Emerging Market

Economies
THE NEXT BIG ECONOMY IN ASIA
INDONESIA

Group 9 Details:
Name Roll No.
Shubham Aggarwal B056
Vummadi Shankar Reddy A011
Harshal Rao I018
Arsh Dhingra I011
Tushar Singla I010
Anshul Sharma B008
 INTRODUCTION
Indonesia is the world’s 14th largest country (area-wise) and it is the largest island country.
Indonesia has a population of over 276 million people making it the fourth most populous
country in the world. The growth rate of real GDP has been constantly just above 5% every
year for the country. Although, the growth rate plummeted to -2.07% in 2020 due to the
pandemic, it is expected rise back up to 4.3% this year and then go over 5% in the year after.
Just like GDP, even the GDP per capita was seen to be constantly increasing prior to pandemic,
but it went down from $4186 in 2019 to $ 3921 in 2020. Although, the IMF has predicted that
after the pandemic, there will be again a constant increase in the GDP per capita.

The demography of the nation is as follows:

• More than 60% of the people lie in age group of 20-65

• Literacy rate of more than 95%
• Most of the people live in the urban areas
• The labour force participation rate fell from 69.32% in 2019 to 67.77% in 2020 but it is
expected to go up to 68% by the end of 2021
Below is the graph which shows the contribution of different industries to the GDP of
Indonesia in 2020:
 MAJOR ECONOMIC INDICATORS

Aggregate Demand: Consumption, inflation, government spending, and net exports are the
most significant variables in aggregate demand. Consumption has played a vital part in the
Indonesian economy because the country creates strong demand for commodities due to its
big population, which is the fourth largest in the world. Higher demand encourages other
countries to sell commodities to Indonesia, hence increasing the country's consumption.

Investments: Strong investment is expected to be an essential growth criterion for Indonesia

in the following decade. Particularly in infrastructure-related initiatives, as the government is
already planning to take on additional long-term infrastructure projects. However, the
country's infrastructure is still in poor condition. It is situated between Malaysia and Thailand.
Furthermore, transportation infrastructure is a problem because roads, railways, and ports
are all underdeveloped.

Aggregate Supply: Like other South East Asian countries, Indonesia has gone through the
phases of industrialisation and urbanisation. Agriculture has grown by 35%, whereas
manufacturing has grown by 19% in the last 50 years. Despite modernization, agriculture
continues to be the largest source of supply, accounting for roughly 16% of total output. With
the growing population, employment has become a big issue, with agriculture accounting for
40% of overall employment.

International Trade: Since past half century, Indonesia has developed a good network with
other countries in terms of trade. Trade to GDP ratio was 30% in 1970 which rose to 60% in
early 2000s. In line with its first oil price shock, the value of country's exports rose in 1970s.
Oil price has remained high globally apart, which become one of the most important
components of the economy. Despite protectionist measures taken by the government, the
country is able to maintain its trade balance ratio keeping aside the disruption caused globally
due to the pandemic.

Volatility in demand: During the pandemic, one of the key areas of concern was consumer
confidence. In addition to the effects of changing times, government instability is a major
issue. Customer sentiment can be used to assess the economic climate, and it frequently
shifts in tandem with traditional indicators used in traditional economic analysis.

After many years of strong GDP growth, the countries GDP fell due to the coronavirus
pandemic and contracted by 2.1% in 2020. Fiscal policies and government stimulus, on the
other hand, should help to boost activity. The country was severely impacted due to the
pandemic and is projected to grow at 3.7% in 2021 and 5.5% in 2022.
Import and Export
The main exports and imports by category for 2020 were:

Import and Export of Good Top exports Value TopImports Value in

by category in $ B by category $B
and Services Machinery.
Mineral fuels.
200 oils 25 nuclear 21
reactors
150 Animal and Mineralfuels.
vegetable fats 20 oils 15.7
100 and oils
Electrical Electrical
machinery 9.17 equipment 18.8
50
Veh icles 6.6 Iron and steel 6.85
0 Iron and steel 10.8 Plastics 7.21
2016 2017 2018 2019 2020
Pearls 8.22 Vehicle 7.16
Imports Exports Rubbers Organic
5.61 5.02
chemical

