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Indonesia Case

Essay by   •  December 11, 2013  •  Essay  •  519 Words (3 Pages)  •  1,592 Views

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At $878 billion, Indonesia was the 16th-largest economy in the world. Since 2000, the Indonesian economy had registered a robust average annual real GDP growth rate of about 5.4%. GDP per capita was at $4,850, roughly on par with the Philippines but behind Malaysia, Thailand, and China. Between 2000 and 2012, GDP per capita had grown at 6.4%. (See Exhibit 4 for basic economic indicators.) The last decade had also seen a growth in the Indonesian middle class, with the number of people living on US$3,000 a day rising from 2 million in 2004 to 50 million in 2009 (Exhibit 5). Unemployment, at 6.1%, had been declining from a ten-year high of 11.2% in 2005 (Exhibit 6). Even as the economic growth slowed, the economy generated 1.2 million new jobs, outnumbering new entrants into the labor force.

Domestic investment rates as a percentage of GDP had been rising, but remained low compared to its regional peers. Unlike many of its regional peers, Indonesia did not experience an export boom driven by foreign direct investment (FDI). Among its peer group, Indonesia attracted some of the lowest levels of FDI per capita (Exhibit 7), with Vietnam, China, Thailand and Malaysia attracting 2 to 6 times as much as Indonesia over the same time period. FDI levels were more in line with countries like Philippines that were typically associated with a high level of corruption, weak institutions and poor business environment. Portfolio investment and loans to large corporations had spiked since 2010 (Exhibit 8).

Indonesia was rich in natural resources and had a climate conducive to many forms of high value agricultural commodities. According to government data, Indonesia was the world's largest producer and exporter of palm oil, the second largest exporter of coal, and the second largest producer of cocoa and tin, and it had the fourth and seventh largest reserves of nickel and bauxite. Such abundance in natural resources made Indonesia unique among other emerging markets in providing long term energy and food security for its burgeoning population. While Indonesia's resource sector was substantial, natural resources no longer drove the country's economic development. In fact, the Indonesian economy was much more stable and diversified than many outside observers assumed. Despite soaring resource prices, the overall share of resource sectors in the economy had declined over the
past decade. The mining sector had grown at 0.3% a year in real terms, and agriculture by 2.6%, compared with annual growth in services of more than 6%. Services constituted the largest part of the economy, accounting for 37.6% of GDP, and employed a significant share of the workforce (Exhibit 9).

Nevertheless, resources, in particular palm oil, coal, and oil and gas, remained critical to Indonesia's trade balance as they represented 68% of exports. High prices, notably for coal and palm oil, had underpinned favorable terms of trade for Indonesia,

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