Indonesia’s catch-up growth needs strong leadership

Aristo Purboadji
Doctoral Candidate of Business Management IPB.

IO – For the economic growth rate of developing nations to be more robust than that of developed ones is quite understandable in this era of globalization.  Stunted children can have a period of rapid growth through supplementary nutrition, up to a certain age, thus overcoming their previous accumulated height deficit. Fortunately, unlike biological catch-up growth in stunted children, economic catch-up growth is more merciful.  Theoretically, there is no age limit after which it is too late to grow, for a developing country.

The importance of growth cannot be underestimated, especially the sustainable variety, as it brings about wealth. Wealthier societies have higher living standards, higher longevity, and are more stable. But prosperity asides, growth also create many virtues of the modern world such as plurality, weaving together diverse cultural strands within a nation as shown in Benjamin M. Friedman’s The Moral Consequences of Economic Growth.

What makes growth so wonderful is its compounding-effect miracle over the long term. Take President Jokowi’s ambitious target of 7% growth when taking office in 2014 and the realization hovering around 5%. The 2% difference seems insignificant if viewed in a single year, but over the long term, the gap is ever widening. The 7%-annual-growth economy will double every 10 years, while the 5% economy would take 15 years. For the economy to triple, the 7% growth will make it in 15 years, while 5% growth takes a longer 23 years. Indeed, every percentage in growth counts, especially over the longer horizon. Prof. Tyler Cowen of George Mason University once calculated that if U.S. economy had grown one percentage point less each year between 1870 and 1990, the United States of 1990 would be no richer than the Mexico of 1990. When viewed in terms of centuries, the difference between higher and lower growth is heaven and earth.

For Indonesia ($1 Trillion economy, 5% growth) to catch up with the U.S. ($19 trillion, 2% growth), under the silly assumption of constant growth, would take 100 years, a full century! This is discouraging, but if history is any guide, we shouldn’t be. In 1700 the world’s biggest economy was that of India, followed by China. Then came the industrial revolution that altered the world’s pecking order, a combination of fossil fuels and powerful machines to build modern technologies. However, it is interesting to note that in 1820, as the industrial revolution in Britain was in its infancy, the two Asian behemoths still accounted for half the world’s GDP. By 1870 per capita income in Britain was six times larger than India or China, marking the beginning of Western dominance for two centuries. Industrial revolution had become the great leveler, for the West, rendering technology more superior than demography.

At the beginning of the first world war, America had overtaken Britain’s income per head, and became the world’s biggest economy, until its place taken by China in 2016 (adjusted for purchasing power parity, not nominal terms). No doubt, China is the superstar among the catch-up champions, whereas 1976 its income per person was just 5% of that in America, due to Mao’s extremely disastrous industrial and social policies. However, 1976 was also the year of Mao’s death, which marked the turn of China’s fortunes. In 1978 Deng Xiaoping set economic reforms that liberalized China for foreign trade, investment, and even technology. The catchup pace is accelerating. It took 32 years for Britain to double its economy from 1830 to 1862, 17 years for America since the 1870s and just 10 years for China and India since their liberalization.

Though it was mentioned above that no “age limit” applies to an underdeveloped country to start growing, a stern warning came from one of the 2019 presidential candidate, Prabowo. In his personal manifesto, Paradox Indonesia, Prabowo stressed the need for Indonesia to achieve double-digit growth for 10 years straight, in order for Indonesia to avert the notorious “middle income trap”, a theoretical economic development situation in which a country that attains a certain income gets stuck at that level. Prabowo himself is widely known to have a deep concern for the stunting phenomenon in Indonesia and called for “White Revolution”, a program now implemented by the current Jakarta government to distribute high-protein milk and eggs to young students. It looks like Prabowo views Indonesia’s low-growth problem the same way as stunting: there is a time limit urgency.

I argue that what Indonesia needs to have a faster catch-up growth is a strong government with strong bias towards the need for sustainable economic growth. China is a case in point. After Deng Xiaoping’s economic reform of 1978 came Premier Li’s “mass entrepreneurship and mass innovation” of 2014, where he underlined the crucial role that technological innovation played in generating growth and modernizing the Chinese economy.

With growth, of course, there’ll be an inequality problem that will need to be addressed. Deng Xiaoping once said that in order to develop China needed to let some people get rich first. Prabowo is openly known to aspire to be Indonesia’s Deng Xiaoping. I’d rather have growth with an inequality problem than having a no-growth/low-growth problem.