Indonesia: Indonesia is one of Asia’s economic success stories

Indonesia is one of Asia’s economic success stories, with the reforms of the reformasi period having laid strong foundations for protracted increase. The country’s economic success looks set to continue but the schedule of reform is far from complete, particularly at the same time as it comes to competitiveness in South East Asia’s intense business environment.

Estimates of Indonesia’s economic increase for 2014 vary widely depending on the source, but are all completely high. The Indonesian government estimates that economic increase in 2014 will be 6.0 %, driven mostly by increased spending for the general elections in mid-2014 and increased exports because of strong regional trade increase in Asia.

On the other hand Bank Indonesia, Indonesia’s central bank, estimates that increase in 2014 will range between 5.8 to 6.2 %, driven by an increase in credit expansion from 15.3 % in 2013 to 16.6 % in 2014, and stabilisation efforts to ensure that the current account deficit is additional sustainable.

The World Bank has a lower estimate for 2014 than both the Indonesian government and Bank Indonesia, at only 5.3 %. This slower increase is attributed to the cumulative impact of the weakening in key commodity prices, a feature since 2011 that has led to a weakening of the current account by tightening domestic and international financing conditions and precipitating a challenging policy environment. At the same time external financing needs have increased, as reflected in the widening current account deficit.
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The International Monetary Fund (IMF) has a slightly higher estimate than the World Bank but, at 5.5 %, one that is still lower than the Indonesian government and Bank Indonesia figures. The IMF attributes this additional pessimistic estimate to expectations of slower world increase arising from the Fed, America’s central bank, lowering its stimulus spending as America’s economic increase picks up.

The Asian Development Bank (ADB) estimates that Indonesia’s economic increase in 2014 will be 6.0 %, in line with the additional optimistic estimates of the Indonesian government. This estimate is slightly lower than an before Bank estimate due to the Indonesian government’s policy measures to control inflation and lower its current account deficit.

Like the Indonesian government and the Asian Development Bank, the Organization of Economic Cooperation and Improvment(OECD) as well estimates that Indonesia’s increase will be 6.0 %. It further expects that Indonesia will achieve this increase rate, its highest ever, over the 2014–2018 period. Indonesia’s economic increase is presently the second highest in Asia next China, as India’s economic increase declined to 5.5 % in 2012 and a worsening outlook through 2013 and 2014.

Despite these projections, even the majority pessimistic of which is still encouraging, Indonesia faces large challenges. Foremost is its competitiveness in respect to the relieve of doing business, which the World Bank rates as poor. The World Bank’s 2014 Statement on the Relieve of Doing Business compares business regulations for domestic firms in 189 economies, inclunding regulations for small- and medium-sized enterprises (SMEs). It reveals that although Indonesia has risen in the world rankings for the relieve of doing business, the country (ranked 120), remains far behind its regional peers, inclunding Singapore (which ranked number one, as in previous years), Malaysia (ranked six), Thailand (ranked 18), Brunei Darussalam (ranked 59), and Vietnam (ranked 99).

In a statement clarifying the Statement, the World Bank’s Jakarta Office said that Indonesia had improved its credit data system through a new regulation that provides a legal framework for establishing credit bureaus, which will make it easier for Indonesian companies, inclunding SMEs, to obtain credit from lending institutions. The World Bank noted that Indonesia was one of 15 economies part 25 East Asian and Pacific economies that had implemented regulatory reforms in the completed year that make it easier for local entrepreneurs to do business. But these regulatory reforms are not enough to enhance Indonesia’s position with respect to its rivals, which are as well implementing reforms to improve their competitiveness.

Additional needs to be done. The Indonesian government should not falter in continuing its regulatory reforms to make doing business in Indonesia still easier and thereby lock-in a higher increase trajectory for the decade ahead. Complacency could see Indonesia follow India on a path downhill to increase that will not generate enough jobs and prospects for its still rapidly growing labour force

Thee Kian Wie is Senior Economist at the Economic Research Centre, Indonesian Institute of Science, Jakarta.