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Indonesia on Verge of Becoming an Economic Power

  • Brian Padden

A crew stands at the door of a public bus during rush hour at the main business district in Jakarta, Indonesia (file photo)

A crew stands at the door of a public bus during rush hour at the main business district in Jakarta, Indonesia (file photo)

Some economists say Indonesia is poised to become an emerging economic power similar to China and India. Economic growth slowed slightly during the worst of the global economic crisis, but now it is again expanding at a rate of over six percent a year, and Indonesia has the second-best performing stock market in Asia.

An expanding manufacturing base, an abundance of natural resources, a growing domestic market, a sound financial sector and a stable political climate all contribute to make Indonesia's economy one of the strongest in the world.

Emerging economy

Milan Zavadjil the International Monetary Fund's representative in Indonesia, says it ranks just below China and India in attracting foreign investment.

"Various investor surveys have it jumping up the rankings," Zavadjil said. "And an interesting survey puts it as the fourth most likely place for investment over the next several years among emerging markets."

The Asian Development Bank recently forecast that Indonesia will see gross domestic product growth of 6.1 percent this year, and 6.3 percent in 2011.

Zavadjil says Indonesia's financial sector was not sophisticated enough to get involved in the complicated and ultimately disastrous investments that contributed to the global economic crisis in 2008. So while much of the world was thrown into recession, the fundamentals of Indonesia's economy remained strong.

"Indonesia had a very small fiscal deficit, very small borrowing requirements, a low external government and consumer debt, adequate foreign exchange reserves," he added. "The banks were well capitalized and liquid."

Optimism for businesses

For investors, last year's peaceful presidential election is seen as ushering in a new era of political stability and optimism. Despite the bombings of two Jakarta hotels in July of 2009, government efforts to prevent terrorism have reassured the business community.

Indonesian Finance Minister Agus Martowardojo says the government's conservative fiscal policies protect investments by keeping down inflation.

"Most important we would like to manage our budget," said Martowardojo. "Yes, we will provide stimulus but we will not have a budget deficit [of] more than 1.7 percent. And I believe that is the strength of Indonesia."

Increased exports

Continued economic reforms and free trade agreements with China and other Asian countries have increased exports of commodities such as timber, coal and silver. And in some industries, such as shoe manufacturing, companies are moving factories and jobs from China to Indonesia.

Not all labor organizations agree with the country's free trade policies. Baso Rukmana, head of Indonesia's National Workers Union, says clothing manufacturers in particular are losing jobs because the government makes it too hard to compete.

Need to improve infrastructure

He says the infrastructure is not ready, the roads are not enough and there is an added cost to production, something they call under-the-table money.

Corruption remains a significant problem, and some surveys of business managers show it discourages growth. However, the IMF's Zavadjil says it is no worse than in some other Asian countries.

The finance minister says weak infrastructure, particularly the country's air and sea ports, is the most glaring problem inhibiting growth. He says the government has acted to insure that private investments in infrastructure projects that require years to complete would be secure.

"If there is any change in the policy, if there is any change of license, if there is any change of administration, will we guarantee them?. I can say now, Ministry of Finance, we are ready. We are ready to guarantee," Martowardojo said.

Although Indonesia's stock market is at record levels, the finance minister notes that other asset prices are not rising quickly, so there is little risk the economy will overheat. He says, and many economists agree, the country is likely to see annual growth of over six percent for the next few years.