Suryo Bambang Sulisto
By now it has become a familiar refrain that Indonesia is steadily developing into an economic powerhouse, resilient to external shocks because of robust domestic consumer demand and appealing to longer-term investment because of its youthful demographics and stable politics.
There is perhaps a sense of euphoria enveloping this talk of Indonesia’s economic progress because for many years businessmen had been hoping that Southeast Asia’s largest economy would claw its way out of the region’s debilitating 1997-98 financial crisis faster. With much of the global economy slowing due to excessive debt burdens and collapsed confidence in the market, Indonesia’s strong economy has become a matter to rejoice.
Standard aggregate economic indicators are reinforcing this sunny disposition. The second quarter of 2012 saw an expansion in Indonesia’s economy, with GDP growth rising to 6.4%. This figure beat the analysts’ forecast of 6.1% GDP growth. This also quieted some voices expecting a slowdown in Indonesia in response to a string of policies that seem protectionist, including requirements to build smelters and a 20% tax on coal exports.
Forgotten facet of growth
If you peel back a layer or two from this aggregate portrait and examine Indonesia’s realities on a more human scale, what you find is not as comforting or celebratory. Indonesia’s economic performance and progress have not trickled down evenly. In fact, the gap between the haves and the have-nots has been growing since the financial crisis in 1997-1998.
The share of income of the bottom 40% of households has fallen from 22% in 1999 to 17% in 2011, while that of the middle 40% has remained stagnant over this period. By contrast, the share of income of the top 20% of households increased from 41% in 1999 to 48% in 2011. This suggests that Indonesia’s affluent have benefited disproportionately from the gains of the present economic renaissance.
This fact has largely eluded critical discourse because the metric used to measure social inequality, the Gini coefficient, relies on household expenditures. This masks the severity of the matter because Indonesia’s national household surveys (Susenas) primarily account for basic expenses of rural households and fail to observe non-food expenses of wealthy urban households, such as communication devices, health care, automobiles and education.
It’s telling that the cause cited for Indonesia’s higher-than-expected GDP growth during the second quarter of 2012, despite a historic trade deficit, is urban discretionary spending. For example, auto makers notched up a record month in July, selling more than 100,000 cars as consumers snapped up vehicles ahead of the Islamic Idul Fitri holiday, when millions of Indonesians return to their hometowns and flaunt modern accoutrements.
A report funded by the Rajawali Foundation and produced by the Harvard Kennedy School of Government found that the Susenas data Indonesia uses to measure social inequality has become a less accurate indicator of actual national household expenditures. In the 1970s it held up well in tracking private expenditures in Indonesia’s national accounts, but by 2008 it had only captured 35% of this line item.
As a result, while Indonesia is reported to have a Gini coefficient of 0.35, which approaches welfare countries such as Canada, France and Spain, it actually rises above 0.40 if estimated based on national accounts and the real expenses of top income earners. This revised figure places social inequality in Indonesia on par with China, Thailand and the Philippines, where the poor have recently organized and agitated for a fair redistribution of wealth.
This is the underbelly of Indonesia’s amazing economic turnaround and the shadow it casts is growing forebodingly larger, as recent labor protests reveal. Rapid economic growth may introduce a social tinderbox if no swift and serious actions are taken to address Indonesia’s increasingly skewed income segments.
Competing for change
One reason for the widening chasm between rich and poor in Indonesia is that our nation is losing its competitive fire. Competition is a powerful motivational force and typically brings out the best in people and organizations. Were it promoted and refereed properly, gains from Indonesia’s economic resurgence could be more evenly distributed.
It’s not as if Indonesia has never turned to competitive forces to create structural change. In its telecommunications sector, PT Telkom had a monopoly over domestic services while PT Indosat controlled international services for decades. Restructuring brought competition to all business segments and, now with nine wireless operators and 63% unique subscriber penetration, Indonesian consumers are benefiting from lower tariffs and better service.
In the airlines business, national flag carrier Garuda Airlines was no different than other government-owned airlines, avoided wherever possible due to dismal service and hazards to safety. With the rise of low-cost carriers and adoption of Open Skies on the near horizon, it was compelled to clean up its act.
Today Garuda Airlines is heralded as Best International Airline by Roy Morgan, an Australian polling firm, and has inked a sponsorship deal with Liverpool FC. Prior to these milestones, it was awarded World’s Most Improved Airline by Skytrax, a British consultancy, and Asia’s Leading Service Quality Airline by the Center for Asia-Pacific Aviation (CAPA), an Australian industry research firm.
Even closer to Indonesian consumers, the positive effects of competition can be seen at the gas pump following the entry of Total, Petronas and later Shell into the downstream sector, and in the upscale supermarket sector after Sogo, Ranch Market and even Hero’s upgrades of product selection. In both cases, they became beneficiaries to vast service improvements from once-ensconced businesses that grew complacent in their unchallenged positions.
Leadership and opportunity
To tap the transformative power of competition, Indonesia must display focused, problem-solving leadership to eliminate market distortions and a sense of inclusiveness to promote myriad talents and opportunities in the outlying regions. On both ends, however, Indonesia is falling pitifully short.
Take the recent uproar over soybean imports for example. A drought in the US, Indonesia’s main trading partner for soybeans, coupled with alleged cartel-like behavior by importers forced prices for this staple to skyrocket. The administration responded to this controversy by suspending a 5% import duty on the commodity.
Instead of seeking temporary relief, the administration should solve this issue once and for all because it is an area where Indonesia is in the grips of avoidable food insecurity. Twenty-five years ago Indonesia had 1.6 million hectares of soybean production but now there are only 600,000 hectares of plantations. Alternative land use considerations accounted for the shrinkage but plenty of land still remains available for immediate cultivation.
If our leadership were serious about security of supply in this staple, Indonesia also has the climatic conditions, available financing and legions of experts to achieve self-sufficiency in soybeans within a year. All this administration would need to do is provide a clear mandate to the technical ministries so that they can produce a roadmap and give a single agency the authority to monitor, enforce and evaluate benchmarks wedded to a feasible schedule.
A small extension of this no-nonsense approach to ending market distortions could provide immense opportunities for regional development, to balance the distribution of wealth. For example, killing Indonesia’s outrageous fuel subsidy, of which 60% goes to people who can otherwise afford to pay market price, and providing means for public transportation would be a screamingly obvious application of focused problem-solving leadership.
Redistributing the savings from the dead fuel subsidy, which costs more than $50 million per day, to Indonesia’s outlying regions for social development programs in infrastructure, education, health care and poverty alleviation would demonstrate a sense of inclusiveness that can generate marginal gains needed to sustain long-run economic performance. Higher productivity from outlying regions that results from curtailing market distortions would be a one-two policy punch.
Greater stock in both leadership and inclusiveness therefore could lift barriers respectively to an efficient deployment of capital and upward social mobility and thereby enable healthy competition. But there is a sluggishness to undertake these clear-cut prescriptions because Indonesia today appears content with misleadingly glowing aggregate economic indicators.
As evident from the experiences of other countries within the region, it’s just a matter of time until Indonesia is forced to pay heed to the growing inequality gap. History shows that any society where a sliver of the population enjoys enormous benefits relative to the multitude is inherently unstable. To prevent decay and decline, Indonesia must encourage competition as a force of change and renewal.
While Indonesia may be given dispensation for basking in the limelight of international attention, it must move sooner rather than later towards leveraging that renewed interest into reforms that create a better business environment and deepen the extent of social impact.