Future Economic Trends in Indonesia - Term Paper Example

Running head: ECONOMIC GROWTH IN INDONESIA Economic Growth in Indonesia Indonesia passed a long way through colonization to independence and sustained economic growth. As of today, Indonesia is at the forefront of economic growth and achievements in the Asian world. This paper provides a brief insight into the background and current state of economy in Indonesia. A brief background of the country is provided. Macroeconomic indicators and market development changes are discussed. The paper includes a brief analysis of future economic trends in Indonesia. Implications for the future of economic development in Indonesia are included. Keywords: Indonesia, economic growth, macroeconomic, future. Economic Growth in Indonesia Economic growth has long been the basic measure of policy effectiveness and success across countries. Recent global financial crises reduced considerably the pace and scope of economic developments in a number of regions. However, as the global crisis is moving to its end, the developing world faces better chances to improve their economic position. Indonesia is no exception: a vast and resource-intensive economy, Indonesia has everything needed to strengthen its position in the global economy. It should be noted, that the countries of the Asian and Pacific region are in a better economic position, compared with other countries of the world (The World Bank, 2011). Simultaneously, the risks of inflation remain increasingly high. Therefore, Indonesia must develop economic policies and implement instruments to slow down the acceleration of inflationary mechanisms, in ways that do not damage the country’s economic growth prospects. Indonesia: Background Information Indonesia is ranked the world’s fourth most populated country (U.S. Department of State, 2011). Located in the equatorial region of Asia, Indonesia occupies about 2 million sq.km, with approximately 240.3 million of people inhabiting it (U.S. Department of State, 2011). The prevailing majority of the country’s residents are Indonesian (U.S. Department of State, 2011). For many years, Indonesia was one of the biggest Dutch colonies; 300 years of the Dutch rule turned Indonesia into one of the richest and most profitable resource supplements (U.S. Department of State, 2011). It was not until 1945 that Indonesia was granted independence from Netherlands (U.S. Department of State, 2011). After the first democratic elections in 1999, Indonesia became one of the most populous democracies in the world (CIA, 2011). Despite recent developments, Indonesia is faced with a number of challenges, including poverty, poor quality education, terrorism and the risks of authoritarianism (CIA, 2011). The situation is further complicated by the global economic crisis. Unlike other countries, Indonesia passed the crisis without major economic losses. Nonetheless, certain economic issues remain unresolved, including inflationary pressures and industrial output. Indonesia: Macroeconomic Indicators Indonesia is by far one of the most successful and economically stable countries of the Asia-Pacific region. Rich in natural resources and with a well-developed industrial infrastructure, the country managed to live through the global crisis without major losses. The country’s reliance on domestic consumption and wise investment policies secured Indonesia from serious economic mistakes during and after the crisis (CIA, 2011). The country’s GDP in 2010 was $1.03 trillion (CIA, 2011). GDP per capita was $4,200 (CIA, 2011). Industrial production accounted for nearly one half of the country’s gross domestic product; agriculture constituted not more than 15% of Indonesian GDP (CIA, 2011). Simultaneously, 41.2 of the working population worked in agriculture, compared to 18.8% in industry (Emporiki Bank, 2011). The rates of unemployment equaled 7.1% (CIA, 2011). Young Indonesians ages 15-24 were at the highest risks of unemployment: in 2010, 22.2% of young people between 15 and 24 years old were without employment (CIA, 2011). 13.33% of Indonesian population lived below the poverty line in 2010 (CIA, 2011). In the meantime, the country failed to escape the pressure of budget deficits, and in 2010, budget expenditures exceeded government revenues by almost $12 billion (CIA, 2011). The public debt accounted for 25.5% of the nation’s GDP, and the rates of inflation reached an estimated 5.1% (CIA, 2011). Indonesia was ranked the 30th among countries with the highest account balance: $6,294 billion (CIA, 2011). In 2010, Indonesia imported gas, oil, electrical appliances, and rubber (CIA, 2011). Machinery, equipment, foodstuffs, chemicals, and fuels were the main objects of import to Indonesia (CIA, 2011). This being said, Indonesia is believed to be in a relatively better economic position than other countries. The country possesses resources and capabilities to pursue continued economic improvements. Microeconomic Situation in Indonesia: A Review of National Markets It is no secret that resources (oil and gas) remain the leading fields of manufacturing growth and output in Indonesia. Indonesia has long been the leading producer of energy resources in Asia (Koyama, 2011). In 2010 alone, Indonesia produced and used (or imported) approximately 990,000 barrels of oil every day (Koyama, 2011). Indonesia produced 82 billion cubic meters of natural gas in 2010 (Koyama, 2011). 