Comment on “Indonesian Growth Dynamics”

• DOI: http://doi.org/10.1111/j.1748-3131.2011.01185.x
• Published date: 01 June 2011
• Date: 01 June 2011
• Author: Yuri SATO

Comment on “Indonesian Growth Dynamics”

Yuri SATO†

Institute of Developing Economies

JEL codes G01, O53

The authors Basri and Hill (2011) are the leading researchers on Indonesian economy, and

the former has been committed to policymaking as the high-level brains of the Govern-

ment of Indonesia. Reflecting these backgrounds, the paper provides a broad-based and

balanced view on Indonesian dynamics. Atthe same time it offers a useful rev iew of recent

Indonesian studies.

One of the key issues the paper raises is the decline in manufacturing growth. This

phenomenon would be more apparent when the manufacturing performance is observed

in the longer term and in relation to changeover of political systems (see Table 1).

Throughout Soeharto’s authoritarian rule, the manufacturing sector had been a “driver”

of growth, with its average growth rate of 11.6%, 4.6 points higher than the average gross

domestic product (GDP) growth. In the transition period, the levels of both GDP and

manufacturing growth declined, but the latter was still 1.1 points higher than the former.

However,in the per iod of democracy, while the GDP growth picked up above 6% after a

decade, the manufacturing growth has continuously declined to the level of 1.8 points

lower than the GDP growth average. The manufacturing sector has obviously turned into

a “dampener” on growth.aepr_1185108..109

Thus, in the Indonesian context, the deindustrialization concern has emerged with

democratization, in the sense that there is no longer top-down industrialization with the

firm supply-side control. What matters, however, is not the political system but policy,

considering that some democratic countries like India and Thailand keep the manufac-

turing sector to be a growth driver. As a matter of policy, the question is whether

Indonesia’s national leaders are still eager to pursue industrialization, or they are thinking

the shift from manufacturing to agriculture, mining, and service sectors as a more appro-

priate development path for Indonesia.

The low manufacturing performance is related to the Dutch disease challenge, which

the paper also touches upon. A symptom of the Dutch disease, caused mainly by the

current high prices of coals and crude palm oils (not oil and gas), is already observable

(Basri, 2010), though it seems that most researchers as well as the Government do not

seriously recognize Indonesia as suffering from the disease. While many advanced and

emerging countries are seeking weaker currencies, Indonesian people – politicians, most

economists, the mass media, and so on – seem to prefer to see a stronger rupiah (option

1 in the paper). However, the continuing appreciation of the rupiah, without taking

†Correspondence: Yuri Sato, Institute of Developing Economies, 3-2-2 Wakaba, Mihama-ku,

Chiba-shi, Chiba 261-8545 Japan. Email: yurisato@ide.go.jp

doi: 10.1111/j.1748-3131.2011.01185.x Asian Economic Policy Review (2011) 6, 108–109

© 2011 The Author

Asian Economic Policy Review © 2011 Japan Center for Economic Research

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