Global Recovery: a Paradox for Indonesia?

Jakarta was so live on the last midnight of 2010. Jakarta??s sky was so colorful because of thousand of uninterrupted firework. The night was so cheerful because of trumpet blows by thousands, if not millions, of people all over Jakarta. It seems that 2010 is a good years for people to celebrate.

In, 2010 is a great year for Indonesia. Despite the global economic uncertainty, Indonesia has been able to maintain economic growth. Despite some major issues on Indonesia’s politic and law enforcement, poverty and unemployment rate shows encouraging trend; and at the same time, foreign investment flow in and foreign reserve reach it historical record. In short, what should go up goes up, what should go down goes down.

In 2010, Indonesia is also perceived positively by the global community. Various research report and comment from opinions leader channeled through the media justify this conclusion. Indonesia’s Global Competitiveness Index rank jump by 10 levels and reach 44 in 2010. Not only that, Economist Intelligent Unit also put Indonesia as the fourth most attractive investment destination. In addition, Standard Chartered Bank in its report ??The Super-Cycle Report” says that Indonesia will take over Japan as economic player in 2030, ranked fourth globally with GDP of USD 9.3 trillion.

My reading from various international major media, people perceive that Indonesia is stable politically and sound economically. As far as my memory can tell, all this extensive good exposure in the global media has no precedent. It is true that during the early nineties, economic news on Indonesia was also very positive; however, this good news was discounted by discouraging news on Indonesia’s politic and human right track record.

2011 could not be another 2010
An economy goes up and down, moving right and left like a pendulum. The above fact shows us that last year the pendulum moved in a direction in line with Indonesia’s interest.

The increase in global commodity price has benefited Indonesia, a major mineral, CPO and other agricultural producer. The high energy price due to global climate, production interruption in some exporting countries due to natural disaster and real increase in global demand are also good news for Indonesia’s coal and natural gas exporter.

In the financial and capital market, the crises in the US and Europe has made global investors turn their view to Indonesia due to its relatively higher risk adjusted return, en route to historical size of foreign reserve and level of stock composite index.

Just like pendulum, this situation will not stay forever, especially in this globalize world where change could happen very quickly. One day, and it could be in 2011, the pendulum will move toward another direction, against the interest of Indonesia.

The US economy has shown encouraging development; the decrease in unemployment rate and the increase in consumer spending show the growing confidence among producers and consumers; an indication of early stage of economic recovery.

In Europe, similar trend happens. Despite the uncertain mid term prospect of Greece, Belgium, Spain, Portugal, Italy and Ireland economy, several major economies has shown their economic flexibility and adaptability in responding the crises and very likely to follow the US??s path to recovery.

Asian countries, except for Japan, have recovered already. World Bank project Indonesia GDP will grow by 6 percent in 2010, while at the same year China, India, Singapore, Malaysia, Philippines and Vietnam is projected to grow beyond 6 percent.

Paradox of Global Recovery
The global and regional economic development sends a mixed message for Indonesia. On one hand, economic recovery is good news since it means bigger export market. On the other hands it is bad news since recovery means tougher competition in the goods and financial market.

The improving global economy stimulates global demand for goods and services,n stimulating export market. However, Indonesia’s exports are dominated by natural resources based commodities with relatively inelastic global demand. This means that the potential incremental in export venues will mainly come from price of most commodities is on the high side already, indicating the limited potential for increase in export revenue for Indonesia. Reliance on natural resources-based commodities for long term growth is a false strategy

The progress we have made is far from adequate even to maintain our position in this competitive world

Economic recovery has enable countries economy to operate at it almost full capacities. This mean more goods will be available in the export market. As a result, only those who are efficient and innovative will survive. In short, Indonesia’s manufacturing industry will face tougher competition in the export market; it is quite likely that our non-commodity export will be eroded despite the increase in global demand.

In the financial market, the situation for Indonesia is more challenging. The global recovery means investors have more options to allocate their investment. The US and EU recovery makes investors in the two areas put their countries in the radar screen again, reducing the availability of fund in the global financial market. What’s more, the Asian recovery means that Indonesia will face tougher competition from the neighboring countries in search of global investment.

If we don’t maintain our attractiveness as an investment destination, Indonesia will face the challenge capital outflow. If we don’t response the global situation correctly and timely, capital outflow will have immediate and serious impact on our economy stability.

We are not living in the vacuum
My professor told me a story about two young boys, John and Henry. They run with bare foot to avoid a hungry bear. Knowing John stop running to wear his shoes, Henry asks him “Why do you wear your shoes? No mater what the bear could run faster than you.” John replies calmly “What is important for me is to run faster than you.”

The above story is relevant to depict the Indonesia existing situation. What important for Indonesia is not to keep its economy growing at 6% per annum, but to grow faster than the other countries. The crucial point is not to improve our productivity, but how we could be more productive than our competitors. Being innovative is important, but being more innovative than the others is the much more important. We are happy to hear that we could reduce corruption level, but it has no impact if we are still much more corrupt than other countries.

We are not living in a vacuum. Just like the basic principle of Game Theory: the outcome of our action is not determined by our effort only, but also depends on how the rest of the world behave and act. It is true that we are making progress, but I am afraid that the progress we have made is far from being adequate even to maintain our position in this competitive world.

Wijayanto is a vice rector at Paramadina University. He is also the Co-founder and Managing Director of Paramadina Public Policy Institute. He can be reached at [email protected]