indonesia macroeconomics condition
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Page 1 of 10
“Assessing Macroeconomic Developments in Indonesian”
By Rustan A.
(Researcher in PKP2A III LAN Samarinda)
As a developing country, Indonesia has faced many problems and uncontrolled
economic situations because of internal influence (worst management) and external effect.
Indonesia, in the era of President Soekarno -well known as “old order”- got economic
depression. Economic structure was in chaos with higher inflation rate and stagnant
production activities (particularly for export). The reverse of economic condition happened in
“new order” which controlled by President Soeharto. Indonesia could grow impressively
through the biggest contribution from agriculture and industry. Subsequently, Indonesia
slipped with economic declined around the year 1998-2007 because of monetary crisis that
occurred in almost countries in Asia. Fortunately, nowadays Indonesia slowly can improve
the economic growth that is signed by increasing GDP growth, minimizing inflation and
reducing unemployment rate.
Table 1. Indonesia Macroeconomic Conditions
Source: Central Bureau of Statistics
The first concern to analyze economic situation in wide-range is based on the three
variables (Blachard, 20091) namely, (1) Output - the level of the economy as a whole and its
rate of growth, (2) The inflation rate - the rate in which the average price of the goods in the
economy is increasing over time, and (3) The unemployment rate – the proportion of workers
in the economy who are not employed and are looking for jobs. The explanation about each
Macroeconomic indicator in the table above will be described in the following details:
1. GDP Growth Rate
GDP is always used to measure the economic progress of the country. Every country
tries to increase their GDP rate to improve their economy stabilization. Measuring production
growth over time, we use real GDP (constructed by constant prices). From the table, it can be
1 Blanchard, Oliver. 2009. Macroeconomics 5
th edition. Pearson International Edition.
Macro-Economic Variables
(On Average) 1951 - 1960 1961 - 1970 1971 - 1980 1981 - 1990 1991 - 1997 1998 - 2007 2008 2009 2010
Real GDP Growth (%) na 3,94 7,44 5,51 6,88 2,81 6,01 4,58 6,10
Inflation Rate (%) 18,29 194,02 16,78 8,00 8,52 15,33 11,06 2,78 6,96
Unemployment Rate (%) na na na 2,71 3,81 8,51 8,42 8,01 7,27
Year
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seen that real GDP growth moved 6,10 % fluctuatively last year. The movement of GDP is
affected by some events happened along that time.
Source: Central Bureau of Statistics
Remarks for GDP Growth (%) :
Year 1960-1973 using the base year 1960
Year 1973-1983 using the base year 1973
Year 1983-1993 using the base year 1983
Year 1993-2000 using the base year 1993
Year 2000-2004 using the base year 2000
- Period of 1961 – 1970
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At the initiation of Indonesian independence, there were huge chaos of social and politics
that directly affected economic structure. Indonesia economic only grew on average
3,94%, even in 1963 touched minus 2,24%, In addition, inflation rate on average touched
the highest point (194,02 %) that force dwellers lived in difficulties to fulfill their basic
needs. This condition occurred as the result of inadequacy production factors such as,
human resources with the level of entrepreneurship and management capability in high
quality, workforce with higher education/ skill, fund (especially to construct infrastructure
that needed for industry), technology, and government capacity to arrange the best plan
and strategy for national development (Tambunan, 20012)
- Period of 1971 – 1997
In this period, government concentrated to improve people welfare through economic
development by recovering economy, social, and politic situation. This plan was
successful and could increase economy rate of growth to 7, 44 % in 1971-1981, 5, 51 %
in 1981-1990; and 6, 88 % in 1990-1997 respectively. This triumph was achieved mainly
because great revenues from oil export when oil boom/ oil crises occurred. Besides that,
many economists argued that government could organize and put into action the series of
five years development plan or REPELITA in the right track, at least temporarily.
- Period of 1998 – 2007
Indonesia faced a big economic turbulence that trigger economic crisis. Indonesian
currency was pushed down with exchange value above 10.000 per US$. The GDP growth
in 1998 went down to minus 13, 31%, substantially lower than the average growth rate in
1960-1971. In this period Indonesia established reformation and economic stabilization
program strictly to raise the GDP growth rate.
- Period of 2008 – 2010
Indonesia GDP growth rate in 2008 increased to 6,01 %, then in the middle of global
crisis GDP growth declined to 4,58 % in 2009. This condition happened because there
was an increasing of oil price in international commerce. However, the GDP growth rate
recovered significantly to 6, 10 % in 2010, which means economic condition in this
period has grown. Monetary management and investment condition were quite good; also
inflation rate was not too high. In fact, Indonesia could reach inflation rate below 3 % in
2 Tambunan, Tulus. 2001. Indonesia Economic: Theory and empirical findings. Ghalia Indonesia Publishing
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2009 (most macroeconomists believe that the best rate of inflation is somewhere between
0 and 3 %) 3
Growth sources from aggregate demand side could be estimated by analyzing rate or
composition of GDP according to spending. The composition of GDP consists of household
consumption (C), investment (I), government spending (G), and net export (exports (E)
subtract imports (IM)). The rate of Indonesia aggregate demand can be seen from the figure
clearly.
