Indonesia Development - Case Study Example

Indonesia Development This paper examines the current trends in Indonesia's development in terms of social, economic and political indicators. The recent trends show that in spite of significant economic progress achieved, the government has not been successful to reduce the gap between poor and rich. In fact, the conditions of poor got worse off than in the crisis period. The employment statistics also shows disappointing trends. The main reasons for these trends are identified as the lack of access to education, health and food to the poor in spite of the political freedom existing in Indonesia. Another major reason is the widespread corruption existing there. Rise in public expenditure and widespread reforms in judicial systems and police service can be suggested as the major policy options for alleviating the current situation. More focus needs to be given to the health and education needs of poor. These need assistance from international organizations like World Bank. 1. Introduction According to (Seers 1989, 485), development cannot be measured in terms of economic development alone. This is because for economic development Gross Domestic Product is used as the main indicator. This indicator is only an aggregation and hence in a country with significant poverty, a luxury item like car will be counted more than an essential commodity like food items. Hence, GDP can overestimate the level of development in a country (Seers 1989 486). Further, economic development need not always lead to human development. It involves development in terms of combination of social, economic and political development rather than economic development alone. Therefore, development needs to be measured in terms of a combination of economic and social terms. Based on the above definition of development, the current level of development in Indonesia is assessed. The major indicators of development used are economic and social indicators. For indicating economic development, the growth rate of GDP, inflation, money supply, foreign exports and imports and foreign investments are used. The main social indicators used are population growth rate, infant mortality rate, life expectancy, school participation rate, adult literacy rate and unemployment rate.Further, the reasons for the current level of development are also examined. Finally, the main policies to be adopted for improving the current level of development are suggested. How to implement these policies and what assistance is needed for the country to improve the situation are also examined. 2. Current Level of Indonesia's Development and its Reasons In terms of economic development, Indonesia achieved considerable growth since 1966 (Hill 2000, 11).From 1969 to 1997, there has been a rapid rise of about 150 percent rise in GDP in Indonesia. In this period, service sector has been following the economy's overall growth very closely (Hill 2000, 11).The main reasons for the sustained economic growth in this period have been suggested as high investment rates and thereby rapid technological transfer (Dick and Vincent 2002,354).Money supply growth and Inflation were all under control in this period(Hill 2000,30). At present, Indonesia has an economic growth of 4.2 percent, which is the highest in South East Asia though this was less than the GDP growth of 6.2 percent in 2008(Asian Development Outlook 2009,136). This decline might be due to the global financial crisis of 2008. Private and government consumption grew by 5.4 percent and 18.0 percent while investment declined slightly in 2009. Service sector has been the major contributor to GDP growth followed by industrial and agricultural sector in 2009.Inflation declined to 2.7 percent in 2009 from 12.7 percent and poverty incidence measured by the national poverty line declined to 14.7 percent in 2009 from 15.4 percent. Net foreign investment inflows are $3.5 trillion in 2009 and balance of payments recorded a surplus. The trends in foreign trade show that the merchandise exports of Indonesia grew than the previous year mainly due to the exports of oil and gas. Further, the merchandise imports also grew at a rate higher than the previous year. Broad and narrow money also increased recently in Indonesia (Economic and Social Commission for the Pacific 2004, 16). The social indicators of development used are population, health and nutrition status, education, employment and consumption pattern indicators based on Economic and Social Commission for the Asia and Pacific (2004). According to the latest population census of Indonesia in 2000, in spite of an absolute increase in population, the rate of growth has shown a decline. It also shows a stage of demographic transition from young to old age population. The decline in the fertility rates has been suggested as the main reason for the demographic transition in Indonesia (Economic and Social Commission for the Asia and Pacific, 2004). From 1990 to 2000.there has been a decline in infant mortality rate while life expectancy at birth increased in the same period(Iqbal and Williams 2002,11).The child malnutrition has declined from 35 percent in 1996 to 27 percent in 2002(UNDP 2004,13). In terms of education indicators, the adult literacy rate is 89.5 percent and hence the illiteracy rate is 15.5 percent in 2000 while the adult literacy rate has improved to 90 percent in 2002.School participation rate is around 96.1 percentages. The employment statistics shows that the labour force participation rate declined in 2002 from the previous year's rate while the unemployment rate increased from 8.1 percent to 9.1 percent in 2002(UNDP 2004,14). Though there has been a rise in the proportion of employment in agriculture, there has been no change in the employment proportion in the manufacturing sector while it showed a decline in the services sector. The trends in the employment statistics in this period are quite opposite to the trends from 1966 to 1997, which shows a steady rise in employment particularly in manufacturing sector (Halls 1999, 26).The child labour rate has decreased in both rural and urban areas. Work force in the informal sector has shown a decrease while it still constitutes 70 percent of the total workforce (Economic and Social Commission for the Pacific, 2004, 13).At the same time, labour participation rate in the formal sector has also shown decrease. The consumption patterns in Indonesia on an average each people spends 58. 