youth dominate demographics
In his inauguration speech in 2019, President Joko “Jokowi” Widodo unveiled his ambition for Indonesia to escape the middle-income trap by 2045, aiming to turn the country into an advanced country with an annual income of Rp 320 million per capita. This figure equals a monthly income of Rp 27 million per person.
However, Sunarso warned that, with the current economic growth amid the pandemic, the government might not achieve this feat.
“Even in 2045, we cannot reach a level above $12,000. We may get into the upper-middle income [group], but not into the high-income [group] yet,” he said.
The National Development Planning Ministry estimates Indonesia that will need at least 6 percent annual growth in per-capita income to pass the $12,535 threshold for becoming a high-income country before it turns 100 years old in 2045.
Suharso said the government was expecting the country to return to the upper-middle income group soon if economic growth reached between 4.5 and 5 percent this year and above 5 percent next year.
However, economists have also warned that the economic crisis due to the pandemic might deepen the income gap, as some sectors and income groups may recover sooner than others, a phenomenon described as a “K-shaped recovery”.
The fall in income per person, a common measure of living standards, is said to be more pronounced among low-income citizens than their more affluent counterparts during the pandemic, according to Mohammad Faisal, the executive director of Center for Reform on Economics (CORE) Indonesia.
“The gap is very wide. The rich remain strong and their savings even rise during the pandemic, while those at the bottom see their purchasing power fall as their income declines,” Faisal told The Jakarta Post in a phone interview on Thursday.
According to BPS data, the gini ratio, which measures inequality based on spending, showed a slight increase to 0.381 in March last year from 0.380 in March 2019. Under the current macroeconomic assumption, the government aims to bring down the ratio to between 0.377 and 0.379 this year.
The latest GDP per-capita data suggests the government may need to assess its 2045 goal and COVID-19 policies, according to Josua Pardede, an economist at Bank Permata.
While the government stimulus might be able to lighten the pandemic’s impact on the economy, the stringency of the country’s COVID-19 measure plays a key role in recovering the economy, so its growth returns to positive territory, he said.
The government has allocated Rp 627.9 trillion for this year’s COVID-19 stimulus measures, doubling the allocation for stimulus in the healthcare sector Rp 133.07 trillion. But the government recently eased the public activity restrictions (PPKM) put in place in cities and regencies across Java and Bali.
“The government’s spending and stimulus must reach the right targets, so it can have an impact or restore private consumption and investment faster than in other countries,” Josua told the Post in a phone interview on Thursday. “If the recovery takes place faster, we can still catch up.”
