Our latest ‘Survey of recent developments’, by Jason Allford and Moekti P. Soejachmoen, examines the responses of the Indonesian government and the central bank to what appeared to be disappointing economic data released in August. GDP growth, for example, has decreased further. Foreign portfolio investors have continued to pull funds out of Indonesia, as the likely tapering of the US Federal Reserve's quantitative-easing program and hesitant economic recovery in Europe look set to increase investment returns in advanced economies. As a consequence, the rupiah has depreciated, adding to the cost of imports. Inflation has continued to rise, owing in part to rising food and fuel prices – the latter because of reduced fuel subsidies. In contrast, following a record 2012, inflows of foreign direct investment (FDI) have so far remained significant.
Indonesia weathered the 2008 global financial crisis better than many of its peers, yet flagging macroeconomic indicators contributed to the government's decision to implement a policy package in August in a bid to deflect the situation. The Survey analyses the package, which includes, among other measures, increasing mineral exports by removing regulatory hurdles, as well as reducing oil imports by increasing the share of biodiesel in diesel fuel. Allford and Soejahmoen express doubts about the efficacy of the package. Around the same time, Bank Indonesia lent support to the package by raising its lending- and deposit-facility rates in an effort to attract foreign portfolio investors back into the country and slow the rupiah depreciation.
The Survey discusses these and other moves in detail, acknowledging that Indonesia's government has limited policy tools to deal with the short-term economic challenges. Allford and Soejachmoen argue that Indonesia therefore would do well to sustain deregulation. They detail that argument with discussions of reforms of the supervisory regulations of its financial market, as well as its mining and energy policies. Yet they concede that it may be difficult for policymakers to reap the effects of such economic reforms before next year 's presidential elections.
The potential emergence of a next-generation, reformist president in 2014 has changed the tone of discussions of Indonesian politics. In this year 's politics update, Dave McRae assesses the so-called Jokowi effect – that is, the rise of Joko Widowo, the governor of Jakarta, from mayor of Solo to potential president. The polls are in Jokowi's favour, but he has yet to announce whether he will run. McRae notes that this decision is up to former president Megawati Sukarnoputri, the leader of Jokowi's party, who may again wish to run for office. Other candidates include Golkar 's Aburizal Bakrie, a business tycoon, and Gerindra's Prabowo Subianto, a former Soeharto-era general. Regardless of who Indonesia's next president may be, McRae questions whether any leader can redress the entrenched defects of Indonesia's democracy and the tackle the corruption that afflicts many of the country's institutions.
Three further articles analyse specific issues in Indonesia's economy. Lloyd R. Kenward reviews the history of inflation targeting in Indonesia since 1999, when Bank Indonesia (BI) adopted it as part of its monetary-policy toolset. Kenward examines BI's performance in hitting its inflation targets against a discussion of its policy reactions in critical periods. He summarises BI's record from two perspectives: a narrow, technical analysis; and a broader view of the bank's accomplishments in inflation targeting. Kenward finds that, although BI's record falls short of that of its peers in the region, inflation has been kept largely in check throughout Indonesia's most recent period of solid economic growth. Indeed, he notes that the past three to five years have seen the most stable rates of inflation in Indonesia's history. The question, he argues, is how authorities will be able to build on this achievement.
Rudy Rahmaddi and Masaru Ichihashi use industry-level data from 1990 to 2008 to examine the effect of FDI on Indonesia's manufacturing exports. They also assess the influence of private domestic capital investment, GDP growth and exchange rates in determining manufacturing export performance. They reveal that the export-generating effect of FDI is higher in industries in which Indonesia has not had a comparative advantage, and also that FDI has played a role in changing Indonesia's export structure from natural-resource-based, lowtechnology commodities to technologically complex, higher-value-added ones.
In the final article in this volume, Tim Stapleton considers the potential of branchless banking to enhance financial inclusion and to connect Indonesia's smaller enterprises to the world economy. Stapleton asks why the country has yet to undergo a branchless-banking revolution, given that its citizens are enthusiastic in adopting new information and communications technologies. He defines the main barriers to the uptake of transformative branchless banking in Indonesia, from its fragmented telecommunications sector, to the restrictive regulatory environment, to a possible lack of demand. Yet he argues that success in this field could make Indonesia an exemplar for branchless-banking deployments in emerging economies.
In each issue, we endeavour to publish a number of recent abstracts of doctoral theses on the Indonesian economy, to bring new research and researchers to the attention of our readers. This issue features studies of contract farming among oil-palm smallholders, public-sector accounting reforms after Soeharto, agricultural transformation and the middle-income trap, determinants of labour migration in East Java, and regional dimensions of monetary policy.
Our collection of book reviews includes discussions of Indonesia's economic history, the role of infrastructure in connecting Asia's economies, the development of Indonesia's distinctive foreign policy, the distributional effects of fuel taxes and their implications for climate policy, the ‘conservative turn’ in Indonesian Islam, the economics of East Asian integration, changing marriage patterns in Southeast Asia, and how to sustain growth in Asia in the face of subdued global demand for its exports. Selamat membaca!
Pierre van der Eng