Tuesday, May 30, 2023 | 08:46 WIB

THE TRILEMMA OF INDONESIA’S ECONOMIC DEVELOPMENT Aspiring to become a ‘developed’ country


Jakarta, IO – Post-World War II, the philosophy of economic development leaned toward economic growth, as classical economists viewed that high-quality economic development was also associated with high economic expansion. Thus, during that period, economic development efforts were geared towards stimulating higher growth. One way to achieve this was by finding ways to amass capital, in the effort to achieve economic growth targets. This view was espoused by such prominent economists as Sir Roy Harrod and Evsey Domar, in the period 1939-1946. Furthermore, Arthur Lewis, who won a Nobel Prize in 1979 for pioneering research on economic development in emerging countries, posited that a developed country is one that would be capable of revolutionizing its economy, moving from an agrarian-based one to an industrial-base. The goal was, needless to say, to achieve ever-higher economic growth rates. 

High economic growth was expected to better people’s welfare through a “trickle-down effect”. Thus, government funding was allotted to sectors capable of spurring high economic growth, the objective of which would ultimately be to increase per capita income. Meier and Baldwin stated that economic development is achieved when there is an increase in per capita income in the long term, and the economic growth rate exceeds population growth. High per capita income is the standard measure of economic benefit enjoyed by each individual citizen. 

However, this model has in its manifestation created a new problem, namely the accumulation and control of economic capital in the hands of “the few”. And as the majority lack capital of their own, this gives rise poverty, economic inequality and insufficient access to education and health. Thus, many argue that the trickle-down effect from economic development has not been optimally realized. 

Trickle-down Effect 

GDP-wise, Indonesia’s economy has grown rapidly, blooming from US$52.7 billion in 1960 to US$1.07 trillion in 2021. From the 1960s to early 2000, this was in fact driven by exports of petroleum. At that time, Indonesia was still a net-oil exporting country and was even member of the Organization of Petroleum Exporting Countries (OPEC). Increasing demand for oil and subsequent high prices gave Indonesia’s economy its momentum. However, this changed when Indonesia became a net oil importer, in 2008, as a result of declining oil production against increasing domestic demand. 

Given Indonesia’s fertile land, the economy in the 1960s was also driven by the agricultural sector. At that time, the Government was focused on developing the agricultural sector and achieving food self-sufficiency. This was reflected in the New Order’s five-year development plan, better known for its acronym Repelita (Rencana Pembangunan Lima Tahun). Indonesia was finally able to achieve self-sufficiency in rice, and became one of the world’s largest rice exporters in the 1970s. 

The Government then began to diversify the economy, by developing the country’s industrial sector. This could be seen from the rising proportion of manufacturing to GDP, which grew 19 percent from 1967 to 2009, while the share of agriculture in the GDP declined by 35 percent. Nevertheless, agriculture still plays an important role in Indonesia’s economy. In 2021, Indonesia’s GDP stood at US$1.07 trillion, primarily driven by manufacturing (19.25 percent), agriculture (13.28 percent) and wholesale and retail trade (12.97 percent). 

Indonesia is still categorized as a “developing country”. In general, developing countries tend to have higher economic growth than developed ones, because there is still much room to optimize various resources and economic sectors. Indonesia’s economic growth averages around 4-6 percent per year, higher than the US (1-2 percent), Japan (0-1 percent) and UK (1-2 percent). GRAPH-1 

In terms of economic size, Indonesia’s GDP is still smaller than that of populous China or India. India’s GDP in 2021 was US$2.73 trillion, more than double that of Indonesia. Meanwhile, China’s GDP (US$15.8 trillion in 2021) was 15 times larger than Indonesia’s. China is known for its successful economic model of high growth based on investment, low-cost manufacturing and exports. 

Compared to countries with similar geographical conditions, such as Thailand, Indonesia’s GDP is still higher. Thailand posted a GDP of US$438 million in 2021, with an economic structure that is quite similar to that of Indonesia, centered on manufacturing, agriculture and services. 

Even though Indonesia’s economy is growing, poverty and inequality remain an issue. While its poverty rate tends to decrease every year, it is still high. Based on data from the World Bank, the percentage of people with earnings less than US$3.65 per day (the poverty line) in 2020 was 24 percent. GRAPH-2 


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