20 Years of Economic Reform

KOMPAS/PRIYOMBODO

Container trucks drive along Jl. Jampea on Monday (21/5/2018) in Tanjung Priok, North Jakarta. The Central Statistics Agency’s data shows that Indonesian exports reached US$14.47 billion in April, 7.19 percent lower than exports in March, but a 9.01 percent increase year-on-year.

This month, we are commemorating 20 years of Reform. What is the condition of the Indonesian economy 20 years after the Reform Movement, which was triggered by the 1997 financial crisis?

Battered during the 1997 Asian financial crisis and forced to beg for bailouts from the IMF, Indonesia is currently the world\'s 16th largest economy and the only Southeast Asian country with GDP that exceeds US$1 trillion.

In 1997, Indonesia\'s GDP was $215.7 billion and $1.004 trillion in 2017, or an increase by 4.6 times. By 2030, as McKinsey  has estimated, the Indonesian economy will be the seventh largest in the world with GDP of $3.7 trillion and the fourth largest by 2050, according to PricewaterhouseCoopers (PwC). However, this scale does not necessarily reflect a country’s strength, progress, superiority and economic resilience.

Indonesia is increasingly lagging behind or being overtaken by neighboring countries in a number of areas, such as the Human Development Index, industrial development and infrastructure quality. Indonesia has also been experiencing a more severe impact from the current global uncertainty and is tailing in taking advantage of new opportunities in the global economy.

On the macroeconomic side, the World Bank said thatIndonesia’s fundamentals was currently very strong, much more ready to face the crisis and with a small probability of being hit again by a financial crisis like in 1997. Its prospects for economic growth are good amid the economic slowdown trend in other countries. Inflation is also being maintained and relatively low, its foreign exchange reserves are very safe, and its trade balance is positive despite recent increases in current account deficit pressure. Its fiscal deficits are also relatively under control.

As we know, the 1997 financial crisis was triggered by a problem concerning the balance of payments. The inflexible exchange rate and the absence of policy synchronization sparked market speculation and distrust. Another trigger was the stock of private foreign debts, which was very large and generally short term, which was not balanced by adequate foreign exchange reserves and a good supervisory mechanism. In addition, there were systemic problems in the banking sector, which was recklessly managed. Moreover, there were changes in the political direction and situation.

Today, all these factors are generally resolved. Banking conditions are much better, including risk management and governance. The monetary policy and the central bank are also independent. Foreign debts, especially private, are recorded and managed better. Fiscal management is also prudent and transparent.

In short, Indonesia is no longer a vulnerable sand castle like in 1997. However, 20 years of Reform have left several structural problems that contribute to Indonesia\'s economic vulnerability today. Among the structural problems is the export base, which has not been diversified and is still very dependent on commodities. We have not been able to overturn the symptoms of deindustrialization.

The role of the manufacturing sector has continued to fall from 30 percent in 1997 to about 18 percent today. Indonesia is also unable to take part in the global production and supply chain as extensively as other countries in the region.

The industry, agriculture and infrastructure sectors, which are lagging, prevent us from moving forward as quickly as other countries and from realizing our growth potential. The quality of human resources and growth in workforce productivity are also lagging.

Further worsening our vulnerability is the financial sector, which is still relatively shallow and undeveloped so that we are susceptible to any global turmoil. All this is an accumulation from several regimes that have built up into a gigantic problem, a large task we must face today and in the future.