eco TV Week

Indonesia: Robust but still insufficient growth

2/21/2020

In 2019, Indonesian economic growth decelerated slightly to 5%. A path of growth close to its potential but still insufficient to increase significantly its GDP per capita. Without large structural reforms, Indonesia will grow old before it gets rich.

Johanna MELKA

TRANSCRIPT // Indonesia: Robust but still insufficient growth : February 2020

In 2019, Indonesian economic growth decelerated slightly. It stood at 5% when it had been at 5.2% in 2018. This is rather quite a good result given the international economic environment.


Over the past five years, Indonesia has confirmed its ability to withstand international shocks. Its growth has remained solid and its macroeconomic fundamentals have remained robust.


Behind these good results lies a more nuanced reality. Growth is now insufficient to significantly raise the income level of the population, which remains well below that of other South-East Asian countries, such as Thailand and Malaysia. Indeed, even if the poverty rate has been halved in twenty years to less than 10% of the population, inequalities have increased and the middle class is less than 25% of the population according to the criteria defined by the World Bank. Indonesia is failing to take full advantage of its formidable demographic advantage. It could get old before it gets rich. According to the World Bank it would have ten years to act.

The main structural constraints on growth are :

- The concentration of employment in agriculture
- The low level of education of the population in spite of the increase in expenditure
- The low share of women in the labour force
- Major infrastructure needs
- Institutional constraints.

In this context, President Widodo, re-elected last April for five years, reaffirmed his willingness to reform the country. Several laws will be presented to parliament during the year 2020. The “Omnibus law on job creation” is the most controversial of these. By relaxing the rules governing the Indonesian labour market, it could help to attract more foreign direct investment. Indeed, unlike other South-East Asian countries and notably Vietnam, Indonesia has seen its FDI stock relative to GDP decline over the last five years. The lack of FDI reduces technology transfers but also makes the country dependent on volatile capital inflows to finance its economy.

Getting this law passed will not be easy even though President Widodo now enjoys a larger majority in parliament than five years ago. Even within his own party, opposition remains strong.

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