Realizing Indonesia’s Economic Potential ed. by Luis E. Breuer, Jaime Guajardo and Tidiane Kinda (review)

It is always a difficult task to write a book on the Indonesian economy, given its sheer size and complexity. Realizing Indonesia’s Economic Potential aims to tackle this challenge. It tries to provide a comprehensive macroeconomic analysis to capture the intricacy of Southeast Asia’s largest economy.

Through its thirteen chapters, the book identifies the structural constraints preventing the country from growing faster and offers policy suggestions that could help the economy realize its hidden growth potential. Although many factors determine a country’s overall growth rate, the authors try to narrow down the analyses to specific aspects that are of particular interest to the International Monetary Fund (IMF) – issues related to fiscal and monetary policy. In fact, all chapters, except the second, have been authored/co-authored by IMF staff members.

The book is comprised of five main parts. The first part includes two chapters that provide a broad overview of the entire edited volume, a brief discussion on important trends that could transform the economy, and a general assessment of how Indonesia has transformed since the Asian Financial Crisis (AFC) of 1997. The second part focuses on important structural reforms that could boost the nation’s potential growth (Chapter 3), paying significant attention to the need to tackle issues pertaining to the prevalent infrastructure gap (Chapter 4). The third part covers public finance and looks at how fiscal policy could be used to support inclusive growth more effectively (Chapters 5 and 6). In the fourth part, the authors discuss cross-border trade and finance. The four constituent chapters highlight how domestic growth has been affected by spillovers from the global economy (Chapters 7 and 8), the need to diversify Indonesia’s merchandise exports (Chapter 9), and the importance of improved management of the country’s capital flows (Chapter 10). The final part evaluates the monetary and financial policy framework, specifically drawing the reader’s attention to financial deepening and stability.

It is important to note that this is not the first review of the IMF publication. Stephen Grenville (2019) and Fredrik Sjöholm (2019) have drafted insightful commentaries on the book, and this review tries to complement their views.

The book is framed under a rather optimistic scenario for the global growth trajectory. Several chapters offer suggestions on how Indonesia could achieve a higher growth rate—close to the pre-AFC level of 7 per cent, instead of the current 5 per cent. For instance, in Chapter 3, Jongsoon Shin claims that a higher rate (1 percentage point greater than the baseline growth rate) can be achieved by structural reforms in infrastructure, regulations, and human capital (p. 49). Further, in Chapter 8, Mitali Das argues that increased exposure to economic and financial developments taking place in other parts of the world could open opportunities for Indonesia, which stands to benefit from the diffusion of technological advances and productivity-enhancing spillovers. This, together with structural supply-side policies, could help the country raise its growth potential (p. 181). Then, Heedon Kang, in Chapter 11, contends that financial development (in the form of advancing financial deepening and inclusion) is also critical for boosting government efforts to develop infrastructure and human capital (p. 229). In general, most authors believe that Indonesia has been performing below its potential and a host of structural reforms are the need of the hour.

Some readers might question the assumptions behind the growth projections in the book. It seems that the authors believe that a 7 per cent growth rate (the target that President Joko “Jokowi” Widodo set during his first term) is achievable if the government is able to carry out the required structural reforms. While the book describes many conditions before Indonesia can achieve such a high expansion rate, it forgets to mention that, empirically, economic growth tends to be slower when a country reaches high-income status. On average, upper-middle-income countries with per capita...