Communiqué: Doubling Shared Prosperity in Indonesia

January 30, 2014
Communiqué: Doubling Shared Prosperity in Indonesia
Construction in Jakarta, Indonesia.

Ash Report Presents Three Paths Forward

By Jessica Engelman – Communiqué: Winter 2013, Volume 13

Formerly an authoritarian state, Indonesia has made impressive gains since President Suharto’s resignation in 1998 as the world’s first majority Muslim, multiparty democracy. The country’s successes and challenges as a new democracy were the subject of the Ash Center’s 2010 report “From Reformasi to Institutional Transformation: A Strategic Assessment of Indonesia’s Prospects for Growth, Equity, and Democratic Governance.” A new report, also from the Center’s HKS Indonesia Program, builds on the findings of the first to propose specific policies to achieve transformation in Indonesia. “The Sum Is Greater Than the Parts: Doubling Shared Prosperity in Indonesia Through Local and Global Integration” addresses the government of Indonesia’s primary development objective, which is to join the ranks of upper middle-class income countries by 2025. The report’s authors argue that current policies will keep this goal out of reach and that Indonesia will fall short in three fundamental dimensions: growth will be jobless, competitiveness will decline, and inequality will rise.

But there are reasons to be optimistic. As Jay Rosengard, faculty chair of the Ash Center’s HKS Indonesia Program, notes, under Reformasi there are now direct elections of all levels of government, from the village chiefs up to the president—something that still eludes citizens of the US. And, as Indonesia approaches a season of presidential and parliamentary elections in 2014, it is hoped that the report’s suggestions will be debated among candidates and that whoever is elected might find it a valuable resource in planning Indonesia’s future. Harvard Kennedy School Dean Ellwood and Center Director Saich traveled to Jakarta in September to attend the report’s launch event hosted by the Vice President’s National Team for Accelerating Poverty Reduction. In addition to remarks made by the Dean and Saich, Emil Salim, an eminent Indonesian economist and former minister, and Deputy Trade Minister Bayu Krisnamurthy commented on the report’s timeliness and relevance. The event was well attended by a cross-section of academics, policymakers, research institutions, and the media, and was reported in media outlets including two of Indonesia’s leading newspapers, the Jakarta Globe and Kompas. The report’s authors hope when the Indonesian translation is published later this year its reach will extend to those outside the central government in Jakarta.

Constraints on Indonesia’s Future

The binding constraint to accelerating sustainable, inclusive growth is that Indonesia exploits neither the benefits of being a large country nor its international dynamic comparative advantage. Indonesia is beset by local economic fragmentation and global economic marginalization. The report observes that growth in the country is fueled by mostly raw material exports and natural resource extractions, which provide no significant added value. This results in jobless growth because most jobs are currently tied to variable commodity prices as opposed to more stable and expandable industries such as manufacturing. Further, strengthening the manufacturing industry would allow the country to become more competitive by plugging into the global supply chain.

So, at present, “the sum is worth less than the parts.” And, instead of just measuring Indonesia’s growth by quantifying it, the authors further ask “What is the quality of Indonesia’s growth; is it sustainable and equitable?” In measuring growth not just by looking at GDP, but also by looking at GDP per capita, it becomes clear that the gap between rich and poor in the country is growing. The report also assesses inequality by comparing incomes and societal well-being for urban and rural populations, for Java and the outer islands, and for men and women. In all of these areas, the gaps are widening.

Three Paths Forward

Saich notes that while the findings are discouraging, the Center’s analysis and recommendations reflect a cautiously optimistic view that the report’s recommendations are achievable, even in Indonesia’s current challenging political landscape. The authors assert that the nation has a choice of three future development paths: reactive, proactive, and transformative. Reactive best describes the government’s current approach of “muddling through”; proactive refers to policies pursued in response to major crises such as the widespread malnutrition and rural poverty in the 1960s and the collapse of oil prices in the 1980s; and transformative, or fundamental metamorphosis, characterizes the policies that enabled the “Four Asian Tigers” (Hong Kong, Singapore, South Korea, and Taiwan) to become high-income nations. In the report’s preface, Saich puts forth its primary recommendations: “The key to both local and global integration is the same: greater investment in enabling hard infrastructure such as roads, ports, and power; improved soft infrastructure in the form of better government and governance; and development of human resources through more effective education and training.”

The report offers in-depth recommendations for each element of this three-pronged approach and includes a chapter that addresses the political economy in Indonesia , i.e., how to get things done. Finally, the report concludes “None of the difficulties the GOI [Government of Indonesia] will face in promoting and sustaining the reforms needed to achieve rapid and inclusive growth is insurmountable. The key challenge will be to seriously pursue robust, sustained economic reform in the interests of the whole population rather than particular individuals or select groups.”

While the report was written by the research team at the Ash Center, led by Center Director Saich, it is important to note that the research process was designed to be consultative and included roundtable discussions with leading policymakers and academics in Indonesia, as well as field visits outside of Jakarta. This approach helped insure inclusivity when establishing the findings of the report and defining its recommendations.