Recovery underway, but more than just GDP matters
Helmi Arman, Jakarta
The third quarter national accounts show a slow but steady improvement in gross domestic product growth. However, to avoid overlooking important but somewhat obscure issues, analysis needs to be conducted over a longer time frame and expanding beyond GDP.
Last week, the government released the quarterly national accounts for the third quarter of 2006. The figures showed that GDP grew at an annual rate of 5.5 percent, which is higher than the 5.2 percent recorded in the previous quarter.
The expenditure breakdown shows that growth in household consumption was stagnant, government consumption shrank and fixed capital investment contracted.
The contribution of exports appears to have increased, but on a net basis it actually declined as imports accelerated at a slower pace.
Not too much should be inferred from the expenditure breakdown, though. GDP calculated using the production approach is Rp 20 trillion (at constant 2000 prices) higher than the figure produced by the expenditure approach. This statistical discrepancy, equivalent to over 4 percent of output, may have obscured the true picture of growth in the expenditure components during the quarter.
Positive statistical discrepancy means that one or more of the expenditure components are substantially understated (or overstated, in the case of imports).
There are also other reasons to be optimistic as GDP is, after all, a lagging indicator. It provides a count of what has happened, which is not necessarily the same as what is still happening. Interest rates have come down from 12.75 percent in May to 10.25 percent currently. It should be just a matter of time before the effects of this start to emerge in the GDP numbers.
Nonetheless, it is important to broaden the length and scope of the analysis of the national accounts. In this regard, we shall now discuss a couple of signals hidden in the figures that are rarely cited by economists.
Firstly, a longer term analysis of national accounts data shows indications that every rupiah of investment is fewer and fewer jobs over time.
For example, in 2000, every one person in additional employment was accompanied by roughly Rp 18 million in incremental investment in the same year. In 2005, every one person in additional employment was accompanied by incremental investment that was 50 percent higher than in 2001 (using constant prices).
Many reasons may be adduced to explain this trend. One possible explanation is that the portion of investment that takes the form of construction, which is labor-intensive, has been declining. Another maybe that the nature of investment is moving away from the labor-intensive kind. Amid increasing globalization, labor-intensive investments that would previously have headed for Indonesia may be heading elsewhere.
Another trend that is infrequently highlighted is the fact that the income received by Indonesian residents has been diminishing over the last two quarters.
Gross domestic product measures the amount of goods and services produced domestically while (net) national income measures the amount consumed by Indonesian citizens all over the world, net of taxes, subsidies and depreciation of capital. Last week's figures clearly showed that national income has been shrinking for the last two quarters.
This comes as the income earned by foreigners in Indonesia grew at a far higher rate than the amount earned by Indonesians abroad. Whereas the former grew by approximately 75 percent compared to the same period last year, the latter only grew by 15 percent!
Many efforts have been made to make the investment climate more attractive in the hope of encouraging investment, and thereby reducing unemployment. However, the decline in national income highlights the urgent need to also make the Indonesian workforce more attractive in the hope that more workers can be sent overseas.
In the Philippines, an estimated 8 million of the country's 38 million labor force works overseas, whereas in Indonesia, the number of Indonesian working abroad is estimated at only 3 million out of a labor force of over 100 million.
It is not long since President Susilo Bambang Yudhoyono expressed concern over the difficulty in providing jobs for a population that is growing at a rate of 1.3 percent. The third quarter GDP results are no cause for celebration, but there are definitely signs of recovery.
However, GDP should not be taken as the sole measure for gauging economic success. If immediate efforts are not focused on tackling obscure trends, such as those mentioned above, reducing unemployment and poverty could become an even greater challenge. Disclaimer: this article should not be taken as any form of recommendation by PT Bahana Securities to enter into any investment agreement.