31.4 billion cubic meters of gas were also imported during 2010 (Koyama, 2011). Other mineral resources included tin and coal, nickel, copper and bauxite (Koyama, 2011). The global macroeconomic and national microeconomic situation favors the rapid development of Indonesian gas and oil industry: oil and gas prices are rising globally, giving Indonesia additional resource advantage and supporting it in its way towards increased presence in the international gas and oil industry (Koyama, 2011). Yet, natural resources have their limits, and Indonesia is facing downward trends in gas production (Koyama, 2011). Most probably, Indonesian gas markets will face the risks of decline; for this and many reasons, the country has shifted its attention toward other, nontraditional resources like coalbed methane (Koyama, 2011). The energy market in Indonesia exhibits a remarkable growth potential in the renewable energy sector, particularly, geothermal energy (Koyama, 2011). Oil and gas are not the only successful markets in Indonesia. The current state of microeconomics implies that Indonesia is one step ahead of other countries in textile and chemical manufacturing. The textile market in Indonesia relies on long-standing manufacturing traditions, which give textile manufacturers a strong competitive advantage in the international market. In 1987, there were only 88 textile companies operating in Indonesia; by 2003, the number of textile manufacturers in the country had reached an unprecedented 2654 (Hossain, 2006). Almost 90% of all textile companies are located in Java, and half of national textile manufacturing is being imported (Hossain, 2006). The clothing and garment sectors account for 16% of the entire textile industry in Indonesia (Chongbo, 2005). Chemical markets and industries add weight to the country’s economic position. Economic Growth: How and Why? That Indonesia is one of the most rapidly developing countries of the Asia Pacific region cannot be denied. Much has been written and said about the prospects and experiences of economic growth in Indonesia. Traditionally, changes in GDP reveal the main trends and successes of the country in its fight for a better economic position. In case of Indonesia, the country’s GDP has been steadily growing during the last couple of years. Real growth in Indonesian GDP was 6.1% in 2010 (CIA, 2011). Even during the global economic crisis Indonesia did not give up its economic strength: in 2009, Indonesian economy grew by 4.6% and in 2008, real GDP growth had been 6% (CIA, 2011). In the meantime, the country managed to reduce national unemployment, from 7.9% in 2009 to 7.1% in 2010 (CIA, 2011). GDP per capita grew from $4,000 in 2009 to $4,200 in 2010 (CIA, 2011). However, whether or not Indonesian citizens benefit from these changes is difficult to define, since the rates of inflation in the country continue to increase. Compared to only 4.8 percent in 2009, Indonesia is currently facing 5.1-percent inflation, and these trends will, most probably, persist in the nearest future (Emporiki Bank, 2011). As the whole planet is recovering from the biggest financial shake, Indonesia continues to pursue the path of steady but moderate economic growth. The country’s reliance on domestic consumption and policies favoring foreign and domestic investments facilitate its transition from the developing into the developed world (CIA, 2011). As the country is growing, more important are the factors responsible for such growth. Economists and policymakers must understand what exactly drives economic growth in Indonesia and how to retain its economic achievements. Prudent fiscal policy is one of the main factors of stable economic success in Indonesia (Wie, 2011). Indonesia has been long committed to fiscal consolidation, with its main goal to reduce the pressure of public debt and diversify the government’s debt portfolio (Wie, 2011). Financial consolidation must also reduce the country’s reliance on foreign sources of capital (Wie, 2011). Another factor of sustained economic growth in Indonesia is the country’s attitudes toward investments. The economic climate in Indonesia is extremely favorable to investments (Wie, 2011). Indonesian government works hard to improve the economic and investment climate in the country. A number of laws were introduced to speed up the development of infrastructure (Joint Asian Development Bank, 2005). Anti-monopoly laws were developed and enacted, to promote fair competition in the country (Joint Asian Development Bank, 2005). The government promotes