Will Indonesia Be The World’s 5th Largest Economy?

Posted on October 25th, 2010 at 12:43 pm by Akhyari


Since surviving from the recent global crisis, with economic growth rate at 4.5 percent in 2009, while many other countries suffered economic contraction, some economic observers have started projecting the emerging economic power of Indonesia. They began adding “I” (for Indonesia) to the emerging BRIC (Brazil, Russia, India, and China) countries, to make BRICI or IBRIC.

Recently, businessman Chairul Tanjung, who is also the chairman of National Economic Committee, an ad hoc forum for the President of Indonesia, made another grouping.

He said that in 2030, Indonesia, with a 285 million population, will become the fifth largest economy in the world, after China, the US, EU and India. He said that the gross domestic product of Indonesia will jump from the current US$700 billion to $5,100 billion in 2030.

Summarecon City - Bekasi - World's 5th giant in sight?

In other words, Tanjung predicted that Indonesia’s economy would grow at an average of about 10.0 percent every year from next year until 2030. Per capita income in 2030 will be $17,895, assuming $1 is equal to 9,000 rupiah. Nevertheless, with an exception in 1987, Indonesia never achieved an annual economic growth rate of more than 9.0 percent.

Even though, after the start of the reform period in 1998, growth rates have never passed 6.5 percent. This year, the economic growth is predicted not to exceed 6.5 percent. Therefore, will Indonesia’s economy grow much faster since next year until 2030? Can Indonesia achieve that?

Let us see what has happened in Indonesia’s economy. Coordinating Economic Minister Hatta Rajasa, just mentioned that Indonesia’s per capita income has increased rapidly, from $1,196 in 2004 to $3,000 now. He implied that the per capita income rose by an average of 15.3 percent annually from 2004 to 2010.

A fantastic growth rate! This rate is much higher than what I mentioned earlier that economic growth rates never exceeded 6.5 percent during the reform period.

Did he make a mistake? I checked the statistics from the Central Statistics Agency (BPS). As the statistics for the whole 2010 is not yet available, and I do not want to use a projected rate, I have done my own calculation for the period of 2004-2009.

I found that the national income (measured by GDP) grew only at 5.4 percent annually. If the average growth rate of the population is 1.4 percent, then the per capita income growth rate will only be 4.0 percent. This rate is much lower than Rajasa’s calculation.

However, I did the calculation by assuming no inflation, that prices did not rise during 2004-2009. I calculated the changes in real income (no change in price level), to measure the change in purchasing power. Rising income with rising prices means a smaller rising purchasing power.

I then calculate the per capita income growth rate if I include changes in price level, the nominal income. I found that the growth rate of the nation during 2004-2009 was 17.9 percent. If population growth rate is 1.4 percent annually, the growth rate of per capita income is also fantastically high at 16.48 percent, which is not much different from what Rajasa implicitly said. So, is it correct, that Indonesia’s per capita income rose so fantastically during 2004-2010? Therefore, is the prediction for 2030 reasonable?

Yes, their numbers are reasonable. However, we should be aware that the impressive statistics on current per capita income is measured at the 2010 price. The prediction for the year 2030 is made using price levels in 2030.

During the last six years, prices of goods and services have been soaring in Indonesia.

The prices of goods and services will also keep rising in the next 20 years. The prices have been rising along with the (nominal) income, and therefore the increase in the purchasing power is smaller than the increase in income.

Let us see some illustrations using statistics from the BPS. Measured with 2009 prices, the per capita income in 2009 was about $2,696. With a similar method, using 2004 prices, the per capita income in 2004 was $1,179. It was a fantastic jump, more than double during 2004-2009.

However, a very different story emerges if we hold the prices constant during 2004-2009 so that we can measure the change in purchasing power. Using the price level in 2000, the statistics from the BPS reveal that the per capita income in 2009 was $1,045, only about one fifth higher than $851, the per capita income in 2004. In other words, the impressive increase in per capita income during 2004-2009 was much attributed by rising prices of goods and services.

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How about the prediction that Indonesia’s national income will attain $5,100 in 2030, with an annual rate of growth of at least 10.0 percent during 2010-2030?

It is possible, if the predicted growth rate does not reflect a change in purchasing power, that the predicted income is measured at the price level in 2030. It can be achieved for example with real economic growth at 6.0 percent and an inflation rate of 4.0 percent.

Yes, it should be remembered that prices keep rising. Therefore, the predicted $5,100 billion in 2030 will be accompanied by ever increasing prices of goods and services. The living cost will be much higher if the predicted number is achieved through lower real economic growth and higher inflation.

In a nutshell, we should be aware that those impressive statistics on Indonesia’s income hide the ever-rising prices.

Indonesia achieved and will produce a larger national income and per capita income at an increasingly more expensive living cost.

Aris Ananta, Singapore – The writer is senior research fellow at the Institute of Southeast Asian Studies, Singapore.

Source: The Jakarta Post

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