Indonesia is the world's second biggest exporter of thermal coal, which is used at power
stations. China and India. the world's largest coal importers are the two major customers for
Indonesia.
Top exports and imports of Indonesia by country in 2020 were:

Top exports by country Value In $ B Top Imports by country Value In $ B

China 31.0 China 39.0
United States 18.6 Singapore 12.3
Japan 13.6 Japan 10.6
Singapore 10.7 United States 8.64
India 10.4 Malaysia 6.93

Economic ties between China and Indonesia are becoming closer given the threats being
faced by the two countries on their trade relations with United States protectionist actions.

Exchange Rate Stability

As the pandemic stuck, the rupiah plummeted as the coronavirus spread across Indonesia and
investors sought safe-haven assets. In April-June, it began to recover. In 2021, the annual
average is expected to be Rp14,500: 1 USD, up from Rp14,148: 1 USD in 2020. The potential
of a downturn remains high, particularly if the government announces a statewide increases
monetary policy stimulus.

The rupiah is expected to rise against the US dollar on an annual ave rage basis once the
pandemic is contained over the prediction period. The country's reliance on external finance
in the form of volatile portfolio investment flows will be reduced as the current-account
deficit improves. The rupiah is predicted to rise to an annual average of Rp 13,684: 1 USD by
2024, despite the fact that it will remain prone to bouts of instability in the following five
years. The current exchange rate depreciation creates chances for FDI inflow by lowering the
 cost of capital investment and increasing returns to foreign investors, particularly in export-
oriented sectors.

Inflation
In comparison to comparable emerging economies,
Indonesia's inflation rate has been more erratic in the INFLAT IO N
past. Other emerging countries' inflation rates ranged
4.5
from three to five percent. Between 2005 and 2014,
Indonesia's average yearly inflation rate was roughly 8.5 4
percent on average. Inflation in Indonesia, on the other 3.5
hand, has been under control since 2015. It has indeed 3
entered a period of low inflation. Inflation in Indonesia 2.5
has been rising on the back of the expansionary policy by
2
the government in order to increase Rol GDP of the
country and decrease the unemployment. It has attracted 1.5

a lot of EDI% and private investments to boost the 1

economy which led to rise in inflation after the financial 0.5
crisis. Also government increased its expenditure in order 0
to boost the economy which led to increase in the rate of 2016 2017 2018 2019 2020
inflation and also decline in the rate of unemployment.

Unemployment
Indonesia's unemployment rate has been steadily UNEMPLOYMENT
declining over the last decade, but it peaked at 7.9% in
2009 and 7.07 in the pandemic. One cause was the global 8
7
financial crisis of 2009, which resulted in an increase in
6
global unemployment. Slowly. Indonesia began to recover
5
from the crisis by pursuing an expansionary policy aimed
4
at increasing investment in the economy, both through FDI
3
and private investments by local businesses. As a result, 2
employment increased as more jobs were created. Since 1
then, there has been a downward trend in the 0
unemployment rate, which now stands at 6.26 percent of 2016 2017 2018 2019 2020
the economically active population. This shows the
positive trend of employment in the country if we keep the
pandemic impact aside.
GOVERNMENT POLICIES WHICH BOOST INVESTMENTS IN THE COUNTRY
FDI Policies
According to the World Investment Report of 2020, The FDI investment increased by 14%
between 2018 and 2019 in Indonesia reaching USD 23.4 billion. This was the period before
COVID when the foreign investors were returning to Indonesia because of the high yields on
the government bonds and a large injection of liquidity by the central banks in the developed
markets like the European Central Bank and Federal Reserve. Further, the increase in FDI was
due to a set of economic policy packages implemented by the government of Indonesia in the
last few years which focused mainly on –

