Paradox of Indonesia’s economic growth and its global positions

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Frans B. M. Dabukke
ICASEP Researcher & Economist at Food and Agribusiness Center

IO – Indonesia’s economic growth needs more serious attention and deepening, especially since we have built systematically and planned almost 50 years ago since the beginning of PELITA I in 1969. It seems to be a paradox of our economic growth. National economic growth is often considered to be good, on the track, and relatively high, but the relative global position of national per capita income levels that are key indicators of progress and prosperity of a nation’s people, relatively unchanged or relatively stagnant. Also the global position of the national economy is also relatively unmoved. This condition is missed for review.

Internationally, the main and general indicators for measuring the progress and prosperity of a nation, state or society  are per capita income. This indicator shows the level of income generated and enjoyed by each resident of a country on an aggregate average scale. Prosperity and progress of each person or population (capita) which becomes the basic and essential objective of a nation’s economic development. Which in order to apply standard and comparable, expressed in US dollars with certain calculations. While there are other indicators or measures, such as the Human Development Index, the Happiness Index, and others, these indicators are used long ago and globally as well as by international agencies, including the World Bank, which are the reference of this paper. This indicator becomes an international standard because the data is also available with complete, traceable and consistent and easy to obtain.

Stagnant Income Per Capita
From the beginning of the national development era of PELITA I, for more than 14 (fourteen) years from 1971 to 1985, the Indonesian economy successfully doubled its per capita income from Rp2 million to Rp4 million or from US $ 247 to US $ 476 constant in 2000). This multiplication can be achieved with a national economic growth of 7.14 percent per year and per capita income growth of 4.82 percent per year. It took a longer time of about 20 years, to double our 1985 per capita income as economic growth and per capita income growth between 1985-2005 were lower, only 5.1 and 3.51 percent. With slightly higher economic growth and per capita income, 5.5 and 4.15 percent from 2005-2010, the time to double our per capita income is about the same, about 20 years. It can be estimated that this doubling time will be much longer due to the average economic growth and thus per capita income growth also, is lower.

Whereas with the per capita income level, its position globally (compared with other countries) is also relatively stagnant. For example, we compare with comparable neighboring countries, such as Malaysia, and Thailand, and China, Indonesia is still not able to compete in terms of nominal and per capita income growth. Indonesia’s position in terms of per capita income (as measured in gross domestic product per capita), since the beginning of the New Order development has not been able to parallel the country like Thailand, especially with Malaysia. And this time relatively left behind when compared with China, South Korea, and Brazil.

Indeed various international institutions praised the economic growth rate of Indonesia and mentioned that Indonesia included in Asian Tigers / Tigers / Asian Tigers (before the 1998 economic crisis) or rapidly developing countries / emerging markets after the economic crisis and reform. It is now hailed as a candidate for the country with the fourth largest economy in the world. However,  the international comparisons with other countries show the very different conditions that we still have to deal with.

The relatively global position of income per capita of our population is also relatively lagging and stagnant with the achievement of national economic growth rate as above. According to World Bank data, based on the Gross National Income Per capita (gross national income per capita) method, which forms the basis of the world income classification, Indonesia’s position is ranked 116 out of 180 countries, far below Malaysia, Thailand and China. Only better than India who is in the order to-139. This position is relatively unchanged (relatively stagnant) when compared to the position of 1971 ago, or 45 years ago. Indonesia ranks 96th out of the 101 countries which the data is recorded, under the order of Malaysia, Thailand and China and even India. The same global relative position also occurs when calculated in 1985, 2000 and 2014 for comparison. Only China can improve its global relative position significantly and approach the order of Malaysia and Thailand.

Table. Gross National Income The World Bank Atlas Method and Indonesia Ranking Position

1971 1985 2000 2014 2016
Number of countries 101 138 185 187 180
India 92 119 148 147 139
Indonesia 96 101 140 118 116
Tiongkok 88 118 122 80 67
Thailand 75 89 92 93 82
Malaysia 53 60 73 64 58

Source : World Development Indicator, download at http://www.worldbank.org

Yet, Indonesia when compared with these countries including countries with the largest economy in the world, along with China, is always included in the order of the world’s 10th largest country, with abundance of natural resources and large population in strategic geographic location. For Indonesia, the world’s large economy has not been a factor of excellence and a supporting factor to become a prosperous country and developed world.

Higher Economic Growth Urgency
The above two conditions confirm that our national economic growth rate which is the basis for determining the growth rate of per capita income along with population growth rate, is still relatively low and has not been able to lift the relative global position of the economy and the income of our population internationally. This can be called a trap of low economic growth trap (low economic growth trap and low income per capita growth trap). Which also means that it takes a much higher national economic growth to be able to catch up with the above positions in the not too distant future. That is coupled with national population growth rate control as well.

Learning from the experience and achievements of the Chinese state in terms of economic growth, with one of the world’s highest economic growth rates, China, despite being one of the superpowers currently with the United States and Russia, from per capita income level aspect has not been able to match Thailand and Malaysia. For Indonesia, this is a lesson and a reference, that growth above 7 percent even double digits becomes a necessity if we want to match Malaysia and Thailand from the per capita income level indicators, and it is in a relatively short time.

However, learning from Malaysia and Thailand whose economic growth rate is not as high as China and even Indonesia, it is estimated that the exchange rate and inflation rate are the contributing factor to the relatively high growth rate of per capita income. The calculation of per capita income levels used by the World Bank does take into consideration factors of economic growth rates, together with exchange rate weight, inflation, and population growth rates. Malaysia and Thailand have relatively near-undervalued currencies and relatively have low inflation rates as well. In terms of the value of the currency, Indonesia as China, chooses to be more overvalued.

To accelerate the growth of the national economy in the future, it is necessary to prioritize efforts to accelerate the growth of national exports far exceeding our imports. The experience of various countries with relatively high economic growth rates shows that in general these countries are dominated by exports that are much more dominant than household consumption and government expenditure. In addition, the national economic growth needs to be supported by the formation of fixed gross capital which is also relatively high as the investment effect both domestically and globally. It is likely that household consumption factors are difficult to hope to attract and push national economic growth to a higher level in a relatively short time. The experience and performance of these decades shows the condition.

Indeed the descriptions and notes in this paper are only general overview, and it has not come to  the detail and provides an alternative. However, this paper is useful when it is able to arouse and disturb the minds of the readers to remain aware (alert) and understand that we need immediate higher economic growth. More details on how the strategy of achieving it, let the technocrats and bureaucrats of our economists achieve it.