Indonesia re-enters the club of fast growing economies

Riyadi Suparno, The Jakarta Post, Paris | Fri, 03/20/2009 1:10 PM

After sinking deep during the financial crisis, Indonesia has now entered the club of the world's fastest growing economies, but it needs further economic reforms and liberalization to gain more from international trade.

The Organization for Economic Cooperation and Development (OECD), in its latest report "Globalization and Emerging Economies" released in Geneva on Thursday, includes Indonesia among the world's best performing large developing economies.

Indonesia now sits alongside Brazil, Russia, India, China and South Africa, in a group the OECD calls BRIICS.

"The inclusion of Indonesia into BRIICS is a recognition of the importance and size of the country, the situation relative to OECD member countries, and the desire of OECD countries to engage in it more closely," Douglas Lippoldt, acting head of the Development Division at the Trade and Agricultural Directorate of the OECD.

Des Alwi, an official at the Indonesian embassy in Paris, said the inclusion of Indonesia into BRIICS puts Indonesia back on the global radar as a future economic powerhouse following the financial crisis.

He also said the inclusion acts as recognition of Indonesia's relatively fast recovery from the severe financial crisis of the late 1990s.

The report said while Indonesia had not yet recovered to pre-crisis levels of growth, the national economy had done very admirably considering the sharp depreciation of the rupiah and the rise of oil prices.

The biggest drawback is Indonesia's international trade, which has been declining in proportion to its gross domestic product and global trade, as well as new constraints on business in the country. The increasing rigidity of the labor market, in particular, is of big concern.

Before the crisis, Indonesia's international trade had long been a key catalyst for growth, but since the crisis trade has played a much smaller role. The emergence of new competitors, or the fact the severity of the crisis affected the ability of firms to trade, could be two reasons for this change. Another factor is that Indonesia, which has the lowest tariff levels among the BRIICS nations, has become less open to international trade. The nation has been raising tariff barriers for agriculture, textiles and steel products. Since 2001, new non-tariff barriers have emerged and creeping protectionism has set in.

In addition, the recovery of the economy has not spread equally across sectors. Growth has been strongest in capital-intensive services, while labor intensive primary and manufacturing sectors are experiencing sluggish growth. This results in persistently higher unemployment.

High unemployment has also been attributed to the increasingly rigid labor market, where hiring and firing has become more expensive for businesses.

Indonesia, therefore, needs to continue deeply integrating into the world market and improve the investment climate to boost its attractiveness as a global production base. This way, with the momentum of high growth being sustained, it will remain relevant to the global economy.

As Indonesia becomes significantly more important economically on the world stage, the OECD has adopted an "enhanced engagement" process with the BRIICS countries, with the view being they will eventually become members.

OECD Secretary General Angel Gurria said that engaging Indonesia and other BRIICS countries was important for the OECD to maintain its relevance.

OECD countries' share in global trade has declined for several decades to just 60 percent, while the BRIICS countries' shares has increased to 30 percent.

"If we are not engaging BRIICS nations, we run the danger of becoming less and less relevant," Gurria told journalists from BRIICS countries at his office Thursday.

"Whether you are going to be a member or not, we say we are representing 60 percent *of global trade* and working closely with the other 30 percent, and therefore, we remain a relevant organization."