• Law enforcement and business certainty

• Deregulation
• Interest rate tax cuts for exporters
• Tax incentives for investment in the SEZs (Special Economic Zones)
• Energy tariffs cuts for the labour-intensive industries
• Lowered tax rates on property acquired by the local real estate investment trusts
• Lowered the minimum equity requirement for the foreign investors
• Abolished approval requirement for various business transactions involving foreign
investors

Impact of FDI Policies

Source – World Bank

Trade Policy
Indonesia enjoys a positive outlook towards trade with foreign countries. Indonesia’s exports
stood at 18.41% as a percentage of GDP while imports of goods & services were 18.9% as a
percentage of GDP. Several steps have been taken by the government over the years to boost
the export and imports. Some notable steps include launching of the National Single window
for the online processing of licensing and trade activities.

Indonesia continues to provide the Most Favoured Nation (MFN) treatment to all the WTO
Members. It has also created economic zones as well for fisheries, agriculture, mineral and
coal mining etc. Indonesia’s trade policy is focused on medium term with the objective of
increasing the share of Non-Oil products and strengthen the domestic markets and creating
policies related to tariffs and quotas imposed. Over the years the top trade partners for
Indonesia has been United states, Singapore, Japan, Malaysia etc.

Indonesia’s focus has been on trading energy-related products(fuels) and in-line with that
number of measures like export restrictions, certain divestments of mining companies,
changes in tax regimes on raw materials etc have been taken by the Indonesian Government.

Services
Indonesia’s service sector has been growing at a rapid pace . Between 2010 & 2017, the
services sector grew at a CAGR of 7.1% which is considerably higher than the growth rate of
Manufacturing and Agriculture. Indonesia has keen focused on implementing Industry 4.0,
but lack of accurate data sources and mapping of this sector has limited its potential which
had contributed around 43.6% to the GDP in 2017.

Indonesia was found to be most restrictive in OECD’s Service restrictiveness index in the
Insurance, telecommunications and legal services compared to 43 firms. Foreign direct
Investments (FDIs)is inversely proportional to the OECD’s index ranking and thus government
is working continuously to ease it polices and launching schemes to train employees for
modern service sector.
Labour Laws and Policy
The total labour force of Indonesia is 134 million with low cost and abundant supply. This
makes Indonesia an ideal base of production for the labour-intensive industries. The labour
costs are competitive and the minimum wage levels in Indonesia is rising faster than the rest
of ASEAN countries. It is very difficult to terminate employment which hinders organizational
flexibility. Overtime is regulated on overtime work & overtime pay. There are 2 types of Social
Security programs which currently exists BPIS health care and BPIS Manpower. Under this
program, both employees as well as employers bear the fees for the services.

Skill Development Initiatives

Since 2016, the government of Indonesia has executed major reforms to bring improvement
in the education sector. This includes –

• A constitutional mandate to spend about 20% of the national budget on education

• Implementing Teacher Law made in 2005
• Decentralizing some functions of education sector to district and school level
• Supported parents to enrol their children in schools through Smart Indonesia Program
Although in recent years, there have been great improvements in the education system of
Indonesia, it still faces few challenges on a structural level. Decentralization has led to
enormous challenges linked to its capacity and week system of checks and balances in the
service delivery of education. The school and colleges remain plagued by poor quality
teaching, corruption and staff absenteeism. In order to make Indonesia reach its full potential,
the country will have to improve the learning and teaching environments and coordinate
across various levels of the government. Practical solutions are needed to improve the
education sector like selecting only those teachers with high quality skills, an efficient plan
and budget plan by government to achieve the minimum standards in education.

Labour Productivity Trend

Labour productivity encapsulates both the labour policy and skill development. We notice
that the labour laws and upskilling has had mixed effects. Indonesia needs to root out basic
flaws like corruption, strong labour power and short-sightedness to implement a sustainable
reform to make effective use of the young growing labour force.

Manufacturing

The BKPM data reported that the investment made in manufacturing sector increases from
IDR 104.6 trillion in Q1’19 to about IDR 130 trillion during the first quarter of 2020, growth
rate of 23.9%. This increase has been a surprise as the growth rate shown is during the COVID-
19 pandemic. This has been a major achievement by the government of Indonesia. The
increase in investment in manufacturing sector directly affects the economic state of the
nation.

