Reflections on the near-term economic outlook in Indonesia
Reflections on the near-term economic outlook in Indonesia
David Jay Green, Jakarta
National elections and a change in government are a wonderful
time for reflection and stocktaking and Indonesia's recent set is
no exception. It is a useful, as well as a fun undertaking to try
and identify the most important lessons of yesterday and guess
the problems we'll face tomorrow. From the standpoint of the
economy, one clear picture emerges: Indonesia has shown both
stability and moderate growth for the past few years and most
forecasts suggest more of the same.
This picture contains both good and bad news. Stability has
meant that Indonesia has weathered a number of shocks over the
past several years. The country has had to endure terrorist
attacks in Jakarta, its financial and political capital; and also
in Bali its center for tourism.
The country faced a fall-off in trade and travel due to
international strife and also regional problems such as SARS and
Avian Flu. The elections themselves, until fairly recently were a
source of concern -- not all elections in such a large,
developing country as Indonesia have gone as smoothly or as
peacefully.
The robust performance with respect to these and other shocks
has allowed Indonesia to put the 1997 Economic Crisis and the
political upheaval of the end of the Soeharto regime firmly
behind itself. Since 2001 the annual growth rate in GDP has risen
from less than 4 percent to between 4.5-5 percent. This has
allowed per capita income to rise and the incidence of poverty to
fall. Millions of people have been made better off -- at least a
little. This growth has come on the back of strong household and
public sector spending.
It has not come alongside strong investment spending -- year
after year, firms have failed to spend to open new plants or even
to maintain old facilities. Currently, the investment-to-GDP
ratio is nearly two full percentage points below its level in
2001.
Indeed, perversely this is one of the reasons the economy has
been relatively stable: There have been so few investors that
there has been no one to scare when shocks hit. While stability
has been welcome, it has meant on average lower growth. More
worrisome, potential growth is lower: Failure to invest in new
plants, to buy new equipment, and to maintain existing facilities
means that the economy will be limited in its ability to grow in
the future. A lack of investment today, stunts growth
possibilities tomorrow.
The reason for a lack of foreign investment is well known.
Foreign investors, in particular, have been reluctant to risk new
funds in view of the well-publicized problems in governance, in
protecting their rights amid a corrupt and poorly functioning
legal and judicial system. Any firm contemplating new investments
is going to think of the experiences of Manulife and Prudential.
Indonesian firms similarly have severely limited their new
commitments over the past few years. They too worry about
ensuring the safety of their investments.
The picture of a relatively stable economy with low investment
has been quite clear for several years. During the election it
has made for focused discussion on the need to encourage
investment by improving governance. Arguably, it was the image of
Susilo Bambang Yudhoyono as the candidate more likely to attack
corruption that helped give him the victory.
Ironically, it may also be the election that makes it harder
to see the economy in this fashion. It would not be unusual for
an election such as this, bringing in a reform-minded candidate,
after a long period of little investment that sparks a mini-boom
in business spending. It would not take too much for many firms
to increase their capital spending -- many businesses are likely
to need to spend something just to keep their production
facilities going.
The Asian Development Bank's 2004 Asian Development Outlook
projected only a very modest increase in investment expenditures,
supporting an overall 4.8 percent rise in GDP. If that investment
spending increased to 10 percent, it would boost GDP growth by
more than one full percentage point. A 10 percent increase in
investment spending sounds large by recent standards, but it
would still put business spending 20 percent below the levels
seen in 1996 and 1997, before the Economic Crisis.
I am not saying we will definitely have this pickup in
business spending; many things can combine to frustrate this.
(Although if it does occur, remember where you heard about it
first.) We can all dream up external or internal shocks that
combine to lower growth. Missteps in monetary or fiscal policy,
if they occur, could also be costly.
But if the "boomlet" does come, let us be clear that it does
not reflect a resolution to the many problems Indonesia has been
struggling with for the last few years. An economic boomlet that
stands on a cyclical upswing in investment, encouraged by a calm
election and prospects for reform, will be short-lived unless
these reforms actually come about. When firms have accomplished
their priority spending targets, when this higher spending works
its way through higher household income and expenditures, growth
will again slacken.
Only when palpable changes in the investment climate emerge
will there be sustainable higher levels of spending and
sustainable higher growth. A boomlet will give the Government
some breathing room, but the longer-term reforms will still be
needed to turn a boomlet into a period of prosperity.
David Jay Green is Country Director at the Indonesia Resident
Mission in Jakarta of the Manila-based Asian Development Bank.
The opinions expressed are those of the author and do not
necessarily represent those of the ADB.