아세안

Introduction

As of 2009, Indonesia is one of Asian countries well on its way to freeing itself from the second wave of the recent crisis. With its economy registering a growth rate of 4.5 per cent, Indonesia was acknowledged as having the third highest economic growth rate in the world after China and India (Bank Indonesia, 2010). Macroeconomic fundamentals during the crisis seemed to have remained stable, though there some exceptions in terms of its international trade. It is well documented that the crisis in 2008 was a culmination of various forces set loose by such factors as the rise of China as a global powerhouse, the downturn of Japanese economy and consumption boom in the United States. As a result, Indonesia’s external sector was hit severely by the crises. As indicated by Indonesian central bank (2010), the domestic demand structure of the economy holds the key to averting further downturn in the economy. Then, the question in line with the current situation is how this sector could be made into an engine of growth, bucking the trend of Indonesia’s current accounts that is presently dependent on the export demand for natural resources; and oil, mining and quarrying in particular.
 

The fact sheet shows that first, Indonesia has a relatively large population (230 million) as of 2009 - the 4th largest among the world’s 221 countries, and the 3rd largest in Asia. Second, Indonesia is located in a tropical region.Though possessing an overwhelming proportion of the world’s mineral resources, Indonesia’s location on the tropical area means it has yet to shed the image of a poor country commonly associated with states in the tropics. It is noted that countries in temperate zones are generally wealthier than those in tropical areas. Jeffrey Sachs (2000) attributes the heavy concentration of poor countries in the tropics due to high environmental barriers to economic growth.  Although these countries have grown rapidly, they were also made to face the consequences of enviromental destruction such as floods, earthquakes, the effect of global warming, and so on.

Performance of Indonesia’s GDP and the Contribution of Oil and Mining
Indonesia’s economic growth has been characterised as ‘export-led industrialisation’. The first transformational role of exports is marked by the steady increase in contributions made by oil and mineral resources, as a result of uncompetitive and poor management/performance of non-oil exports (Geldb and Associates 1998). The global economic turmoil has indeed led to reduced global growth and the fall in oil prices and prices of other minerals. However, the current account shows a 10.6 billion US dollar export surplus, up considerably from 16 million US dollars in 2008 (Bank of Indonesia 2010).  On the contrary, the flow of imports slowed significantly as a result of reduced demand for raw materials for export–oriented manufactured goods. 

The state of current structure of GDP is illustrated in table 1. The general election that was held in June – July of 2009 had the effect of preventing a further downturn in economic growth. During the election, the focus of government consumption was on the campaign,which represented 19.25 percent in the first quarter of 2009. In the following quarters, government spending was in line with government commitments to initiate fiscal stimulus efforts. That subsequently had a multiplier effect for boosting household consumption and the wider economy including the operation of the social safety net with a direct cash transfer programme and other policies to counter poverty. Growth in overall government consumption for 2009 reached 15.7 percent, much higher than the 10.4 percent growth in 2008.

While household consumption also indicated increasing consumer confidence in response to positive influence of continuing low inflation and improvement in public purchasing power. On the other hand, the proportion of household consumption in the formation of GDP was 58 percent, which had a significant role in supporting economic growth in 2009

Table 1. Indonesia’s GDP Growth by Expenditure, 2009

Sources: Bank of Indonesia, 2010

Turning to export performance, the steep decline on oil and gas export contributed to an average economic growth of negative 54 percent. World oil prices plunging to 39.0 US dollars per barrel was cites as a major cause. As reported by the Bank of Indonesia, in the first quarter, exports for oil and gas was hit by global economic slowdown and bad commodity prices. Exports began regaining momentum when the global economy recovered slightly in the second quarter of 2009. In addition, world prices for certain primary mining products of Indonesia also went up significantly and improved overall net exports to 12.37 percent, albeit still representing a near-50 percent decline compared to the previous year.

It has been known that Indonesia is a country with high level of dependence on oil exports since 1966, after Soeharto seized power. However, this led to the weakening of the state-owned oil company, namely “Pertamina” since the oil boom period in 1980. Woo and Hong (2010) argued that Indonesia has been experiencing the so-called “Dutch disease” which worsened macroeconomic performance in the 1970’s and 80's. It is widely known that the Dutch disease means that a condition where oil export earnings can cover a large part of the cost of the country’s imports, with the resulting exchange rate becoming ‘over-valued’ in the sense that the country needs to produce only a small amount of non-oil exports in order to achieve a zero trade account balance. Such an ‘over-valued’ exchange rate, it is often argued, militates against the appearance of a dynamic manufacturing sector and makes export-led industrialization difficult.

Figure 1 explains clearly that the effect of the Dutch disease was strongest between 1974 and 1985. The November 1978 devaluation of the Rupiah blunted the impact of the Dutch disease that followed OPEC’s doubling of the oil price in 1979. Of the 11 percentage point increase in the export–GDP ratio in 1978–79, 5.5 percentage points were due to a rise in non-oil exports, probably induced by the 1978 devaluation. As a consequence, oil and gas lost their status as primary exports and were replaced by manufactured and other non-oil exports.