Manufacturing sector contributes the highest to economic growth of Indonesia, but the ratio
of contribution has been declining continuously year by year since 2010. The manufacturing
GDP is about 19.8% in 2020.

Government Revenues & Expenditure Trends

Source – Statista

The government revenue of Indonesia as a percentage of GDP is considerably lower than most
of the emerging countries, including others in the region. There is a pressing need of Indonesia
to increase the government spending on its development to unlock its substantial growth
potential and to meet the Sustainable Development Goals. The Government needs to spend
more, maintain, and increase revenues. High government revenues would enable them to
spend on education, health, infrastructure, and social safety measures which will help in
fostering the sustainable and inclusive growth. Additional fiscal resources would also help
Indonesia tackle challenges related to climate change and transition to a greener economy.
RISKS AND OPPORTUNITIES PRESENT IN THE COUNTRIES WHICH WOULD
AFFECT INVESTMENTS:

RISKS
Economy downturn and job crisis:
During the crisis, about 1.8 million people become unemployed and another 3.2 million
people left the labor force in Indonesia along with 2.8 million falling into poverty. Forty seven
percent of Indonesian workers are stuck just below middle -class status and have little upside.

Impediments for transition to higher productivity and inclusive jobs:

There are 5 major impediments for Indonesia to move to higher productivity jobs. Over the
last few years most the jobs that are created are low productivity jobs and is not higher than
agricultural productivity as the workforce shifted from agriculture sector to manufacturing
sector. Secondly, most of the enterprises in Indonesia are small which led to low productivity.
Thirdly, Indonesia doesn’t have skills needed for the jobs. Fourth is the differences between
the labor participation, wages and job quality between the male and female workers. This
resulted in the under representation of the women. Lastly, negative impact of the covid 19
on the economy and the people entering labor market.

Export & Import risks:

Indonesia’s major exports include coal, palm oil, gold, rubber and plywood. Coal alone
contributes to 11% of the exports and increased focus of clean energy will leading to lower
price realization for the coal and also lower volumes.
Top 5 export destination contribute to almost 50% of the exports. Country should diversify its
export destinations. China alone contributes to 27% of the goods imported to Indonesia.
Personal travel and business travel alone contributes to 50% of the exported services. Country
needs to diversify its exports and imports of goods and services.
Political stability:
Indonesia ranks 136 out of 194 in the political stability. Indonesia suffered a lot from the
political infighting and religious rebellion. Even though there has been political stability in
recent times, Indonesia faces political risks.

OPPORTUNITIES
Covid 19 has exacerbated the Indonesia’s crisis and also gave raise to opportunities to build
the foundation for sustainable and stable growth over the years.

Capital Investment:
Indonesia can prioritize on the capital investment and redirect the FDI investment to create
more productive and high skill jobs.

Training:
Indonesia should prioritize the upskilling of the labor force to increase the productivity and
structural shift from the agricultural to industrial jobs. High literacy and online distance
learning will help in upskilling the labor force in short technical and vocational education
courses and prepare workforce for the future jobs.

Corruption and Transparency:

Indonesia ranks 88 out of 175 in
Corruption Perceptions Index. This
indicates the level of political corruption
in the country. Investing in Indonesia is
lucrative, but level of corruption hinders
the investment in the country. Country
can bring in policy which are more
transparent and helps in decreasing
corruption. Indonesia is lacking in ease
of starting business and enforcing the
contracts than it peers.

Digital transformation and technology adoption:

Indonesia has been the one of the fastest growing digital economies in south Asia. Adoption
of the digital technology will help in creating the high paying jobs and develop the IT sector in
the country. This also helps in diversifying its exports.
Adopting new technology will help increase the productivity. Newer technology is expected
to add $2.8 trillion to Indonesian economy by 2040.

