Report

Indonesia’s economy: between growth and stability

15 Aug 2018
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Views of the Indonesian economy oscillate between optimism that it is set to become the world’s next economic giant and fear of renewed instability. Such views, however, get the story backwards. Indonesian policymakers have consistently prioritised stability over growth. The more concerning issue is that the economy is now heading into its fifth consecutive year of subdued growth. Although growth is solid at about 5 per cent a year, it is inadequate in terms of the job creation and economic modernisation required to meet Indonesia’s development needs and ambitions. The problems are structural. Indonesia is hemmed in by the need to protect stability while its growth model has struggled to deliver the productivity gains necessary to grow faster within this constraint. Left unaddressed, even the ‘new normal’ of slower growth will not last.

As President Joko Widodo begins his 2019 re-election bid, he takes with him an unfinished agenda to transform Indonesia’s economic future. His program of infrastructure development and economic reform has made progress but so far has only stabilised Indonesia’s trajectory, rather than boost it. Doing better will require more than just pressing on. Indonesia cannot ignore the trade-off between growth and stability, but it needs to make it less binding, especially with the global economic backdrop becoming more difficult as liquidity tightens and protectionism potentially escalates. Infrastructure investment needs to be substantially higher, public saving increased through a more comprehensive tax strategy, and business climate reforms recalibrated towards liberalising markets rather than just cutting red tape.

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2018
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