INDONESIA Arriya Mungsunti Andy Sumner Arief Yusuf The Developers - - PowerPoint PPT Presentation

INDONESIA

Kyunghoon Kim Arriya Mungsunti Andy Sumner Arief Yusuf

The Developer’s Dilemma: Structural Transformation, Inequality Dynamics, and Inclusive Growth UNU-WIDER Workshop, 10th/September/2019, Bangkok, Thailand

BACKGROUND: STEADY BUT SLOW

Source: IMF World Economic Outlook Database China Indonesia 1 2 3 4 5 6 7 8 9 10 11

• 1

1 2 3 4 5 6 7 8 9 10 11 12 Standard deviation of GDP growth, 2000-2017 GDP growth per annum, 2000-2017 (%) Notes: (i) 100 largest emerging and developing countries in terms of GDP in 2017. No data for Afghanistan and Venezuela. Equatorial Guinea, Iraq, and Libya are not shown in the graph. (ii) Dotted lines show the averages of each variable. Source: Author’s illustration based on IMF World Economic Outlook Database 2000 4000 6000 8000 10000 12000 14000 16000 1995 2000 2005 2010 2015 China Indonesia (GDP per capita, constant, PPP 2011 international dollar)

THREE MAIN PERIODS: 1960S-MID 1970S; MID-1970S-MID1990S; 2000S-

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 40 41 42 43 44 45 46 5 10 15 20 25 30 Gross income Gini Manufacturing value added share (%, constant price) 1975 1980 1985 1990 1995 2000 2005 2010 40 41 42 43 44 45 46 7 8 9 10 11 12 13 14 Gross income Gini Manufacturing employment share (%) Notes: (i) The missing Gini coefficients were calculated using linear interpolation. (ii) Manufacturing value added and employment shares are five-year moving

• averages. For example, the data for 1975 is an average of data for 1971–1975.

Source: Author’s illustration based on GGDC 10-Sector Database and UNU-WIDER WIID

KUZNETSIAN TENSION IN THREE PERIODS

Kuznetsian tension: Weak (‘adverse’)

Period I (1960s-mid 1970s) Period III (2000s-)

Kuznetsian tension: Strong Kuznetsian tension: Ambiguous Kuznetsian tension: Weak (‘benign’)

Period II (mid-1970s-mid1990s)

Weak Strong Growth-enhancing structural transformation Inequality Increasing Stable or declining

KEY FINDINGS ON THE LATEST PERIOD

• Structural transformation losing dynamism
• Weak growth in manufacturing & high value-added services
• Recent increase in investment to strengthen ‘fundamentals’ (e.g. infra.): Positive but far from enough
• Selective industrial policies & SOE-led high-tech. manufacturing development: Require more attention
• Questionable record on inclusive growth
• Will be close to eradicating extreme poverty by 2030, but poverty rates at higher thresholds are still

very high & inequality is close to the post-independence period’s peak

• Recent increase in investment on targeted social policies: Positive but far from enough
• Challenges
• Strengthening fiscal revenue and expenditure / sourcing domestic financial resources for development
• Legitimising state’s long-term investment and industrial policies
• Making social policies progressive

ECONOMIC HISTORY (1/2): STRUCTURAL TRANSFORMATION

5 10 15 20 25 30 35 40 45 50 1880 1890 1900 1910 1920 1930 1940 1950 1960 Agriculture etc. Manufacturing Non manufacturing industry Services (% of value added) 20 40 60 80 100 1928 1938 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 Others 6 other main natural resources Sugar Rubber Petroleum & products (% of exports) Source: Van der Eng, P. (2010). ‘The Sources of Long-Term Economic Growth in Indonesia, 1880–2008’. Explorations in Economic History, 47(2010): 294–309. Note: 6 other main natural resources = copra, tea, tobacco, tin, coffee, palm oil Source: Thomas, T., and J. Panglaykim (1966). ‘Indonesian Exports: Performance and Prospects 1950–1970, Part I’. Bulletin of Indonesian Economic Studies, 2(5): 71–102. 10 20 30 40 50 60 70 80 90 100 1930 1961 Services (including utilities) Non manufacturing industry Manufacturing Agriculture etc. (% of employment) Source: Jones, G. (1966). ‘The Growth and Changing Structure of the Indonesian Labour Force, 1930–81’. Bulletin of Indonesian Economic Studies, 2(4): 50–74.

