Equitable Economic Development Challenges
Indonesia will always find it difficult to get out of the dark alley of inequality as long as corruption and the collection of illegal levies are still rampant.
In the Golden Indonesia 2045 Vision, Indonesia is targeted to have one of the largest economies in the world. The country’s gross domestic product (GDP) is projected to reach US$7 trillion by that year.
High and inclusive economic growth is believed to be the key to success in the country’s goal of becoming the country with the fifth-largest GDP in the world. Standard Chartered Bank in its publication The Super Cycle Report (November 2010) estimates that in 2030 Indonesia will be the fifth-largest economy in the world.
The PricewaterhouseCoopers (PwC) in its study The Long View: How the Global Economic Order Will Change by 2050 (February 2017) projects that Indonesia will become the fifth-largest economy by 2030 and fourth largest by 2050.
The consulting agency McKinsey & Company in its empirical study The Archipelago Economy: Unleashing Indonesia's Potential (September 2012) projects that Indonesia will become the seventh-largest economy in the world by 2030 after China, the United States, India, Japan, Brazil and Russia. Indonesia is projected to displace Germany and Britain in GDP.
However, we have to be realistic. Based on Statistics Indonesia (BPS) data, Indonesia’s 2021 GDP, based on current prices, was Rp 16.97 quadrillion (US$1.17 trillion). To achieve a GDP growth of up to 7 times its current position will require a growth rate of 8 to 9 percent per year for 20 years.
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It is certainly not easy to achieve 8 percent GDP growth. The realized GDP growth during President Joko “Jokowi” Widodo’s administration has never even reached the target stated in the state budget. The country’s GDP growth was 4.88 percent in 2015, 5.03 percent in 2016, 5.07 percent in 2017, 5.17 percent in 2018, 5.02 percent in 2019, negative 2.07 percent in 2020 and 3.69 percent in 2021. GDP growth fell dramatically in 2020 and 2021 due to the Covid-19 pandemic.
The government and all stakeholders have focused on fixing various unresolved domestic economic problems, even before the Covid-19 pandemic. The structural transformation of the economy, as well as regulatory and governance/bureaucracy reforms, are key in creating a conducive business and investment climate. Investor confidence, the market and the business world are vital in accelerating the pace of inclusive economic growth to remote areas of the country.
The trap of an exclusive economic paradigm that only pursues a high GDP growth target must be avoided. The exclusive economy focuses on the growth of the tertiary sector (services). The primary (agricultural) and secondary (manufacturing) sectors are often left behind even though they absorb a lot of labor. There are regional economic disparities.
Inclusive economy
Critical aspects of inclusive economic growth lie in growth, stability and equity. The inclusive economic development index is an indicator of the inclusiveness level of Indonesia's development at the national, provincial and regency/city levels.
There are three main pillars: pillar I, economic growth and development, with sub-pillars of economic growth, job opportunities and economic infrastructure; pillar II, income distribution and poverty reduction, with sub- pillars of inequality and poverty; and pillar III, expanding access and opportunities, with sub-pillars of human capability, basic infrastructure and financial inclusion.
Based on data from the National Development Planning Agency (Bappenas), in 2020, the Indonesia Inclusive Development Index was recorded at 5.52, a decline from 5.95 in 2019, 5.75 in 2018 and 5.75 in 2017. The index value of the 2020 pillar I was recorded at 4.46, pillar II at 6.57 and pillar III at 6.56. The index scale ranges from 0 to 10. The regions with the highest index scores were Jakarta (7.18), the Riau Islands (6.16) and Yogyakarta (6.1). The lowest on the index were West Sulawesi (4.99), East Nusa Tenggara (NTT) (4.64) and Papua (3.59).
The first and most important point is inclusive economic growth. The benefits of economic growth must be enjoyed by all Indonesian people. Moreover, the Jokowi government has disbursed a lot of funds.
Based on data from the Finance Ministry, the annual state budget allocations for infrastructure from 2016 to 2021 were Rp 269.1 trillion, Rp 381.2 trillion, Rp 394 trillion, Rp 394.1 trillion, Rp 281.1 trillion and Rp 417.4 trillion, in chronological order. The annual state budget allocations for village funds and regional transfers over the same period were Rp 710.3 trillion, Rp 742 trillion,
Rp 757.8 trillion, Rp 813 trillion, Rp 763.9 trillion and Rp 795.5 trillion. In 2022, the state budget allocations for infrastructure and village funds and regional transfers reached Rp 365.8 trillion and Rp 769.6 trillion, respectively.
