Indonesia Today: Challenges of History

4 THE ECONOMY IN 2000: STILL FLAT ON ITS BACK?

Indonesia’s GDP grew moderately well in 2000, confirming that the country’s economic recovery is gaining momentum. As a consequence, the government raised its official forecast of economic growth for the whole of 2000 from 3–4% to 4–5%. Although its recovery has been slower than that of other countries affected by the Asian crisis, Indonesia’s most recent growth rates are similar to those reported for Thailand. Economic recovery in 2000 was led by a rebound in consumer spending and export growth. Retail, auto and motorcycle sales all grew at double-digit rates. Non-oil exports reached record levels and were more than 26% higher than in 1999. In fact, manufacturing exports grew faster in Indonesia than in most other Asian countries in 2000. New investments, however, remained low, and the restarting of foreign and domestic investment will be critical for sustaining economic recovery over the medium term and creating jobs for Indonesians. Indonesia’s sluggish investment rates are probably due mainly to delays in restructuring corporate debt and the fragile banking sector. Continuing concerns about poor security, the uncertain political situation and the rule of law may also be factors deterring new investment. REAL SECTOR RECOVERY After the massive decline in real GDP – which the Central Statistics Agency (BPS) estimated to be 13.7% lower in 1998 than in 1997 – positive economic growth has been sustained since the fourth quarter of 1999. The economy grew by 5.1% in the third quarter of 2000, up from 4.5% in the second quarter and 4.0% in the first quarter. Based on these trends, growth for the entire year should be about 5.0%.1 A notable characteristic of the recovery is that those sectors with large tradable components – for example manufacturing – 4 THE ECONOMY IN 2000: STILL FLAT ON ITS BACK? Kelly Bird* 45 AA/Part1 23/3/01 6:24 PM Page 45 did not contract as much as non-tradable sectors and have more or less recovered to their pre-crisis levels (Table 4.1). For instance, levels of agricultural and mining output were close to pre-crisis levels and the manufacturing sector stood at 96.2% of its 1997 level. On the other hand, levels of output of the construction and commerce sectors in the first three quarters of 2000 were about 67% and 87% respectively of 1997 levels, although the pace of recovery in these sectors was increasing. This asymmetric response is to be expected given the substantial real depreciation of the rupiah, which by the end of November 2000 was 50% lower than in June 1997. The steep depreciation in the rupiah has made it more profitable to produce tradable than nontradable goods. Figure 4.1 documents Indonesia’s progress relative to the three other countries most seriously affected by the currency crisis. Indonesia had by far the largest fall in GDP in 1998 and was the slowest to recover in 1999. However , its recent economic growth rates are similar to those reported for Thailand , which appear to have settled at around the 5% rate. In contrast, Korea and Malaysia have made rapid recoveries and their real GDP rates surpassed pre-crisis levels well before the first quarter of 2000. 46 KELLY BIRD 1997 1998 1999 2000 -20 -15 -10 -5 0 5 10 15 Malaysia Thailand Korea Indonesia FIGURE 4.1 Regional Economic Growth Rates, 1997(Q1)–2000(Q3) (year-on-year, %) Source: National Income Accounts. AA/Part1 23/3/01 6:24 PM Page 46 THE ECONOMY IN 2000: STILL FLAT ON ITS BACK? 47 TABLE 4.1 GDP Relative to Pre-crisis Levels Sector 1st Three Quarters 1st Three Quarters 1st Three Quarters 1998 Relative to 1999 Relative to 2000 Relative to 1st Three Quarters 1st Three Quarters 1st Three Quarters 1997 1997 1997 Production Agriculture 96.8 99.5 98.4 Mining 95.8 96.2 98.9 Manufacturing 90.3 91.1 96.2 Oil 101.9 109.2 112.7 Non-oil 89.0 89.1 94.4 Agro-processing 105.3 110.0 109.6 Textiles, footwear & leather products 85.3 83.9 90.4 Wood products 77.0 61.8 90.5 Paper & printing 94.1 96.4 101.7 Fertilisers, chemicals 79.3 88.5 97.8 Non-metallic products 67.7 69.3 76.6 Iron & steel 76.2 69.2 73.9 Machinery 49.8 36.1 88.9...