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Muhammad Aljawi
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Indonesian's Government, Through Economic Instability

19 Februari 2020   20:12 Diperbarui: 19 Februari 2020   20:17 62 0 0 Mohon Tunggu...

Chamber of Indonesia Commerce and Industry (Kadin) declared Indonesian economy that is actually very promising for both domestic and foreign investors. However, there are still weaknesses seeing by Kadin of the economy that need to be addressed. Vice Chairman of Kadin Indonesia said, promising Indonesian economy is evidenced by incoming investment, private consumption, and vibrant business world.

Steady growth despite external headwinds

Indonesia's robust economic growth in the aftermath of the 1997 crisis led to a marked increase in the level of per capita wealth, which saw a twofold increase between 1998 and 2012, and the emergence of a middle class, which could double by 2020. It currently accounts for 20% of the population, i.e. some 45 million people.

However, this remarkable increase in Indonesia's GDP per capita did not lead to a reduction in inequalities in the aftermath of the shock of the crisis. In fact, it was rather the opposite, as these inequalities increased: the Gini index rose from 29.9 to 38.1 between 1999 and 2011, reflecting an increase in income inequalities. The wealthiest 20% of Indonesians saw their relative wealth rise between 1999 and 2011. As for the poorest 20% of Indonesians, their wealth declined and accounted for 7% of GDP in 2011, after 10% of GDP in 1999. Finally, regional inequalities continue to be prevalent, despite decentralization, with a very important share of activity concentrated in Java.

The poverty rate (at the threshold of USD 2 a day in purchasing power parity) is high and concerned 43% of Indonesia's population in 2011 -- which is among the average for countries in the same income bracket --, but has declined considerably since the Asian crisis (82% of the population was poor in 1999). A significant proportion of the poverty and social difficulties that prevail in Indonesia has been caused by the financial crisis which hit the archipelago in July 1997. The lack of social protection nets explains why the most vulnerable communities are exposed to the turnarounds in economic activity. In addition, improving health services poses a major challenge for the country, since public health expenditure only accounts for 1% of GDP. Both health indicators and mortality rates (child, maternal, total) are the most negative in the region. This is due to the poor quality of basic healthcare and access to hospitals for the poorest, as well as the low level of preventive health measures.

Fuel reforms saves budget for much needed infrastructure investment

Highly capital intensive industries (steel, electrical equipment, chemicals...) and highly labor-intensive industries, such as the textile industry, have declined in added value in relation to GDP due to a lack of investment, which has contributed to accelerating the aging of equipment. In addition, there is a lack of infrastructure, especially in the electricity sector. At the same time, industry has experienced a boom in the plantation sector -- mainly for palm oil and rubber -- and mining sector (especially coal), fuelled by increasing international demand for these products. Overall, there has been a marked increase in the dependency of Indonesian industry on natural resources over the past decade (58% of the manufacturing industry), at the expense of other branches. This increase in the dependency on natural resources may be a source of vulnerability for the country in the long term, due to the constraints on the reserves related to these resources, and of greater exposure to the volatility of international prices in the exporting sector.

The development of the manufacturing industry is stagnating, in particular due to the lack of infrastructure. The country has the least infrastructure compared to its regional peers and it is of low quality. More specifically, it is the density and quality of roads, the capacity of ports and the quality of the power generation supply which show the greatest weaknesses for connectivity in Indonesia and with the countries in its region. According to IMF research [1], if infrastructure caught up with the average level of developed economies in terms of quantity and quality, the Gini index in Indonesia would fall by two percentage points. However, the investments to remedy these structural deficiencies, which affect competitiveness and therefore Indonesia's growth regime, are grossly inadequate. In addition, they focus more on natural resources sectors.

Furthermore, the shock of the Asian crisis in 1997 was so strong that a series of restrictions was introduced, which limits the banking sector's financing of the economy, as well as the possibility for the State to borrow. These measures may be virtuous, but they also pose a constraint for Indonesia's economy in general, and for the State in particular, in terms of addressing the structural challenges faced by the archipelago.

Seeking political stability through a large coalition

President Jokowi was elected for a second five-year term in April 2019, capitalizing on his track record on reforms despite missing the growth target of 7%. With a focus on domestic issues during his second-term, he reaffirmed the reform agenda, particularly across labour, healthcare and infrastructure to lure foreign investments. That said, his victory was contested by Prabowo's opposition camp, which resulted in violent protests. Considering Jokowi is seeking to push forward the reform agenda with ease, he formed a broad coalition with Prabowo and key opponents in October 2019, hoping it would weaken critics over the government. This might pave the way for more political stability and help to mitigate risks of political Islam, as it would conciliate Jokowi's pluralism and Islamist groups backing Prabowo.

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