Figure 1. The Rate of Real Growth of Aggregate Demand
Source: Central Bureau of Statistics
Overall trend, it can be clearly seen that the rate of growth of aggregate demand have
a tendency to decrease. The rate of household consumption (C) remained stable on average
5,35 %, government expenditure (G) still fluctuated, investment (I) showed a downward
trend to 8,50 %, meanwhile, exports (E) reached the lowest point in 2009 then rose rapidly to
14,92 % in 2010. Imports (IM) initially depicted a downward trend from 1961 to 2009 then
increased significantly in 2010.
Investment showed the highest rate in 1961-1970, 1981-1990, and 2008. However, in
1998-2007 because of economic crises investment declined to the lowest rate 1,48 %, as well
in 2009 which only rose to 3,30%. Consumption reached the lowest rate (7,88%) in 1971-
3 See Blanchard, 2009 (p.54)
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1980, and 5,34 % in 2008. Lastly, government spending showed the lowest rate in 1961-1970
which was 2,61 %, 2,76% in 1990-1997, and 0,29 % in 2010 respectively. Interestingly,
government spending grew positively to 4,65 % in 1998-2007, in which Indonesia suffered
from monetary crisis.
In 1998-2007 all component of aggregate demand went down (except for government
expenditure). Monetary crisis in that period has hit the whole component to the lowest point
rate. Afterwards, all composition recovered strongly. For exports and imports, overall trend
illustrated the growth rate of import still higher than exports.
In the last ten years (2000-2010), we could also see the role of each composition of
aggregate demand to GDP remained stable. Consumption still contributed the highest
proportion to GDP. The second highest proportion was exports, which means that Indonesia
got trade surplus (exports higher than imports). Investment still showed a stagnant proportion
to GDP; meanwhile government spending contributed the lowest proportion. It could be
concluded that Indonesian economic still depend on the movement of consumption and this
was quite relevant to defend from economic crises, rather than rely on exports like other
countries.
Figure 2. The Composition of Aggregate Demand with respect to the Construction of GDP
Source: Central Bureau of Statistics
Furthermore, we also can elaborate the contribution of industrial origin with respect to
GDP. In the last ten years, contribution from agriculture, livestock, forestry and fishery;
mining and quarrying; and manufacturing industry to GDP have a tendency to decline. In
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contrast, the other industrial origins increased consistently. The biggest contribution was
from manufacturing industry with average contribution around 27,4 %, and the second
biggest contribution were from trade, hotel, and restaurant; and from agriculture, livestock,
forestry, and fishery with average contribution about 16,7 %, and 14,5 % respectively.
Table 2. Contribution each Industrial Origin to GDP (%)
Industrial Origin 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Agriculture, livestock, forestry, and fishery 15,6 15,5 15,4 15,2 14,9 14,5 14,2 13,8 13,7 13,6 13,2
Mining and quarrying 12,1 11,7 11,3 10,6 9,7 9,4 9,1 8,7 8,3 8,3 8,1
Manufacturing industry
27,7
27,7
27,9
28,0
28,4
28,1
27,8
27,4
26,8
26,2
25,8
Electricity, gas, and water supply
0,6
0,6
0,7
0,7
0,7
0,7
0,7
0,7
0,7
0,8
0,8
Construction
5,5
5,6
5,6
5,7
5,8
5,9
6,1
6,2
6,3
6,4
6,5
Trade, hotel, and restaurant
16,2
16,2
16,2
16,3
16,4
16,8
16,9
17,3
17,5
16,9
17,3
Transport and communication
4,7
4,9
5,1
5,4
5,8
6,2
6,8
7,2
8,0
8,8
9,4
Finance, real estate, and business services
8,3
8,6
8,7
8,9
9,1
9,2
9,2
9,3
9,5
9,6
9,5
Services
9,3
9,3
9,2
9,2
9,2
9,2
9,2
9,3
9,3
9,4
9,4
Source: Central Bureau of Statistics
The lowest contribution to GDP was from electricity, gas, and water supply, about
0,6% to 0,8%. Fortunately, its proportion was bigger and bigger every year. Above all,
Government should give more attention to the sectors that contribution tend to decrease every
year, particularly to manufacturing industry, and agriculture, livestock, forestry and fishery.
2. Inflation Rate
In simple definition, inflation is an increasing of price generally and continually.
Inflation is happened because of the pressured from supply side (cost push inflation), demand
side (demand pull inflation), and the expectation of inflation4. Information about inflation is
very important, particularly for policy maker and firms, because it can affect income
distribution. On the other hand, inflation might influence the decision of firms to invest
because of the uncertainty in price.
