Indonesia’s position in the global economy

The Jakarta Post, Apriadi Gunawan, Mon, 12/21/2009 11:35 AM, Review & Outlook

JP/P.J. Leo

The financial crisis of 2008 has had an extensive impact on the global economy, including Indonesia’s. What are our chances of weathering the fallout and emerging unscathed from the crisis? The following are excerpts from an interview between The Jakarta Post’s Apriadi Gunawan and North Sumatra University School of Economics dean Jhon Tafbu Ritonga, in Medan recently.

Question : On the global economic map, where is Indonesia?

Answer : Indonesia’s 2008 GDP indicates that we rank 19th. But our per capita income is only 107th. With the world’s fourth-largest population, we are among the big 20.

We should take a look at China with its GDP of US$4.3 trillion, Brazil’s $1.6 trillion and India’s $1.2 trillion. Moreover, China in the last three decades, with per capita income of $3,300, has secured 96th place. Brazil earns $8,400 per capita, making it 54th, and India $1,100, ranking 131st.

With our natural resources as an agricultural country, Indonesia has 10 highly prized commodities, including coconuts, palm oil, natural rubber, rice, vanilla, cacao and coffee.

Sadly, all their prices are determined by world traders or buyers, making our position weak on the global economic map despite other countries’ demand for the commodities.

Although we lag behind China, Brazil and India, Indonesia has an unchallenged future advantage, i.e. comparative advantage. And we have the potential to excel in competitive advantage if economic management is properly conducted.

Is Indonesia’s economic development already on the right track?

In view of such a position and the domestic economic structure, we are optimistic the country will survive.

But in order to win competition, it takes time. Our nation is getting weaker in competition. Inefficiency remains high. Competitiveness has declined in rank from 37th in 1999 to 54th in 2009. We have lost.

Our economic development was once on the right track. The period of 1969-1994 should be seen as successful, leading to Indonesia’s status as an economic miracle in Asia.

We were praised like China has been lauded over this past decade. But we neglected institutional and democratic development. Human resources promotion was also slow.

Our momentum of reform and democratization was actually by accident, triggered by the monetary crisis of 1997/1998. There was no grand strategy for our reform. It was trial and error. The outcome is what we witness today, a crawl filled with hesitation.

What are the basic issues facing the Indonesian economy?

There are so many issues in nearly all aspects, but they boil down to inefficient, unproductive economic management. So far their solution hasn’t been focused either.

We are behind in infrastructure as far as rural areas go. Village roads built by the standards of the 1970s can no longer bear local economic conditions of the 2000s. All of them are damaged, resulting in high transportation costs.

Vehicles are blamed, while it’s a consequence of construction during the New Order period. Formerly no six-wheel trucks entered villages, only two-wheel and four-wheel motor vehicles. Now it’s impossible to carry oil palms with these vehicles, so six-wheel trucks are used, but the roads belong to the 1970 criteria, making the load too big to bear.

At present, maintenance is left to all regions in the name of autonomy. In fact, in terms of revenues (import duties and excise), such as Rp 100 million per truck for the central government and Rp 3 million in motor vehicle tax for a region a year, in 10 years it becomes Rp 30 million, which is all for the region to widen, lengthen and maintain its roads. It’s surely insufficient, making infrastructure damaged. No new roads are built.

What will Indonesia’s economic strength in the future be?

It lies in natural resources and workers of a productive age. Psychologically our nation is optimistic. When I travel by air, I notice the green expanses of the country.

We are a producer of oxygen. But we are scared by the warning against global warming, which daunts us, while with our 138 million hectares of forests, our oil palm plantations only cover 8 million hectares, or 5 percent. Our NGOs also lambaste oil palm planting as a source of people’s livelihood.

When I visit regions, I look at the vegetation along the roads, comprising crops that yield food and renewable energy. There’s cacao, mangoes, guava, langsat, oil palms and rubber trees. It’s great to see them.

That’s our future. They key word is management. It means knowledge and needs management. It’s got to be solved with economics and technological innovations.

Has Indonesia realized strategic steps to achieve the target of national economic development?

Since the 1998 reform, not much has been properly and seriously carried out yet. Even the objective of national economic development is no longer clear and focused like it was in the first 25 years, with its target to reach a takeoff as formulated by W.W. Rostow, specifying clear economic criteria.

Negative elements like discrepancies were corrected with the eight paths of equity.

To promote growth and equity, for instance, there was the transmigration program under the pattern of nucleus and smallholder estates, or PIR. For local communities there were export crop rehabilitation schemes besides the PIR. Presidential-aid elementary schools and public health clinics were set up in villages.

Now Indonesia has become a major producer of palm oil and rubber. Children go to school in remote areas and people get treatments in local clinics. The problem is that there’s no further quality enhancement.

Has economic reform progressed far in the Indonesian context?

Economic reform is moving like a snail, very slowly. The Constitution has been amended but there are minimum follow-ups and no proper responses to global dynamics. In business competition, there is the Business Competition Supervisory Commission (KPPU), which works well. But national economic efficiency is not yet apparent, corruption eradication has had no effect on efficiency, and our competitiveness has dropped from 37th worldwide to 54th. While one embezzler is jailed, a thousand commit corruption, and a million others are contriving new modes.

Natural wealth like mines and plantations are given up to the private sector. Concession holders have turned into virtual kings of crude palm oil. Rice paddies are falling into the hands of industrial, real estate and property conglomerates. Fairly good reform has taken place in the banking sector.

What economic priorities should Indonesia develop, especially in 2010?

We earlier discussed strategic medium-term priorities. For 2010, the focus should be on farmers, in this case seedling and fertilizer procurement. This should no longer be an annual program in 2011.

For non-agricultural sectors like micro and small businesses, fuel prices have to be controlled so as not to raise production costs. The government can introduce pilot projects to transform micro units into small ones, and small businesses into medium ones. For medium and large businesses, lending rates and the business climate should be favorable.

What are the considerations for these priority sectors?

Farmers, micro and small units constitute an issue that can directly affect production. It involves half of job opportunities. Consumption is at the same time affected. The domestic economy covers around 75 percent of the tradable economy. To medium-scale businessmen, bank rates are sensitive.

Our large-scale entrepreneurs have long complained about the unfavorable business climate. They should be encouraged to foster new ventures and set up new business units. In this way, our economy will be shifting to the formal sector. It will grow stronger.