good governance mechanisms and develops legal barriers to corruption (Kuncoro, 2006; Robinson, 1996). A number of laws were passed by Indonesian government, to stop corruption in the public sector and reduce the scope of governmental bureaucracy (Joint Asian Development Bank, 2005). In the meantime, considerable improvements in the performance of non-oil sectors caused a $1.3 billion surplus in the country’s trade balance (Wie, 2011). With this in mind, Indonesia will, most likely, continue to improve its economic situation in the coming years. Unfortunately, the current economic climate in Indonesia is not without controversy. Three main challenges faced by Indonesia include 1) inflation; 2) excess domestic liquidity; and 3) the negative effects of capital inflows (Wie, 2011). To begin with, inflation pressures Indonesian economy. Emporiki Bank (2011) predicts that the rates of inflation in Indonesia will continue to grow, from 6.1 percent in 2010, to 6.4 percent in 2011 and 6.3 percent in 2012. Excess domestic liquidity is followed by relatively weak growth of Indonesian manufacturing sector, after the global financial crisis. The latter slowed down the development of the major manufacturing industries in Indonesia (Wie, 2011). Simultaneously, employment opportunities in the Indonesian economy are rather scarce, which makes the prospects of further growth in manufacturing difficult and even improbable. Indonesia managed to reduce unemployment rates which, nevertheless, are still too high for a country as advanced as Indonesia. Eventually, Indonesia is well-known for its mineral resources; but the latter also have their limits. What Indonesia needs is to diversify its economy and the sources of profits. Tourism and the services sector hold the promise to strengthen Indonesia’s economic position in the international and global markets. Conclusion Indonesia is fairly regarded as one of the most successful countries of the Asia-Pacific region. The country exhibits remarkable economic and political stability and faces excellent economic growth opportunities. Even during the global financial crisis Indonesia was able to retain most of its economic potential. The country’s GDP steadily increases. Indonesia’s reliance on domestic consumption and favorable investment climate foster relevant economic improvements in the country. The country exports oil and gas, chemical resources, and textiles. Mineral resources exemplify the country’s strongest competitive advantage in the global market. Despite considerable achievements, Indonesia is facing a number of economic challenges. Inflation continues to increase; most probably, these inflationary trends will continue to persist. Excess domestic liquidity burdens the nation’s economy. Eventually, Indonesia relies on its mineral resources, but they are not infinite. Indonesia needs to have its economic instruments diversified. New emphases on renewable energy sources, additional investments in tourism and the services sector, further financial consolidation, and the development of anti-corruption mechanisms will facilitate sustained economic growth in Indonesia. Simultaneously, Indonesia must implement prudent financial policies and monetary instruments, to reduce inflation and unemployment. In its current state, Indonesia has all resources and competencies needed to ensure further economic development in the short and long run. References CIA. (2011). The world factbook: Indonesia. Central Intelligence Agency. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/id.html. Emporiki Bank. (2011). Economic indicators: Indonesia. Emporiki Bank. Retrieved from http://www.emporikitrade.com/uk/countries-trading-profiles/indonesia/economic-indicators Hossain, A. (2006). Macroeconomic developments, policies and issues in Indonesia, 1950- 2005. Malaysian Journal of Economic Studies, 43(1), 19-67. Joint Asian Development Bank. (2005). Improving the investment climate in Indonesia. ADB. Retrieved from http://www.adb.org/statistics/pdf/INO-Report-19-May.pdf Koyama, K. (2011). Strategic importance of Indonesia boasting growing presence. A Japanese Perspective on the International Energy Landscape, 48, 1-3. Kuncoro, A. (2006). Corruption and business uncertainty in Indonesia. ASEAN Economic Bulletin, 23(1), 11-30. Robinson, R. (1996). Indonesia: The rise of capital. Sydney: Allen & Unwin. U.S. Department of State. (2011). Background note: Indonesia. U.S. Department of State. Retrieved from http://m.state.gov/md2748.htm. Wie, T.K. (2011). Indonesia: Blessed by strong economic growth and the curse of resources. East Asia Forum. Retrieved from http://www.eastasiaforum.org/2011/01/11/indonesia-blessed-by-strong-economic-growth-and-the-curse-of-resources-2/. World Bank. (2011). Recent economic developments. The World Bank. Retrieved from http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGBLPROSPECTSAPRIL/0,,contentMDK:22922870~menuPK:659178~pagePK:2470434~piPK:4977459~theSitePK:659149,00.html. Read More