5 percent for food items and 41.5 percent for non-food items. However, the trends show a shift to non-food items while compared to that of the earlier year's trends. The trends show steady and significant decline in absolute poverty from 1999 to 2002 .At the same time, the Gini coefficient shows a rising inequality in these years (Economic and Social Commission for the Asia and the Pacific, 2004, 15). The trends in the present development of Indonesia suggest that in terms of economic development, Indonesia has shown remarkable progress. It has now reached the pre crisis level before 1997 in Indonesia. The main reasons for this has been suggested as a revival in the country in the aftermath of the Indonesian crisis in 1997(Hall 1999, 54). At the time of the crisis in 1997, all the indicators of development were deteriorated and the country was in a very bad position(Hall 1999,435). In the aftermath of the crisis, because of the policies adopted by the Indonesian government for a fast recovery, it can be seen that the economic development indicators have shown considerable progress. This revival has also been reflected in the human development index(HDI) of Indonesia also (UNDP 2004 ,13).It shows that after a period of decline between 1996 and 1999, the HDI again rose in 2002. This has also reflected in the decline in absolute poverty, infant mortality rate and adult literacy rate. Though the economic development showed remarkable progress in terms of social indicators it can be seen that Indonesia still has not recovered from the effects of crisis. This is reflected in the rising Gini coefficient, which shows a rising inequality in Indonesia. This means that though government has succeeded in reducing absolute poverty, it has not succeeded in reducing the inequality between the rich and poor. Further, the poverty gap index developed by UNDP (2004) which shows the distance between the average income of the poor and the poverty line shows that in spite of the decline in the absolute poverty, the poor people are worse off than in the crisis period. The headcount gap index also shows that some people remain permanently poor while some people move in and out of the poverty. The trends also show serious inequality in health and education between different regions in Indonesia with more developed areas performing better than the other areas. Further, the employment statistics also shows that the unemployment rate has increased while the labour force participation rate has decreased in Indonesia recently. Moreover, the employment rate in agriculture has shown an increase while the trends in manufacturing and service sector are quite disappointing. However, the major fact is that service sector and the manufacturing sector have been the major contributors to GDP while agriculture contributes only a minor share to GDP. This is quite opposite to the trends seen in the pre crisis period (Halls 25, 2000). The overall trends show that the Indonesian crisis in 1997 has resulted in a recovery which is reflected in its economic development indicators. This has also been reflected in some of its social indicators and the human development indicators. The rising trend in the economic development can also be attributed to the fact that Indonesia has been one of the major destinations for foreign investment (Kehal 2004, 45). However, the gap between the rich and poor has been increasing. This can be mainly due to the fragile democracy and corruption existing in the public system there(Emmerson 1999,45).In spite of the fact that Indonesia has been able to maintain democracy by conducting two successful national elections, evidence shows that democratic process has been inadequate due to the corruption existing there. Indonesia has the 12th rank among the most corrupted countries in the world (UNDP 2004 13)..This has affected the poor very much since they have to give the bribes for getting all services. Though the poor have many channels for opinion expression, they do not have the opportunities de to the lack of education and malnutrition existing among the poor. Thus, in spite of being a democratic nation having political freedom, the poor are denied the opportunities for social and economic well being. The Indonesian constitution clearly points out that all citizens need to have equal rights to food and social security, human security, education and health (Halls 2000, 56). In spite of this, many poor people are denied the rights for food, education and economic options. The above trend shows that development need not be measured in terms of economic development alone. More than economic development, development means access to human rights also which is proved by the Indonesian case. In the case of economic development, Indonesia is not an underachiever or overachiever as reported by UNDP (2004, 36).In this case, majority of the people do not have access to health and education. The conditions of the poor are worse off now. 3. Policy Options and Implementation By examining the trends in development, it can be suggested that Indonesia has to increase its investment in human development. The social sectors like health, education and nutrition need to be the focus. All people need to have equal rights for food, education, health facilities and economic options. An increase in public expenditure can be implemented which can show considerable progress in this regard. This is because health and education are public goods. Further, the quality of public health services needs to be improved so that all people can benefit from these services. Reports show that in Indonesia, private spending constitutes 80 percent of the total health expenditure while government expenditure constitutes only the remaining 20 percent (UNDP 2000, 37). Private health care services will be more expensive and in spite of this, people are forced to depend on these due to the low quality of public health services. This constraints the opportunity of poor to health care facilities. Further, the data shows that the private health expenditure is skewed towards rich while public health expenditure is widely distributed across all social classes. Hence, instead of leaving the decisions to the private individuals, the public expenditure increase can reduce the inequality in these areas. More focus needs to be given to the health needs of the poor. Further, more investment is needed in services and manufacturing sector so that the employment opportunities in these sectors will improve. Widespread reforms in the judicial system and the police force needs to be implemented to reduce the corruption existing in Indonesia. This can be done by recruiting more qualified professionals in these services and they need to be well paid. According to UNDP (2004, 15), it needs an increase of total budget to 26.7 trillion Rs .The investment in public expenditure leads to an increase of 6 percent of GDP from 3 percent. For increasing the public expenditure and reforming the judicial system, the country needs assistance from international organizations like World Bank. References Asian Development Outlook 2009. Indonesia, Philippines: Asian Development Bank. Dick, H, and Vincent J.H. Houben. 2002: The Emergence of a National Economy: An Economic History of Indonesia,. Honolulu: University of Hawai'i Press. Economic and Social Commission or the Asia and Pacific.2004. Official Statistics and its Development in Indonesia, Jakarta.BPS Statistics Emmerson, D K., ed. 1999. Indonesia Beyond Suharto: Polity, Economy, Society, Transition. New York: M.E. Sharpe. Hill, Hal. 1999. The Indonesian Economy in Crisis: Causes, Consequences and Lessons. New York: St. Martin's Press. Hill, Hal. 2000. The Indonesian Economy. Cambridge: Cambridge University Press. Iqbal, Farrukh, and William James, eds. 2002. Deregulation and Development in Indonesia. AL: Praeger. Kehal, Harbhajan, ed. 2004. Foreign Investment in Developing Countries. New York: Palgrave Macmillan. Seers D . 1989.The Meaning of Development in Charles Cooper, E. V. K. Fitzgerald in Development Studies Revisited USA :Routledge. UNDP. 2004. Indonesia Human Development Report 2004. Jakarta.BPS Bappanas Read More