Second Quarter Economic Growth: The Neglected External Sector

The weakness, shortcoming, or even error in economic policy regarding efforts to increase economic growth is primarily just one thing: neglecting the external sector.

All efforts and dynamics so far have been too inward-looking. Only the domestic sector has been packaged with various policy controversies, yet the result remains moderate growth of around five percent. With current policies, it is impossible for economic growth to match Vietnam, which has managed to record annual growth of up to 8.3 percent.

If this policy weakness can be overcome and economic policy transformed to become outward-looking, then foreign investment will enter because there is an incentive system, good infrastructure support, and a friendly and efficient bureaucracy.

At the same time, domestic investment can grow together with incoming foreign investment because of the export-oriented (outward-looking) policy design.

The industrial sector will develop far better than it currently does because of strong national resource support (resource-based industry).

What should be done? The government must revisit economic policy to address the policy weaknesses so far. To move towards growth of seven or eight percent like Vietnam, a change in economic policy orientation from inward-looking to outward-looking absolutely must be carried out.

If not, and only relying on domestic market resources, then we must be satisfied with a moderate growth rate of five percent or even below it. Without policy change, the campaign promise of eight percent economic growth will be difficult to realise.

Indeed, we do not completely ignore the external sector, and there are still activities and businesses that export, attract foreign investment, and carry out downstreaming.

The problem is that the external sector has not yet been made the main engine of structural transformation and industrialisation. Policy is still relatively too oriented towards the domestic market, import substitution, resource control, and domestic consumption.

Therefore, it must be changed to the opposite policy, one that penetrates international markets with strong industrial competitiveness, export orientation, and utilises global investment and supply chains.

Only by reconsidering the external sector with good policy can a higher growth rate be achieved.

Economic growth will not be higher than what is currently achieved. This must be realised because the export factor has not yet become a sufficiently strong growth engine to drive industrial transformation.

Yet for a country as large as Indonesia, the domestic market is indeed important, but the domestic market alone is not enough to produce world-class industrialisation. To get there, there is no other way except to manage the external sector with an export-oriented policy.

Indonesia, with its large population, indeed has a large domestic market as well. But the problem is not merely relying on large domestic consumption, but that Indonesian businesses are able to move up a class because they are pushed and given the opportunity to compete in the global market.

This is where outward-looking policy becomes important because it can encourage Indonesia to exist in global competition with the hope of earning substantial foreign exchange.

Indonesia once had a best-practice outward-looking strategy, such as in the 1980s, when the state encouraged investment and export-oriented industries.

In the 1980s, this outward-looking policy produced economic growth of seven to eight percent for two decades. So the government simply needs to repeat the policy that once succeeded in lifting high economic growth three decades ago.

Government spending cannot be relied upon for high growth. So far, government spending will not be sustainable because it only serves as a buffer to prevent economic growth from falling below five percent.

Moreover, the fiscal side also has problems from both the revenue and expenditure sides, so it will not last long and can only provide support in the very short term.

Meanwhile, the factor of public consumption can no longer be relied upon because the middle class has been eroded and its numbers have declined, thereby hampering economic growth from the side of public consumption.