After 350 years of colonization by the Netherlands and thereafter by Japan between 1942-1945, Indonesia finally gained its independence on a historic Friday, August 17th, 1945. Fast forward 70 years, Indonesia has experienced many economic and political turmoils; such as the 1965 coup from the communist party and the 1998 revolution to out-throw the 32 years of Suharto’s regime, which peaked at 1998’s financial crisis in Indonesia. Since then, the reformation period in Indonesia has become the starting point of a more decentralized and stable democracy with open and liberal politics (1). The economy is also growing at an astonishing rate with its GDP growing from $114 billion in 1990 to $912 billion in 2012 (2). Currently, Indonesia is the 18th largest economy in the world (1); to further improve its economy, however, it is imperative that Indonesia bridges the economies of the 13,000 islands by enforcing the alleviation of corruption and to increase infrastructure investments in order to build bridges and toll roads - things vital to Indonesia’s economic prosperity. .
Nonetheless, Indonesia’s economy has been slowing down in recent years; the country’s GDP has declined to $888 billion in 2014 (2). Indonesia’s GDP growth continues to decline, reaching only 4.7% in 2015, which is the lowest since 2009 (1).
This economic slowdown was caused by many factors:
Sluggish Global Economic Growth; China in Focus: After the great recession, global economic growth slowed down between 2010 and 2014. China, for example, experienced their lowest growth in 24 years, which was 7.3% (3). This economic slowdown has had a direct impact on Indonesia as the two countries are important trading partners; exports to China equals nearly one tenth of the total of Indonesian exports. “It is even estimated that for every 1 percent decline in China’s GDP, Indonesia’s economic growth will be reduced by 0.5 percent,” according to Indonesia Investments (3).
Falling Commodity Prices: China’s economic slowdown has also caused commodity prices to fall. As a major commodity exporter of palm oil and coal, Indonesia's export performance is affected heavily in times of low commodity prices caused by weaker global demand and an oversupply (3).
Bank Indonesia's High Interest Rate Environment: High interest rate discourages borrowing and investment, which eventually curtails economic growth. The Indonesian Central Bank increased the interest rate to a staggering 7.75 percent in order to combat high inflation (which is mainly caused by fuel subsidy reforms), improve the country’s current account deficit, and improve currency value of the rupiah in the midst of monetary tightening in the USA. All of these suggest that The Central Bank of Indonesia prefers stable economy rather than economic growth (3). This is neither a good nor bad decision in itself, however, since a stable economy is also imperative for the country well-being.
Politics of Indonesia: Last but not least, is the political dynamic in Indonesia. In 2014, Indonesia held their nationwide election year for both the legislative and executive branch. The battle between Joko Widodo and Prabowo Subianto ended with a win for Joko Widodo. For about five months in 2014, Indonesia suffered severe political uncertainties (due to these elections and many disjointed interests from the multi-party system) which led to a slowdown in investment realization and eventually undermine the country's economic growth (3).
The newly elected president Joko Widodo has vowed to bring Indonesia’s economic growth back to 7 percent for the first time since 1990. In order to do so, Joko Widodo plans to bring Indonesia’s economy to shift from commodities to manufacturing. This strategy seems to be viable, since Indonesia’s condition today is a perfect fit for a manufacturing hub. As the fourth most populous country in the world, Indonesia is growing with a huge, fast-urbanizing domestic market and a rising consumer class (4). Indonesian workers are affordable; the average manufacturing job pays a base salary of $253 per month, compared with $369 in Thailand and $403 in China. Demographics also supports this as well since its median age, 29.2, is much less than those of Thailand (36.2) and China (36.7). Moreover, Jokowi’s policy to reduce fuel subsidies has increased the budget for infrastructure by 53% (4).
To improve Indonesia’s manufacturing industry, Indonesia needs to enhance their investment in infrastructures because Indonesia spends 50% more in logistics costs than Thailand and twice as much as Malaysia (4). Moreover, the World Bank estimates that under-investment in infrastructure costs Indonesia at least one percentage point of GDP growth annually from 2004 to 2014 (6).With more bridges and toll roads, cost of logistics will decrease; this will attract more firms in advanced manufacturing and services, and allow Indonesia to lessen its dependence towards palm oil export (5). Now, Indonesia is heading towards the right direction with highways construction spanning Java and Sumatra that will finish by 2019. (9). However, there is still a challenge that Indonesia needs to address to make this process as efficient as possible: the mitigation of corruption.
Corruption is a main obstacle for the government to productively improve Indonesia’s infrastructures. Nonetheless, since the start of the reformation era, this country has been moving towards the right direction in eliminating corruption. The Indonesia’s Corruption Eradication Commission, for example, has done an outstanding job with 285 total investigations between 2004 and 2011 (7). Today, Jakarta’s governor Basuki Tjahaja Purnama, or “Ahok” is the new pioneer in eliminating corruption in Indonesia’s capital city. Since being elected in 2014, he has been a serious advocate in corruption elimination with plans and policies such as firing his subordinates who were involved in corruption and planning to apply e-budgeting and e-money transaction to prevent data manipulation and aid in transparency in the government. By alleviating the corruption in both the central and local government, the money for infrastructures improvement can be used efficiently, and eventually helps Jokowi achieve his goal of bringing Indonesia’s economic growth back to 7 percent.
To conclude, a foreign businessman said, “Indonesia is the country of the future, and it always will be.” As an Indonesian, I always believe that my country will one day be able to fully realize its economic potential. Obviously, eliminating corruption and building infrastructures in a country with 13,000 islands are easier said than done, and these changes may take years or they may take decades; however, I am confident that I will witness the day where I can say “Indonesia is the country of the future,” and it DEFINITELY is.
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1. "General Economic Outline of Indonesia." General Outline of Indonesia's Economy. Indonesia Investments, n.d. Web. 15 Apr. 2016.
2. "World Development Indicator." The World Bank. N.p., n.d. Web. 15 Apr. 2016
3. "Gross Domestic Product of Indonesia." Gross Domestic Product Indonesia. Indonesia Investments, n.d. Web. 15 Apr. 2016.
4. "Spicing up Growth." The Economist. The Economist Newspaper, 9 May 2015. Web. 15 Apr. 2016.
5. "Tiger, Tiger, Almost Bright." The Economist. The Economist Newspaper, 04 Mar. 2016. Web. 15 Apr. 2016.
6. "The 13,466-island Problem." The Economist. The Economist Newspaper, 27 Feb. 2016. Web. 15 Apr. 2016.