Domestic tourism and infrastructure:

Tourism sector contributes to $20 billion in revenue and employees 10% of total workforce
in Indonesia and most of it is dependent on the foreign tourists. Government should push to
encourage the local tourism to make it more resilient.
Indonesia should improve its infrastructure keeping in mind the future benefits it can brings.
Renewable energy source:
Indonesia once a exporter of oil and natural gas now importing the same. Production is
struggling to meet the domestic demand. Currently 60% of its generators are run by coal and
20% on gas. Government should work towards increasing the share of renewable sources to
support its manufacturing.
 CONCLUSION
Indonesia is Southeast Asia's largest economy, with a large young population and a long
history of economic progress. According to UN Population Statistics estimates, th e
archipelago's demographic transformation will be beneficial to economic development during
the next thirty years. The country boasts enormous natural resources, great renewable
energy potential, and food security, providing a long-term plan of action to investors who are
dissatisfied with other markets owing to rising oil and food prices.
President Widodo's demand for increased infrastructure funding is a positive move. After
receiving assessments from the World Bank raising concerns about the country's economic
attractiveness for corporations trying to diversify away from China, the President modified
labor regulations to open the economy in the previous year 2020. These actions will enable
Indonesia to make use of its favorable demographics in order to attract FDI production. The
plan is simple: Indonesia will focus on industries where it wants to expand and create chances
for global firms to invest.

Taking the manufacturing road with FDI will serve many purposes altogether. Rather than less
stable portfolio investment, it would provide stable funding to current Indonesian enterprises
in new factories. This method would diversify Indonesia’s revenue sources while also bringing
international technology advancements. Access to overseas markets will also be improved as
a result of such a strategy. Last but not least, it would assist Indonesia to expand its global
supply chain by increasing the country's share of high-value-added exports in comparison to
lower-value-added exports. Such long-term changes are essential for Indonesia's economic
development to accelerate and realize its potential to reach a GDP growth rate of more than
7%.

In terms of taxation, the most Indonesia will ever achieve is a moderately progressive tax on
wage income and a robust low-rate capital revenue tax. In this context, the best solution for
personal income tax will be one that imposes a consistent marginal rate on roughly equal
footing. Given the problems facing the Indonesian movement, it is unnecessary to "start from
scratch." This has already resulted in the development of numerous strategies that can be
used as the foundation for a more secure and long-term welfare system. It's not an easy goal
to achieve, and it'll be difficult even after-tax reform. The stakeholders require a great deal of
assistance, and we trust that, while difficult, resolving these issues of inequality and taxation,
in particular, will not be impossible.
The nation's real estate and infrastructure development are booming, including the relocation
of Jakarta's sinking capital to East Kalimantan. The epidemic will act as a brake on growth and
cause delays in project implementation. Given the capital requirement to aid crisis
management, policy actions in favor of development will likewise be difficult to implement.
Nonetheless, the administration's long-term commitment to ensuring that reforms provide
possibilities for potential investors appears to be increasing the allure of investing in
Southeast Asia's largest economy.

After considering all of these elements and calculating Indone sia's final growth potential, this
group has reached the conclusion that Indonesia is and will continue to be the investment
hub of Southeast Asia, in the coming future.
 References
• https://carnegieendowment.org/2020/08/19/how-indonesia-can-rev-up-its-
faltering-economic-growth-pub-82477
• https://www.imf.org/en/News/Articles/2021/03/03/na030321-indonesia-has-an-
opportunity-to-boost-growth
• https://www.worldbank.org/en/country/indonesia/brief/improving-teaching-and-
learning-in-indonesia
• https://www.mondaq.com/employment-and-hr/890276/labour-and-employment-
comparative-guide
• https://www.market-prospects.com/articles/indonesia-manufacturing-industry-
business-opportunities
• https://www.theglobaleconomy.com/rankings/wb_political_stability/

• https://www.adb.org/sites/default/files/publication/575806/innovate -indonesia-
unlocking-growth.pdf
• https://www.mckinsey.com/featured-insights/asia-pacific/ten-ideas-to-unlock-
indonesias-growth-after-covid-19