Major issues behind target of high economic growth

Elwin Tobing, California | Sun, 09/05/2010 1:08 PM | Opinion

In his annual State of the Nation address on Aug. 16, 2010, Pre-sident Susilo Bambang Yu-dhoyono stated: “In 2014, the government is targeting economic growth of 7 to 7.7 percent. Through good planning and correct implementation, we are optimistic we can reach that target.” While it sounds good, it begs two major questions.
First, assuming the growth continues to be high until 2014, what would happen afterward? If history is any guide, even prior to the 1997 crisis, from 1990 to 1996, the country’s gross domestic product (GDP) per capita grew by a rather phenomenal rate of 5.9 percent. But like building a house on sand, where the fundamentals were weak, especially in the early 1990s, the aftermath of the high economic growth objective was soon to crumble, albeit it was triggered by external shocks.
The 6.2 percent growth rate in the second quarter was heavily driven by the growth in household consumption, which has become increasingly more important to the economy in the last two decades.
As a percentage of GDP, household consumption has increased from 58 percent in the period of 1988 to 1997 to 64 percent between 1998 and 2008.
Moreover, it is heavily financed by labor income instead of savings or other sources. Coupled with
the growing importance of trade to GDP, our economy is very sensitive to income shocks, whether due to severe climate, such as the long drought in the 1990s that adversely affected income in the agricultural sector, or a crisis in the global market that could hurt jobs in the export-oriented sector.
Another driver of growth is the increase in investment. The slowdown of the US and European economies may encourage even more foreign investment.
And, thanks to the relatively low interest rate and the rapid expansion of bank credits, which grew at an average of 20 percent, our domestic investment is also enjoying a growth trend.
However, once the developed countries’ economies begin to rebound in the near future, our foreign investment could experience a decline.
In addition, an increase in both consumption and investment will pressure prices and interest rates to go up, slowing consumption and investment, which, in turn, will reduce growth.
The inflation rate in July was already 6.22 percent, the highest level in 15 months. This will likely force the central bank to raise its current 6.5 percent benchmark interest rate to curb inflation.
Thus, high economic growth may continue until 2014, enough for Yudhoyono to claim a successful term, but its inevitable decline perhaps is lurking on the horizon. Which brings us to the second question: does achieving high growth really address the two fundamental challenges of the nation, namely poverty and unemployment?
The latest official unemployment rate is 7.2 percent, but the unofficial figure may well reach 10 percent and the underemployment could be between 20 and 30 percent. Meanwhile, about 33 million Indonesians, or 14 percent of the total population, are living in poverty.
If the World Bank’s poverty line of income of less than US$2 a day is used, roughly 60 percent of Indonesians (115 million people) were living in poverty in 2007, a figure that may not have changed significantly over the last two years.
Unfortunately, the number of people living below poverty line could increase, as the surging of the inflation rate will lower real income. Hence, far from reducing the poverty level to around 8 to 10 percent, as also stated by the President in his address, at best, a combination of high economic growth and high inflation will only minimally contribute to poverty reduction.
There is nothing wrong with the policy of targeting high economic growth. But, is it supported by sound fundamentals and the right economic development strategy? With more than half of the population working in the agricultural sector, at least the New Order regime got it right in 1970s when it made agriculture the pillar to create jobs and reduce poverty.
As confirmed by many studies, including Martin Ravallion and Monika Huppi (1991), the prolonged high economic growth, poverty reduction and job creation in the late 1970s and 1980s were attributed to the rapid growth in agricultural productivity and the emergence of an export-oriented manufacturing sector.
Thus, the question for the current policy makers is: under what foundation will we build the Indonesian economy that can simultaneously produce sustainable growth, reduce poverty and create jobs?
Is it still feasible to transform our agriculture into a modern and highly productive sector to answer the challenge? Do we have more chance by directly competing with the giant China in the manufacturing sector? Or, is it reasonable to promote the service sector as the backbone of our economy.
With his projections focused on 2014, the President may have a vested interest in that particular year. But most people do care about long-term strategic solutions to advance the nation’s economy.
Finally, even the most optimistic among us today would realize that the country’s high economic growth could also go hand in hand with what has transpired in the past: Corruption, inefficient banking systems, poor corporate governance, a lack of transparency in the financial sector, and “misadventures” linked to nepotism.
        
The writer is associate professor of economics at Azusa Pacific University, California, the US.
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