Comment on “Indonesian Growth Dynamics”


Chalongphob Sussangkarn, Thailand Development Research Institute, 565 Soi Ramkhamhaeng 39, Wangthonglang District, Bangkok 10310, Thailand. Email:

Basri and Hill (2011) provide an interesting account of the Indonesian growth experiences, particularly the experiences through the 1997–1998 crisis and the recent global financial crisis. The paper also discusses some important changes that resulted from the 1997–1998 crisis, including the changes in the political regime and the economic policy environment. Lessons and future challenges are highlighted in a number of areas. I found the paper very informative, but would like to probe a little more about Indonesia's growth drivers compared to some of the neighboring countries.

The good Indonesian economic performance through the recent crisis indicated a greater balance in the Indonesian economic growth engine compared to many other neighboring countries. Indonesia has managed to maintain a good pace of growth through the crisis. Gross domestic product (GDP) grew at a respectable 4.5% in 2009 compared to −1.7% for Malaysia, 1.1% for the Philippines, −1.3% for Singapore, and −2.2% for Thailand. All of these Association of Southeast Asian Nations (ASEAN)-5 economies were not much exposed to subprime toxic assets, probably because of greater banking risk aversion learned from the 1997–1998 crisis, as indicated in the paper. Indonesia relied less on the export engine compared to the other countries, and her resource-intensive exports also benefited from high prices. Therefore, the export meltdown resulting from the global financial crisis had less impact on Indonesia's macroeconomy than in the other countries.

It is true that Indonesia's share of export of goods and services to GDP is much less than the other ASEAN+5. Real exchange rate movements (figure 4 in Basri and Hill, 2011) were indicated as an important reason why the export share did not increase from the pre-1997 level as much as in the other economies. I am not so convinced of this. Figure 4 started from 2000, but what would be the picture if it had started from, say, 1996? The rupiah certainly depreciated much more than any other currency after the 1997–1998 crisis, although Indonesian inflation was also much higher. A rough comparison of the real exchange rate between the baht and the rupiah from 1996 to 2008 does not seem to show any strong appreciation trend for the rupiah, although that from 2000 to 2008 does.

Another reason highlighted in the paper is likely to be much more important, and it is that Indonesia has been slower than the other economies in moving away from labor-intensive manufactured exports and joining the supply chain of more technologically advanced products. At the same time, the labor-intensive exports face intense competition from other countries, particularly China.

For countries with limited own technological capabilities like Thailand and Indonesia, the ability to move up the technological ladder depends a lot on foreign direct investment (FDI), at least in the initial stages. Indonesia seemed to have benefited from FDI less than most of the other ASEAN+5. Could the uncertain investment climate, mentioned in the paper, be an important reason? Maybe the paper should elaborate more on this. Another unfortunate factor is that Indonesia suffered much more than other economies in the region from the post 9/11 environment. A series of major bombings targeting foreign interests, starting from Bali in October 2002 to the JW Marriot/Ritz-Carlton in Jakarta in July 2009, obviously had significant adverse impacts on the FDI climate as well as on tourism.

For a country like Thailand that depends very highly on exports as the engine of growth (or even the only engine) for many years after the 1997–1998 crisis, discussions have been about “growth rebalancing” in order to diversify the engine of growth to other factors apart from exports, particularly investment, whose share in GDP has continually been almost 20% points below the share prior to the 1997–1998 crisis. In fact, this issue had been raised domestically for many years prior to the global financial crisis, and was reemphasized by the severe export meltdown as a result of the global financial crisis (see Sussangkarn & Jitsuchon, 2009). A footnote here is that while the high dependence on exports meant that the negative impact of the export meltdown on the macroeconomy was large, the bounce back in 2010 has also been very fast. Thai merchandise exports increased by more than 35% year on year in the first half of 2010, and real GDP growth has been 10.5%. For an even more open economy like Singapore, the bounce back has been even more spectacular, with real GDP growth of almost 18% year on year in the first half of 2010.

For Indonesia, the growth drivers appear to be more diverse, so the need is not so much on “growth rebalancing.” Rather, from the discussions above, there seems to be a need to focus on “export rebalancing,” trying to move away from the labor-intensive exports that will naturally move to other even cheaper production locations, and instituting policies to facilitate Indonesia's move up the technological ladder. These will obviously have to be rather broad-based, ranging from maintaining a stable macroeconomic environment, education, improving technological capabilities, research and development, the competitive environment, the labor market, infrastructure, logistics improvements, FDI policies, and security.