The contribution of regions to the national GDP still reflects inequality. Regions outside Java did record high GDP growth. Based on BPS data, regional GDP growth in Maluku and Papua in 2021 was recorded at 10.09 percent year on year, Sulawesi at 5.67 percent, Java at 3.66 percent, Sumatra with 3.18 percent and Kalimantan with 3.18 percent. However, the country’s economic structure in 2021 was still dominated by Java (57.89 percent) and Sumatra (21.7 percent), followed by Kalimantan (8.25 percent), Sulawesi (6.89 percent), Bali and Nusa Tenggara (2.78 percent) and Maluku and Papua (2.49 percent).
There has been no significant change in the contribution of regions to the economic structure from the 2018-2020 period. The contribution of Java to the national economy in 2020 was 58.75 percent, Sumatra’s was 21.36 percent, Kalimantan 7.94 percent, Sulawesi 6.66 percent, Bali and Nusa Tenggara 2.94 percent and Maluku and Papua 2.35 percent. In 2019, the economic contribution was still dominated by Java with 59 percent and Sumatra with 21.32 percent, and in 2018, Java remained the largest contributor with 58.48 percent, followed by Sumatra with 21.58 percent.
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Inequality in the contribution of the GDP structure has serious implications for poverty and economic inequality. This is a structural problem that has never been resolved.
We must be vigilant because poverty may cause a problem in social, economic and political stability in the country. Massive development of physical infrastructure is useless if it is not accompanied by the development of healthy and skilled human resources. High economic growth does not reflect income distribution, employment or poverty alleviation.
Inequality in the contributions to GDP must be minimized so that the problems of poverty and inequality can be resolved. Indonesia's poverty rate as of September 2021 was 9.71 percent, an improvement from 10.19 percent in September 2020. As many as 26.5 million people still live below the poverty line, earning less than Rp 486,168 per capita per month. The provinces with the highest poverty rates as of September 2021 were NTT with 20.44 percent, West Papua with 21.82 percent and Papua with 27.38 percent.
According to United States economist and 2007 Nobel laureate in economics Eric Stark Maskin, measuring development outcomes solely from economic growth will negate equitable distribution of development outcomes. Regional development equity policies must continue to be improved.
Regional development
Bappenas has established the direction of regional development based on local potential. Papua is targeted to become the center of the national food production and the natural resource extractive economy, and Kalimantan is targeted to be a national energy and manufacturing development hub.
Sulawesi is expected to become a food industry base, as well as a gateway to eastern Indonesia, while Bali, Nusa Tenggara and Maluku are targeted to serve as international tourist sites and national fisheries centers. Java is to remain a supporter of the trade, industry and service sectors, and Sumatra is to be a new industrial center, as well as the gateway to Asia.
The second key to spurring growth is ensuring the quality and distribution of investments. Investment this year is projected to reach Rp 1.20 quadrillion, an increase of 33.3 percent from the 2021 investment target of Rp 900 trillion.
Based on Investment Coordinating Board (BKPM) data, realized investment totaled Rp 901 billion in 2021, or 100.1 percent of the target. It consisted of foreign investment (Rp 454 trillion) and domestic investment (Rp 447 trillion). The total investment increased 9 percent year-on-year (yoy), with employment absorption of 1.2 million people, an increase from 1.15 million people in 2020.
Indonesia will always find it difficult to get out of the dark alley of inequality as long as corruption and the collection of illegal levies are still rampan
More investment should be directed outside Java. Local governments must explore the potential of their respective regions in attracting investors. Among the largest investment recipients 2021 were West Java with Rp 136.1 trillion, or 15.1 percent of total investment; Jakarta with 11.5 percent and East Java with 8.8 percent. In 2020, West Java accounted for 14.6 percent of the total investment, Jakarta for 11.5 percent and East Java for 9.5 percent.
Thirdly, political improvements and corruption prevention are crucial. Regional autonomy since the beginning of the reform era, as stipulated by the Regional Government Law, has encouraged regional independence and flexibility in decision making and budget spending. Decentralization replaces centralization. Unfortunately, it also provided more room for corruption.
Indonesia’s score in Transparency International’s 2021 Corruption Perception Index (CPI) remained stagnant at 38, which caused the country to be ranked 96th place out of 180 countries. The score rose from 37 in 2020 but is below the world average of 43.
It is necessary to evaluate and revise the Regional Election Law and the Regional Autonomy Law. Indonesia will always find it difficult to get out of the dark alley of inequality as long as corruption and the collection of illegal levies are still rampant.
Santo Rizal Samuelson
Santo Rizal Samuelson, Economic and financial analyst.
This article was translated by Hendarsyah Tarmizi.