Figure 1. Indonesia: Export Categories as a Share of GDP (percent)

Sources: Woo and Hong (2010)

However, even if Indonesia no longer relies only on oil and gas exports, since the second financial crises in 2008, a key feature of export growth was the dominant contribution by the mining sector. BPS (Indonesia Statistic Board) revealed that the role of the mining sector in Indonesia’s total exports grew much faster than that of other sectors (table 2). Thus, investment policy in Indonesia was made more friendly for investors particularly for those investing in natural resources extraction. According to Pricewaterhouse Coopers, with over 3.5 billion barrels of proven reserves in crude oil, about 98.7 trillion -cubic feet of natural gas reserves, being the tenth largest holder of proven natural gas reserve in the world o producing 65 thousand tons of tin per year of tin production; made Indonesia the world’s second largest tin producer, in turn making Indonesia more attractive as an investment destination than South Africa, Australia and Canada, countries that also are highly dependent on on mineral resources.

Table 2  Value on Non-oil and Gas Export by sector

Sources:  BPS, Statistic Indonesia

The data provided in Table 3 is surprising, as most primary mineral products have declined in production significantly except granite, tin and iron ore. According to government regulations enacted in 1999, tin would no longer be a strategic export commodity, and then there were major domestic reforms in Bangka Belitung province. This had the implication of giving the local indigenous people a chance to participate on tin exploration. Since Bangka Belitung province was separated from South Sumatra in 2002, the province has raised its income per capita, but became more vulnerable in terms of quality of life. But in spite of increasing tin production in 2008, many resources literature were warning that Indonesia's tin resources were facing depletion. Declining tin production led to community conflicts in several mining sites, and even illegal mining and smuggling, with the latter resulting in increased compensation to company contractors and higher tin output from offshore mining. In other words, investing and producing tin in Indonesia is less competitive compared to other tin producers such as Thailand, Malaysia and Belgium.

Scientists also discovered and estimated a huge iron ore reserve along the southern coast of Java island. As a result, the production of iron ore grew by more than five times in 2008, in stark contrast to production slumps in 2007 and 2006.  The new technology for iron ore exploration was introduced by Germany and most mining companies had  much experience with PT. Freeport Indonesia (the second largest producer for Indonesian oil) joined with the new state own company, namely Jogya Magasa Mining.

   Table  3. The Growth of Non Oil - Mineral  Production (percent)

Sources:  BPS, Statistic Indonesia, 2010

Policy Recommendation

The big picture of  the current state of Indonesia economy above tell us that, in the long term, Indonesia economy will become more fragile. While increasing domestic consumption may help mask deterioration of economic performance in the short term, the sizeable role of consumption in driving economic growth in 2009 was also reflected in the sectoral GDP. Economic growth in sectoral GDP was spurred to a large extent by non-tradable sectors; such as electricity, gas and water utilities, construction, transport and communications sector and services. The electricity, gas and water utilities sector, along with transport and communications, grew by 13.78 per cent and 15.53 percent, respectively. Strong performance continued in the transport and communications sector, driven by ongoing market penetration in communications. Thus, all the consumption is done by the end consumer and does not create new value added to the economy, so that there is no strong fundamental economy to support the long term and steadily high economic growth.

In addition, figures indicate that mining exploration is growing rapidly. As mentioned above, Indonesia is located in the tropics, meaning that all mineral resources are explored by open-pit mining. Heavy rainfalls coupled with extravagant water usage associated with open-pit mining have left big hole in many locations and led to enviromental degradation. Thus, exploring without considering negative impact on humans and biodiversity will not only be detrimental, but also lead to lower quality of life and many crises involving energy, food, natural disasters and so forth. The government finally recognized the looming possibility of these negative consequences, and took into account the right mining practices when creating Indonesia's Law No. 4 of 2009 on Minerals and Coal Mining to replace Law No. 11 of 1967. Generally, the new law and regulations clarify some aspects of foreign investment; yet uncertainties still remain in some areas. To some extent, the local governments hitherto lacked the boldness to make decisions on their own since there was no ministerial instruction providing explanation concerning implementation of this new law. But in the present era of local autonomy, all activities and decisions involving local endowments (province or municipality) should go to local government authority.

In addition to structural factors above, whatever the motives behind Indonesian government strategies to boost economic growth by pushing domestic consumption and mineral production as driving force, it was not the best choice to have long term good performance of economic indicators in my opinion. I absolutely agree with Woo and Hong’s recommendation, which suggests that Indonesia should learn more from China. Chinese institutional reforms not only ensure smooth transition but also shows its implication for welfare. Based on the Chinese experience, they recommended earnestly that “second term of ‘SBY economics” should take the “parallel partial progression” approach with regard to its reforms.  At the initial stage, the government should begin reforms involving as many areas as possible. But because it is technically impossible to COMPLETE comprehensive institutional reforms in a short time, reforms should proceed gradually, and step by step. For example, completing 20 percent of the reform required for each institution at a time.

Though the plan above would be the most reasonable, the popularity of SBY (Susilo Bambang Yudhoyono – Indonesia’s incumbent president) is currently in decline. More and more people are becoming less inclined to take his policies at face value. Meanwhile, Indonesia has a law that states that the president can only be elected to two terms, so SBY has only 3 years left to streamline his adminsitration to give its best performance for the reform agenda.  However, Indonesian citizens are already worrying about the next president, who will be elected in 2014. Ideally, whoever becomes the president, the next government must keep the reform of different institutions in line each other, so that the reforms can complement each other and chaos can be avoided.