Expert Commentary

Assessment of Indonesia’s prospects for growth, equity and democratic governance

2010 report from Harvard's Ash Center for Democratic Governance on Indonesia's economic, governmental and social progress since its adoption of democratic rule in 2000.

Indonesia’s colonial rulers were ushered out in the 1940s only to be followed eventually by decades of authoritarian rule under the Suharto government. But in 2000, the country became the world’s first majority-Muslim, multi-party democracy. The World Bank notes that Indonesia’s economy is on pace  to grow by 6.1% in 2012 and 6.4% in 2013. The country’s per capita income rose from $2,200 in 2000 to $3,720 in 2009.

A 2010 report from the Harvard Kennedy School’s Ash Center for Democratic Governance, “From Reformasi to Institutional Transformation: A Strategic Assessment of Indonesia’s Prospects for Growth, Equity and Democratic Governance,” explores Indonesia’s economic, social and structural challenges as it transitions from authoritarian to democratic governance. The researchers focus on limits to Indonesia’s evolution, the economic and social implications of these constraints and recommendations for strategic changes.

Key study findings include:

  • Indonesia’s rate of job growth from 2002-2007 lagged behind that of Brazil, Malaysia, the Philippines, Thailand and Vietnam. “Of the 22 million workers who entered the labor force between 1997 and 2008, only 5.6 million found real jobs. The rest were unemployed, left the country in search of employment or took up low or zero productivity jobs as family laborers or in low return, largely informal occupations like petty trade and services.” The country’s employers and business associations blame the high cost of hiring workers, unions and restrictive employment policies for sluggish job growth.
  • As of 2008, 15.4% of Indonesians were living below the national poverty line of approximately $1 per day; the country’s Gini coefficient of .35 suggest that the full extent of the nation’s poverty level is diluted by the inclusion of extremely wealthy households in the calculations. Overall, the country has a “missing middle,” a term that refers to a “thriving private sector in the economy and a lively middle class of politically engaged consumers.”
  • Rampant corruption remains a major impediment to the implementation of structural change. “Candidates for local office are also drawn from what is euphemistically termed ‘the business community.’ These business people are often linked to some kind of New Order relationship to the military, government or individual political patrons…. More common is the creation of ‘political godfathers,’ many of whom amassed great wealth and political connections during the New Order.”
  • “The country has squandered its natural heritage by allowing the destruction of its forests to continue unchecked. At the same time, Indonesia has underinvested in health and education [and] the government over-regulates the economy.”
  • In Indonesia, foreign direct investment (FDI) — typically prized for providing a country with relatively stable, high-paying jobs, new administrative capabilities and links between producers and suppliers—rose from 5.7 billion in 1985 to 59 billion (14% of GDP) in 2007, but accounted for a higher percentage of GDP in Brazil (23%), Malaysia (41%), Thailand (39%) and Vietnam (57%) the same year.
  • “Indonesia’s first toll road was built in 1978 and covered the approximately 50 kilometer stretch from Jakarta and Ciawi. Over the next thirty years Indonesia added less than 700 kilometers. Plans for a cross-Java highway have not yet been realized. By way of comparison, Malaysia now operates more than 1,500 kilometers of toll roads.” Only 55% of Indonesia’s roads are paved.
  • Tanjung Priok, Indonesia’s leading port on the western coast of Java, can handle 45 container moves per hour — approximately half the capacity of similar ports in nearby Malaysia and Singapore.
  • Indonesia’s electrical infrastructure is inadequate to meet growing demand, but government funds are currently earmarked for subsidies, not expansion efforts. If these subsides were directed towards new investment, the country could afford to meet — and finance — the country’s energy requirements through new construction.

“In comparison with a number of its neighbors,” the report states, “Indonesia is falling behind in crucial economic and social measures with the result that the economy needs to grow more quickly while the fruits of growth need to be distributed more equitably…. Remaining challenges include high barriers to entry in a wide range of industries, a dysfunctional legal system, the continuation of patrimonial politics, and insufficient investment in infrastructure, health and education. The completion of these reforms is all the more urgent as a consequence of the global business revolution and the emergence of China as a focal point in the global production chain.”

Tags: Asia, development