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“Assessing Macroeconomic Developments in Indonesian”

By Rustan A.

(Researcher in PKP2A III LAN Samarinda)

As a developing country, Indonesia has faced many problems and uncontrolled

economic situations because of internal influence (worst management) and external effect.

Indonesia, in the era of President Soekarno -well known as “old order”- got economic

depression. Economic structure was in chaos with higher inflation rate and stagnant

production activities (particularly for export). The reverse of economic condition happened in

“new order” which controlled by President Soeharto. Indonesia could grow impressively

through the biggest contribution from agriculture and industry. Subsequently, Indonesia

slipped with economic declined around the year 1998-2007 because of monetary crisis that

occurred in almost countries in Asia. Fortunately, nowadays Indonesia slowly can improve

the economic growth that is signed by increasing GDP growth, minimizing inflation and

reducing unemployment rate.

Table 1. Indonesia Macroeconomic Conditions

Source: Central Bureau of Statistics

The first concern to analyze economic situation in wide-range is based on the three

variables (Blachard, 20091) namely, (1) Output - the level of the economy as a whole and its

rate of growth, (2) The inflation rate - the rate in which the average price of the goods in the

economy is increasing over time, and (3) The unemployment rate – the proportion of workers

in the economy who are not employed and are looking for jobs. The explanation about each

Macroeconomic indicator in the table above will be described in the following details:

1. GDP Growth Rate

GDP is always used to measure the economic progress of the country. Every country

tries to increase their GDP rate to improve their economy stabilization. Measuring production

growth over time, we use real GDP (constructed by constant prices). From the table, it can be

1 Blanchard, Oliver. 2009. Macroeconomics 5

th edition. Pearson International Edition.

Macro-Economic Variables

(On Average) 1951 - 1960 1961 - 1970 1971 - 1980 1981 - 1990 1991 - 1997 1998 - 2007 2008 2009 2010

Real GDP Growth (%) na 3,94 7,44 5,51 6,88 2,81 6,01 4,58 6,10

Inflation Rate (%) 18,29 194,02 16,78 8,00 8,52 15,33 11,06 2,78 6,96

Unemployment Rate (%) na na na 2,71 3,81 8,51 8,42 8,01 7,27

Year

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seen that real GDP growth moved 6,10 % fluctuatively last year. The movement of GDP is

affected by some events happened along that time.

Source: Central Bureau of Statistics

Remarks for GDP Growth (%) :

Year 1960-1973 using the base year 1960

Year 1973-1983 using the base year 1973

Year 1983-1993 using the base year 1983

Year 1993-2000 using the base year 1993

Year 2000-2004 using the base year 2000

- Period of 1961 – 1970

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At the initiation of Indonesian independence, there were huge chaos of social and politics

that directly affected economic structure. Indonesia economic only grew on average

3,94%, even in 1963 touched minus 2,24%, In addition, inflation rate on average touched

the highest point (194,02 %) that force dwellers lived in difficulties to fulfill their basic

needs. This condition occurred as the result of inadequacy production factors such as,

human resources with the level of entrepreneurship and management capability in high

quality, workforce with higher education/ skill, fund (especially to construct infrastructure

that needed for industry), technology, and government capacity to arrange the best plan

and strategy for national development (Tambunan, 20012)

- Period of 1971 – 1997

In this period, government concentrated to improve people welfare through economic

development by recovering economy, social, and politic situation. This plan was

successful and could increase economy rate of growth to 7, 44 % in 1971-1981, 5, 51 %

in 1981-1990; and 6, 88 % in 1990-1997 respectively. This triumph was achieved mainly

because great revenues from oil export when oil boom/ oil crises occurred. Besides that,

many economists argued that government could organize and put into action the series of

five years development plan or REPELITA in the right track, at least temporarily.

- Period of 1998 – 2007

Indonesia faced a big economic turbulence that trigger economic crisis. Indonesian

currency was pushed down with exchange value above 10.000 per US$. The GDP growth

in 1998 went down to minus 13, 31%, substantially lower than the average growth rate in

1960-1971. In this period Indonesia established reformation and economic stabilization

program strictly to raise the GDP growth rate.

