Second Quarter Economic Growth: The Neglected External Sector

The primary weakness, shortcoming, or even error in economic policy concerning efforts to boost economic growth is simply one: neglecting the external sector. All efforts and dynamics thus far have been too inward-looking. Only the domestic sector has been managed, with various policy controversies, yet the result remains moderate growth of around five per cent. With current policies, it is impossible for economic growth to match Vietnam, which has successfully recorded annual growth of up to 8.3 per cent. If this policy weakness can be overcome and economic policy transformed to become outward-looking, foreign investment will flow in due to an incentive system, good infrastructure support, and a friendly, efficient bureaucracy. At the same time, domestic investment can grow alongside incoming foreign investment because of the export-oriented policy design. The industrial sector will develop far better than it currently does, supported by strong national resources. What must be done? The government needs to revisit economic policy to address the weaknesses of the current approach. To achieve growth of seven or eight per cent like Vietnam, a change in economic policy orientation from inward-looking to outward-looking is absolutely necessary. If not, and we rely solely on domestic market resources, we must be content with moderate growth of five per cent or even lower. Without policy change, the campaign promise of eight per cent economic growth will be difficult to realise. Indeed, we are not completely ignoring the external sector, and there are still activities and businesses that export, attract foreign investment, and carry out downstream processing. The problem is that the external sector has not 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: a policy that penetrates international markets with strong industrial competitiveness, export orientation, and utilisation of global investment and supply chains. Only by reconsidering the external sector with good policies can higher growth rates 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. 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 but to manage the external sector with an export-oriented policy. Indonesia, with its large population, certainly has a large domestic market. However, the issue is not just relying on large domestic consumption, but enabling Indonesian businesses to move up in class because they are forced and given the opportunity to compete in the global market. This is where an 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, where the state encouraged investment and export-oriented industries. In the 1980s, this outward-looking policy produced economic growth of seven to eight per cent for two decades. So, the government simply needs to repeat the policy that once succeeded in lifting economic growth high three decades ago. Government spending cannot be relied upon for high growth. All this time, government spending has not been sustainable because it only acts as a buffer to prevent economic growth from falling below five per cent. Moreover, the fiscal side also has problems from both the revenue and expenditure perspectives, so it will not last long and can only act as a buffer for a very short period. Meanwhile, the factor of public consumption can no longer be relied upon because the middle class has been eroded and its numbers have declined, thus hampering economic growth from the public consumption side.