As can be seen in the graph below, inflation rate at the beginning of independence of
Indonesia (1951-1960) remained stable at average 18,29%. However, started from 1961,
inflation rate increased dramatically above 100 % and reached the highest rate of inflation in
1966, which was 635,35 %. This condition depicted that price of goods and services
4 http://www.bi.go.id/web/id/Moneter/ Inflation /disagregation.htm
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increased dramatically; and it forced the government to work hard by providing economic
and food assistance to poor people.
In President Soeharto era, started in 1967 the inflation rate can be pushed to 16,78 %
in 1971–1980 and to 8,0 % in 1981-1990. Government had successfully stabilizing economic
condition by developing all sectors that gave higher impact to economy growth. Government
could cut and sustained the goods price to improve the domestic consumption. This era, we
called it “the golden era” of Indonesia.
Figure 3. The Change of Inflation Rate in Indonesia 1951-2010
(a)
(b)
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(c)
Remarks for Inflation Rate (%) :
Year 1951-1965 using the base year 1950
Year 1966-1978 using the base year (September 1966=100)
Year 1979-1989 using the base year (March 1977- April 1978=100)
Year 1990-1997 using the base year (March 1998- April 1989=100)
Year 1998-2003 using the base year 1996=100
Year 2004- May 2008 using the base year 2002=100
June 2008 and so on using the base year 2007=100
However, the average of inflation rate began to rise again in the period of 1990 to
2007, which was about 8,52 % to 15,33 % respectively. Afterwards, it went down to 11,06 %
in 2008 and 2,78% in 2009 (which was the lowest point of inflation rate), but increased again
in 2010 to 6,96 %. The stability in inflation is the first order for a sustainable economic
growth and indirectly will give a big impact to national prosperity5. The urgency to hold the
movement of inflation is based on the consideration that high and unstable inflation can cause
negative influence on socio-economic conditions of society.
3. Unemployment Rate
The unemployment rate is the ratio of the number of people who do not have a job but
are looking for one. This data is very important because it has a direct effect to the welfare of
the unemployed, and a signal that the economy may not be using some of its resources
efficiently6.
Figure 4. The Unemployment Rate for the Last 29 Years
5 http://www.bi.go.id/web/id/Moneter/Inflation/Introduction.htm
6 See Blanchard, 2009 (p.50)
Source: Central Bureau of Statistics
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Source: Central Bureau of Statistics The graph clearly illustrates that the unemployment rate remained stable from 1986 to
1993 at average 2,71 %. Afterwards, there was an upward trend in the period of 1994 until
2005 with average rate 6,99 %, and reached a peak in 2005 with unemployment rate about
10, 75%. From this point, the unemployment rate tended to decline slowly. In 2006 the rate
went down to 10,36 %, and in 2007 touched 9,43%. This trend continued in 2008 with the
unemployment rate decreased slightly to 8,42 %, then to 8,01% in 2009, and 7,27 % in 2010.
Decreasing number of unemployment rate reflects that government could provide more jobs
opportunities for people and it will also be related to their welfare growth rate.
Labor force in Indonesia is quite high, it is proven by the percentage between labors
forces with respect to population that above 46 % every year with participation rate
approximately 66 % per year constantly. This condition describe that Indonesia has many
productive workers (working-age) that standing up to fulfill the need in the labor market.
Comparing-with other countries, such as Japan and other developed countries, which have
negative growth of productive workers (majority of the population are elderly), the
companies employ workers with old ages because the limited of workers supply (productive
workers). Indeed, it threat Japan from the productivity side, and that is the reason why Japan
and other developed countries now are facing the fact to be “an aging nations”.
Figure 5. The Percentage of Labor Force to Population and Participation Rate
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Source: Central Bureau of Statistics
Labor force (economically active) consists of employment and unemployment. It can
be seen that on average 91,18 % of labor force were working, and the rest (on average) 9,70%
were unemployment in the last 10 years. It also depicts that the percentage of unemployment
tend to decline which means absorbing rate in labor market was high. However, government
still needs to provide and to open new job opportunities to reduce unemployment rate.
Additionally, it is government responsibility to facilitate and to train the labor force with
standard skills that companies expect.
4. Conclusion
From the details explanation above, it can be concluded:
- GDP growth in Indonesia continued to grow significantly, although a few years ago,
suffering from shock (negative growth of GDP). This is evidenced by increasing the real
value of Indonesia's GDP from year to year
- Domestic consumption and exports remains the largest contributor to Indonesia's GDP
and this needs to be improved, particularly for domestic consumption. As we know, high
domestic consumption is quite good in warding off the economic crisis because national
economy is not too dependent on the influence of foreign markets.
- Inflation rate in Indonesia despite fluctuating but it is still maintained and quite well
controlled by government to support good economic performance. This can be seen from
the exchange rate and prices of goods remained stable in recent years.
- Unemployment rate is still quite high, although there is a tendency to decline in the last 5
years. Work participation rate is still pretty good (above 60%), and the employment rate
has reached above 90% of the total labor force.