ECONOMIC HISTORY (2/2): QUALITY OF LIFE & INEQUALITY

10 12 14 16 18 20 22 1920 1925 1930 1935 (Top 1% income share) 0,3 0,4 0,5 0,6 1925 1932 1939 1942 1953 1959 (Expenditure Gini coefficients) Source: Leigh, A., and P. Van der Eng (2009). ‘Inequality in Indonesia: What Can We Learn from Top Incomes?’. Journal of Public Economics, 93(2009): 209–212. Source: Van Leeuwen, B., and P. Földvári (2016). ‘The Development of Inequality and Poverty in Indonesia, 1932–2008’. Bulletin of Indonesian Economic Studies, 52(3): 379–402. 20 40 60 80 100 120 Life expectancy (years) Per capita GDP (2000 price, Rupiah) Per capita cereals and roots intake (kg per year) (1955/59, 1936/40 = 100) Source: Booth, A. (2016). Economic Change in Modern Indonesia: Colonial and Post-Colonial Comparisons. Cambridge: Cambridge University Press.

TRENDS IN ST (1/4): VALUE ADDED

10 20 30 40 50 1960 1970 1980 1990 2000 2010

Industry Services Agriculture etc.

(% of value added) 5 10 15 20 25 30 35

1960 2012 Mining & quarrying EGW Construction Manufacturing

(% of value added) 5 10 15 20 25 30 35

1960 2012 THR TSC FIRB Government services

CSP

(% of value added) Notes: (i) EGW = electricity, gas, water supply; THR = wholesale and retail trade, hotels, restaurants; TSC = transport, storage, communication; FIRB = finance, insurance, real estate, business services; CSP = community, social, personal services. Source: Author’s illustration based on GGDC 10-Sector Database.

TRENDS IN ST (2/4): TRADE

Source: Author’s illustration based on World Bank World Development Indicators. 10 20 30 40 50 60 1965 1975 1985 1995 2005 2015

Exports Imports

(% of GDP) 10 20 30 40 50 60 70 80 90 (% of exports)

Agricultural raw materials Food Ores & metals 1967 2015 Fuels Manufac- tures

10 20 30 40 50 60 70 80 90 (% of imports)

Agricultural raw materials Food Ores & metals 1967 2015 Fuels Manufac- tures

TRENDS IN ST (3/4): EMPLOYMENT

10 20 30 40 50 60 70 1970 1975 1980 1985 1990 1995 2000 2005 2010 (% of employment)

Industry Services Agriculture etc.

5 10 15 20 25 (% of employment)

1971 2012 Manufacturing Mining & quarrying Construction EGW

5 10 15 20 25

1971 2012 THR Government services FIRB TSC CSP

(% of employment) Notes: (i) EGW = electricity, gas, water supply; THR = wholesale and retail trade, hotels, restaurants; TSC = transport, storage, communication; FIRB = finance, insurance, real estate, business services; CSP = community, social, personal services. Source: Author’s illustration based on GGDC 10-Sector Database.

TRENDS IN ST (4/4): LABOUR PRODUCTIVITY

• 1

1 2 2 4 6 8 10 12 14 Employment share (%) Ratio of sectoral productivity to total productivity (log)

THR TSC FIRB Government services CSP Mining & quarrying Manufacturing EGW Construction

• 1

1 2 2 4 6 8 10 12 14 16 18 Employment share (%) Ratio of sectoral productivity to total productivity (log)

THR TSC FIRB Government services CSP Mining & quarrying Manufacturing EGW Construction

• 1

1 2 3 2 4 6 8 10 12 14 16 18 20 22 Employment share (%) Ratio of sectoral productivity to total productivity (log)

THR TSC FIRB Government services CSP Mining & quarrying Manufacturing EGW Construction

Notes: (i) EGW = electricity, gas, water supply; THR = wholesale and retail trade, hotels, restaurants; TSC = transport, storage, communication; FIRB = finance, insurance, real estate, business services; CSP = community, social, personal services. (ii) Sectors that experienced a simultaneous rise in employment share and relative productivity are coloured red. Source: Author’s illustration based on GGDC 10-Sector Database.

1973–1986 (ISI) 1986–1996 (Deregulation) 1999–2012 (Post-crisis)

TRENDS IN IG (1/4): INEQUALITY

32 34 36 38 40 42 44 46 48 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 Net income Gross income Consumption

• Poly. (Net income)
• Poly. (Gross income)
• Poly. (Consumption)

Gini coefficient Source: Author’s illustration based on UNU-WIDER WIID

TRENDS IN IG (2/4): POVERTY RATE

20 40 60 80 100 1984 1989 1994 1999 2004 2009 2014 Headcount ($1.9) Headcount ($3.1) Headcount ($10.0)

• Poly. (Headcount ($1.9))
• Poly. (Headcount ($3.1))
• Poly. (Headcount ($10.0))

(%) Source: Author’s illustration based on World Bank, PovcalNet.

