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The warning economic signals

Publication Date : 17-09-2012


An increasing number of foreigners and analysts have warned Indonesia against complacency and being insular with regards to its economic policy, even though the country recorded the highest economic growth in Asia, after China, despite the contraction in Europe and slowdown in the United States.

Even though Indonesia dropped four rungs in the World Economic Forum's (WEF) Global Competitiveness Index (GCI) for 2012, which surveyed 144 countries, the country remains in the top 50 of the index. In fact, Indonesia is seen as one of the top places for investment due to its huge domestic market and rich natural resources, and the uncertainty in European and American economies.

So, should we simply sit and relax, disregarding the warning signal from the Geneva-based WEF?

 Deputy Trade Minister Bayu Krisnamurthi played down the findings of the latest opinion polls of business leaders, warning against giving too much attention to the index.

The latest GCI , which defines economic competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country, actually conveys a message of caution for Indonesia because it slipped in the index for the past two consecutive years, from the 44th in 2010 to 46th in 2011 and 50th this year.

Yet even more worrying is that Indonesia's shortcomings were most glaring in the basic areas of competitiveness such as institutions, due to wide-spread corruption, bribery and unethical behaviour within the private sector, and poor and inadequate physical infrastructure.

But as the country has entered the efficiency-driven stage of development, its competitiveness increasingly depends on more complex elements that cannot automatically be resolved by economic growth.

Standing out among the weaknesses, besides corruption, is burdensome bureaucracy and too rigid labour regulations that make the labour market grossly inefficient.

The survey praises Indonesia for the satisfactory quality of its virtually universal basic education but warns that if the economy cannot generate enough jobs outside the agricultural sector for the growing population of the educated youths, the consequences could be dire on social stability.

But as its vigorous development generates new needs and sets new standards among businesses and consumers, challenges in the microeconomic sectors would become more complex as well, especially because the incidence of absolute poverty remains high or almost 13 per cent of the total population or more than 30 million. That figure could skyrocket to over 100 million if the poverty line is raised to a daily spending of the equivalent of US$2.

Sadly, we must note that within the microeconomic perspective, Indonesia lags even worse in the case of Doing Business Index, which is conducted annually by the International Finance Corporation, the private sector arm of the World Bank. The Doing Business Index is based on indicators in such areas as the expediency in business permits, tax administration, contract enforcement, investment protection, labour regulations and basic infrastructure.

Indonesia scored utterly poor in the "2011 Doing Business Index", 121st out of 183 economies surveyed. Indonesia ranks even below Vietnam and scores only better than the Philippines. Our poor records in most of the indicators used to measure the ease of doing business are strongly validated in the eroded competitiveness of our manufacturing industry.

This poses an enormous challenge because the best way to check the current account deficit, which ballooned to $10 billion in the first half due to the big deficit in merchandise trade and services, is by expanding the manufacturing capacity to meet the rising domestic demand and increase exports of industrial goods.


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