Whoever the president is, we will face the same challenge, namely how to get out of the middle-income country trap. Therefore, strategies, policies and work programs need to be sustainable.
By
A Prasetyantoko
·5 minutes read
SALOMO TOBING
A Prasetyantoko
Last weekend, Statistics Indonesia (BPS) announced that the country’s economy grew 5.03 percent in the first quarter of 2023, higher than many economic observers’ estimates of 4.5-4.8 percent. Even though it was higher than expected, some questioned why economic growth could not be higher than around 5 percent. To get out of the middle-income trap, growth of at least 7 percent is needed in the years to come.
In the midst of a global situation of low growth or “slowbalization”, 5 percent growth is quite good. The problem is, good is not enough. A leap is needed so that Indonesia can become a developed country and the people's welfare can improve in time.
From the performance of the first quarter of 2023, we can observe several important (structural) trends. First, growth was dominated by the service sector. The transportation and warehousing sector grew at the highest level by 15.93 percent, followed by the accommodation and food and beverage services which grew 11.55 percent and other service sectors which grew 8.9 percent.
Second, labor-absorbing sectors, such as agriculture, mining and manufacturing, grew below the national growth rate. The agriculture, forestry and fisheries sectors grew only 0.34 percent, while the manufacturing sector grew 4.43 percent.
From the data above, the future task is clear, namely formulating an industrial strategy so that the main supporting sectors of growth that absorb a large number of workers can grow optimally. This problem is not new.
Growth strategy
The government of President Joko “Jokowi” Widodo has done a lot of work, but the scale of the problems facing this nation is too large to be tackled all at once. Therefore, sustainable strategies, policies and programs are needed to accelerate growth for the sake of increasing welfare. The question is, what are these strategies?
A group of researchers from the Harvard Kennedy School of Government (HKS), namely Ricardo Hausmann, Dani Rodrik and Andreas Valesco (2005), pioneered the Growth Diagnostics approach. This approach offers an alternative in development theory with a focus on the binding constraints that cause growth to not be optimal.
Like a doctor, before offering a prescription, it is necessary to diagnose the main problem (obstacle).
Growth scenarios are generally made based on opportunities (opportunity-driven) so that economic projections are more hypothetical or presupposed assumptions are met. This approach is commonly used, such as the McKinsey report (2012) that projected that the Indonesian economy would become the seventh largest force in 2030. Opportunities do exist, but various preconditions are needed as indicated in the footnotes to the report.
In contrast, Growth Diagnostics are based on the main constraints faced in development. If various obstacles can be overcome, growth can be pushed faster. This approach is more realistic or based on field reality. Like a doctor, before offering a prescription, it is necessary to diagnose the main problem (obstacle).
This approach believes that economic growth is primarily driven by investment and business activity (entrepreneurship). Next, a decision tree is offered to diagnose growth inhibiting problems.
There are two clusters of obstacles that lead to suboptimal growth, namely the low level of income from economic activity and high financing costs. These two factors are derived in a more detailed mapping of the root causes of growth barriers. In short, investment and economic activity will accelerate if obstacles in the real sector and the financial sector can be overcome.
The National Development Planning Agency (Bappenas) in 2018 initiated the Growth Diagnostics approach in preparing the 2020-2024 National Medium Term Development Plan (RPJMN). In the process, which was also presented by Ricardo Hausmann, various main obstacles to Indonesia's economic growth were found, including geographical problems, high-cost financing, fiscal issues, quality human resources, regulations and institutions, infrastructure and market failures.
The development strategies and policies that have been implemented so far are actually oriented toward overcoming various main obstacles, such as infrastructure, regulations and institutions, as well as human resource quality. Unfortunately, the implementation is still not well coordinated. This approach is also not passed down at the sectoral level.
Massive infrastructure development and efforts to reform legislation have been taken to dismantle development barriers. The issuance of the Job Creation omnibus law and the financial sector omnibus law, the Financial Sector Development and Strengthening Law (P2SK), can be capital for overcoming obstacles to growth in the real and financial sectors.
Based on these efforts that have already started, the government needs to focus on a number of things. First, the acceleration of reforms to improve the quality of human resources through comprehensive policies in the fields of education, health and social security.
Whoever the president is, we will face the same challenge, namely how to get out of the middle-income country trap.
Second, carrying out the institutional arrangements after the publication of the omnibus laws on job creation and the financial sector. This includes synchronizing derivative regulations and institutional coordination down to the regions.
Third, focusing on reindustrialization so the capacity of the relevant ministries can be increased, especially the industry, mining, agriculture, forestry and maritime affairs ministries, which have so far been operating separately. Fragmentation of institutions, strategies and work programs has resulted in suboptimal outputs and productivity in these sectors.
There is no easy way, but it needs to be done with a solid plan. There is no quick fix, but it takes persistence to carry out coordination that focuses on implementation.
Whoever the president is, we will face the same challenge, namely how to get out of the middle-income country trap. Therefore, strategies, policies and work programs need to be sustainable.
A Prasetyantoko, Rector of Atma Jaya Catholic University.
(This article was translated by Hendarsyah Tarmizi).
