Our new ‘Survey of recent developments’, by Arianto Patunru and Christian von Luebke, provides a sobering contrast between the spheres of economics and politics. On the one hand, recent data confirm that Indonesia has escaped with very little damage from the global financial crisis. Its economic growth rate did not decline by much, and has already rebounded significantly – notwithstanding shortcomings in the government's fiscal stimulus program. As recovery proceeds in the rest of the world both exports and imports are returning to pre-crisis levels. Government debt relative to GDP remains low by international standards. The currency has been quite stable, while share prices roughly doubled in the year to February 2010. Inflation has accelerated, but remains low by Indonesian standards.
On the other hand, there has been a dramatic turnaround in politics, with the vice president under threat of impeachment and the finance minister facing the possibility of losing her position at the time of writing. The president's strategy of including almost all political parties within his coalition has proved ineffective, with nearly all coalition members joining in the attack on these two key reformers. Both individuals have been accused of acting corruptly, but despite a protracted investigation by a special parliamentary committee no evidence of this has been unearthed. The process needs to be interpreted as part of a fight-back by those threatened by the government's anti-corruption efforts, given that the highly effective Anti-Corruption Commission has also been under attack from other law enforcement agencies and from the legislature. Political opportunism too is at work, with various political parties hoping that one of their leaders will secure the vice presidency should it become vacant. There are strong indications that the second SBY administration will not be able to achieve much by way of economic reform because of these severe distractions and the rapid evaporation of its political capital.
None of this bodes well for Indonesia's economic performance in the medium to long term, which is the focus of the sixth paper in our series of comparative studies of Indonesia in regional perspective, contributed by Wing Thye Woo and Chang Hong. The authors' study compares Indonesia's economy with those of two other oil exporters, three other large, populous, developing economies, and three Southeast Asian neighbours. Looking well into the past they note that Indonesia performed better under Soeharto than Soekarno, and above the average of the comparator countries, but slightly below that of the high-performing East Asian economies. They argue that the SBY administration will need to adopt a new policy framework so as to bring about a transition to ‘knowledge-based growth’. This will encompass going beyond ‘getting prices right’ and ‘getting institutions right’ to include ‘getting the role of science right’ and ‘getting the conception of the reform process right’.
The paper by Blane Lewis and David Woodward focuses on borrowing as a means for sub-national governments to acquire and improve capital assets such as infrastructure. The authors point out that many of these governments and the enterprises they own have been precluded from borrowing because of failure to repay past loans. In an effort to resurrect borrowing for local infrastructure development, the central government has begun to implement debt-restructuring programs for defaulters among sub-national governments and their water supply companies. These programs encompass both debt write-offs and ‘debt swaps’ (debts that are forgiven on condition that the borrower undertakes a similar amount of new investment), complemented by provisions for the centre to delay or cut transfer payments so as to guard against future non-repayment. This constitutes a major effort to reform an important and problematic aspect of sub-national public finances, but the authors describe some potential difficulties with the reforms that stand in the way of rapid progress in reviving financial flows to the sub-national public sector.
Riyana Miranti's paper examines the growth elasticity of poverty in Indonesia – the rate of change of poverty relative to that of per capita household spending – across three development episodes between 1984 and 2002, after controlling for changes in inequality. The analysis employs panel data from the National Socio-Economic Survey. Contrary to expectations, the growth elasticity of poverty turned out to be virtually indistinguishable across three distinct development phases: a period of far-reaching policy liberalisation (1984–90), a second period of slower liberalisation (1990–96), and the period of recovery from the Asian financial crisis (1999–2002). Growth was accompanied by poverty reduction in all three periods, while the declines in poverty were either augmented or offset by changes in inequality (as indicated by the distribution of per capita household consumption), depending on the period. Only during the first liberalisation period did a reduction in inequality serve to accelerate the decline poverty.
The starting point for Lesley Potter's note is the observation that the economic impact of the global financial crisis seemed to have been most severe in Kalimantan. The author takes a closer look at this, differentiating among Kalimantan's four provinces, and focusing in particular on price trends for key commodities – palm oil, rubber and gold. Although growth of this region as a whole slowed dramatically with the onset of the crisis, only in the dominant province of East Kalimantan did overall growth turn (slightly) negative. The official statistics suggest that the crisis had surprisingly little impact on unemployment, and that the ongoing decline in poverty was barely interrupted.
We also presentthe abstracts of three recently completed PhD theses on Indonesia, on the impact of decentralisation on poverty reduction; an econometric evaluation of public health interventions; and the causes and effects of pemekaran – the proliferation of sub-national governments. The book reviews cover a work on Indonesia's labour market; a case study of the feminisation of global manufacturing; a book on natural resource and environmental management and development in eastern Indonesia; two works on monetary policy; an analysis of the global financial crisis; a study of direct elections for local government leaders (pilkada); and a geographical, political and economic guide to Indonesia's regions.
Selamat membaca!
Ross H. McLeod