Indonesia: Against All Odds

The fourth most populous country in the world, Indonesia, has thrived into Southeast Asia’s largest economy. Among the G-20, Indonesia is claimed to be the fastest growing country after the superpower, China. Surprising the world, Indonesia’s GDP has achieved 6.17 per cent in the three months ended September 2012, surpassing the assumptions and predictions of many.

A panoramic view of Jakarta skyline

The BIG question is: 

What's behind Indonesia’s massive economic growth?

Back to basics, the answer for this question lies in the formula Y=C+I+G+(X-M)

Indonesian economic growth occurred because household consumptions (C), investment (I) and government spending (G) in Indonesia increased over the year. However, the most powerful driving force is the increase of investment in Indonesia. Investment has increased 32.9 per cent in the first quarter of the year. Not to mention, investment contributes around 33.2 per cent of the country’s GDP.

What has driven the investment level up?

The answer would be low interest rate. Well, in case you’re not familiar with that term, interest rate is the cost of borrowing money. Low interest rate means it’s cheaper to borrow money from banks. Therefore, investors find it easier to reach sources of money needed for them to invest. As funding becomes more accessible, investment surged, aggregate expenditure increases and so does a country’s real GDP.

Analysts and economists are also very much certain that the growth will reach 6.4 per cent by the end of the year and 6.6 per cent in 2013. Foreign investors also view Indonesia as a very lucrative investment hotspot due to its highly strategic location, fiscal incentives offered and also the Indonesian government’s plans to increase their spending so that infrastructures such as airports, and highways can be improved. Positive expectations about the Indonesian economy will drive more investment expenditure in the future.

As the middle class in Indonesia surged and household disposable income rose by 12.9 percent last year, household consumption and aggregate demand soared high.  Why is that so? This is because consumers have greater purchasing power, financial security and they also feel wealthier. This is why they are willing to spend more. If consumers’ expectations of the future prices and income are positive, Indonesia will be facing a further promising growth. Low interest rate also encourages consumers spending instead of saving their money. Consumers can now borrow money from financial institutions such as banks with less interests and riskier purchases can be done. Consequently, demand rises and household consumptions swell.

Wait a second. 

Indonesia’s private consumption (C), Investment (I) and government spending (G) indeed have undergone notable improvements but what happened to Indonesia’s net exports?

In August 2012, Indonesia experienced a 24 percent fall of exports compared to the previous year. 

The fall of Indonesia’s net exports is caused by the global crisis and challenging external conditions, this includes the catastrophic debt crisis that has swept all over the Eurozone and the threatening slowdown of China’s economy. As these countries need to keep their economy afloat, they import fewer goods from Indonesia.

To sustain its economic growth, Indonesia has to take necessary measures to improve its export level. Indonesia should establish various trade expos in attempt to lure new markets such as Africa and South American countries.