TRENDS IN IG (3/4): GROWTH ELASTICITIES OF POVERTY

Source: Author’s illustration based on World Bank PovcalNet and World Bank World Development Indicators

• 2,5
• 2,0
• 1,5
• 1,0
• 0,5

0,0 %point change ($1.9) %point change ($3.1) % change ($1.9) % change ($3.1) %point change ($1.9) %point change ($3.1) % change ($1.9) % change ($3.1) GDP growth GDP per capita growth 1987-1996 2004-2013

TRENDS IN IG (4/4): FORMAL/INFORMAL EMPLOYMENT

Notes: (i) Simplified definition of formal employment is used. Formal workers are defined as employers and employees in the agricultural sector and employers, employees, and self-employed with temporary workers in the non-agricultural sector. Informal workers are defined as family workers, self-employed, and self-employed with temporary workers in the agricultural sector and family workers and self-employed in the non-agricultural sector. From 2001, a new category of ‘casual workers’ was added in the survey and these workers in both agricultural and non-agricultural sectors are classified as informal workers. (ii) Data before and after 2001 are not directly comparable because surveys in these two periods use different categories. (iii) Data for 2011–2013 are backtracked data and data before and after this period are not directly comparable because of the changes in the survey methodology. (iv) There is no data for 1995. (v) Surveys were conducted bi-annually from 2005. August survey data are used for the period 2005–2017. Source: Badan Pusat Statistik Survei Angkatan Kerja Nasional, Statistics Indonesia

7 7 6 7 7 6 6 6 6 7 7 4 4 3 3 4 3 3 3 4 3 4 4 4 4 4 4 3 10 10 11 11 12 15 14 15 13 14 14 13 13 12 12 13 12 12 12 12 12 14 15 14 14 14 14 15 17 17 18 19 20 21 23 24 22 22 21 21 20 20 21 20 22 22 23 23 25 27 27 28 28 29 31 31 49 48 47 46 43 39 37 35 38 36 39 40 41 43 40 40 39 38 37 36 35 33 31 31 30 29 28 26 3 3 3 4 4 4 4 4 4 4 3 5 6 6 6 6 7 7 7 7 8 7 7 6 7 7 8 8 14 13 14 13 14 14 15 17 16 17 16 17 17 16 18 17 18 18 18 19 17 16 16 17 17 16 15 17

10 20 30 40 50 60 70 80 90 100 1989 1994 1999 2004 2009 2014 Agricultural formal Industry formal Services formal Agricultural informal Industry informal Services informal (%) Old category New category

7 7 6 7 7 6 6 6 6 7 7 4 4 3 3 4 3 3 3 4 3 4 4 4 4 4 4 3 15 15 16 16 17 18 20 20 19 19 18 18 17 16 18 17 19 19 19 20 22 23 23 23 23 24 26 26 12 13 14 14 15 18 17 18 15 16 17 17 16 15 15 16 15 16 15 15 15 18 19 19 19 19 19 20 49 48 47 46 43 39 37 35 38 36 39 40 41 43 40 40 39 38 37 36 35 33 31 31 30 29 28 26 12 12 12 12 12 12 13 14 14 14 14 14 13 13 14 13 13 14 14 15 14 13 13 14 14 14 13 14 5 5 5 5 6 6 6 7 6 7 6 8 9 9 10 10 11 10 11 11 11 10 10 9 9 10 10 10

10 20 30 40 50 60 70 80 90 100 1989 1994 1999 2004 2009 2014 Agricultural formal LPNA formal HPNA formal Agricultural informal LPNA informal HPNA informal (%) Old category New category

POLICIES (1/2): ST (2010S)

• Selective trade and investment protectionism
• 2009 Mining law
• 2014 Industry law
• Selective liberalisation
• 16 sets of stimulus packages between September 2015 and November 2018
• State enterprise-led development projects
• Infrastructure development
• Nationalisation in mining
• High-technology manufacturing

POLICIES (2/2): IG (2010S)

10 20 30 40 50 60 2005-2009 2010-2014 2015-2016 Health insurance for the poor Subsidized rice Cash transfer for poor and at risk students Conditional cash transfer Unconditional cash transfer Others (Trillion rupiah, real, 2010 prices, annual average) Source: World Bank (2017). Indonesia Social Assistance Public Expenditure Review Update: Towards a Comprehensive, Integrated, and Effective Social Assistance System in Indonesia. Washington DC: World Bank.

POLITICAL ECONOMY

Indonesia 10 20 30 40 50 60 6 7 8 9 10 11 12 Government revenue (% of GDP) Ln (GDP per capita) Indonesia 10 20 30 40 50 60 6 7 8 9 10 11 12 Government expenditure (% of GDP) Ln (GDP per capita)

Libya: (8.5, 94.8)

Note: 100 largest emerging and developing countries in terms of GDP in 2017 Source: Author’s illustration based on IMF World Economic Outlook Database

RECENT ST TREND AND CONCLUSION

Source: Statistics Indonesia 5 10 15 20 25 30 35 40 45 50 Agriculture Manufacturing NMI Services (% of employment) 2010 → 2017 5 10 15 20 25 30 35 40 45 50 Agriculture Manufacturing NMI Services (% of value added) 2010 → 2017