- Period of 2008 – 2010

Indonesia GDP growth rate in 2008 increased to 6,01 %, then in the middle of global

crisis GDP growth declined to 4,58 % in 2009. This condition happened because there

was an increasing of oil price in international commerce. However, the GDP growth rate

recovered significantly to 6, 10 % in 2010, which means economic condition in this

period has grown. Monetary management and investment condition were quite good; also

inflation rate was not too high. In fact, Indonesia could reach inflation rate below 3 % in

2 Tambunan, Tulus. 2001. Indonesia Economic: Theory and empirical findings. Ghalia Indonesia Publishing

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2009 (most macroeconomists believe that the best rate of inflation is somewhere between

0 and 3 %) 3

Growth sources from aggregate demand side could be estimated by analyzing rate or

composition of GDP according to spending. The composition of GDP consists of household

consumption (C), investment (I), government spending (G), and net export (exports (E)

subtract imports (IM)). The rate of Indonesia aggregate demand can be seen from the figure

clearly.

Figure 1. The Rate of Real Growth of Aggregate Demand

Source: Central Bureau of Statistics

Overall trend, it can be clearly seen that the rate of growth of aggregate demand have

a tendency to decrease. The rate of household consumption (C) remained stable on average

5,35 %, government expenditure (G) still fluctuated, investment (I) showed a downward

trend to 8,50 %, meanwhile, exports (E) reached the lowest point in 2009 then rose rapidly to

14,92 % in 2010. Imports (IM) initially depicted a downward trend from 1961 to 2009 then

increased significantly in 2010.

Investment showed the highest rate in 1961-1970, 1981-1990, and 2008. However, in

1998-2007 because of economic crises investment declined to the lowest rate 1,48 %, as well

in 2009 which only rose to 3,30%. Consumption reached the lowest rate (7,88%) in 1971-

3 See Blanchard, 2009 (p.54)

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1980, and 5,34 % in 2008. Lastly, government spending showed the lowest rate in 1961-1970

which was 2,61 %, 2,76% in 1990-1997, and 0,29 % in 2010 respectively. Interestingly,

government spending grew positively to 4,65 % in 1998-2007, in which Indonesia suffered

from monetary crisis.

In 1998-2007 all component of aggregate demand went down (except for government

expenditure). Monetary crisis in that period has hit the whole component to the lowest point

rate. Afterwards, all composition recovered strongly. For exports and imports, overall trend

illustrated the growth rate of import still higher than exports.

In the last ten years (2000-2010), we could also see the role of each composition of

aggregate demand to GDP remained stable. Consumption still contributed the highest

proportion to GDP. The second highest proportion was exports, which means that Indonesia

got trade surplus (exports higher than imports). Investment still showed a stagnant proportion

to GDP; meanwhile government spending contributed the lowest proportion. It could be

concluded that Indonesian economic still depend on the movement of consumption and this

was quite relevant to defend from economic crises, rather than rely on exports like other

countries.

Figure 2. The Composition of Aggregate Demand with respect to the Construction of GDP

Source: Central Bureau of Statistics

Furthermore, we also can elaborate the contribution of industrial origin with respect to

GDP. In the last ten years, contribution from agriculture, livestock, forestry and fishery;

mining and quarrying; and manufacturing industry to GDP have a tendency to decline. In

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contrast, the other industrial origins increased consistently. The biggest contribution was

from manufacturing industry with average contribution around 27,4 %, and the second

biggest contribution were from trade, hotel, and restaurant; and from agriculture, livestock,

forestry, and fishery with average contribution about 16,7 %, and 14,5 % respectively.

Table 2. Contribution each Industrial Origin to GDP (%)

Industrial Origin 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Agriculture, livestock, forestry, and fishery 15,6 15,5 15,4 15,2 14,9 14,5 14,2 13,8 13,7 13,6 13,2

Mining and quarrying 12,1 11,7 11,3 10,6 9,7 9,4 9,1 8,7 8,3 8,3 8,1

Manufacturing industry

27,7

27,7

27,9

28,0

28,4

28,1

27,8

27,4

26,8

26,2

25,8

Electricity, gas, and water supply

0,6

0,6

0,7

0,7

0,7

0,7

0,7

0,7

0,7

0,8

0,8

Construction

5,5

5,6

5,6

5,7

5,8

5,9

6,1

6,2

6,3

6,4

6,5

Trade, hotel, and restaurant

16,2

16,2

16,2

16,3

16,4

16,8

16,9

17,3

17,5

16,9

17,3

Transport and communication

4,7

4,9

5,1

5,4

5,8

6,2

6,8

7,2

8,0

8,8

9,4

Finance, real estate, and business services

8,3

8,6

8,7

8,9

9,1

9,2

9,2

9,3

9,5

9,6

9,5

Services

9,3

9,3

9,2

9,2

9,2

9,2

9,2

9,3

9,3

9,4

9,4

Source: Central Bureau of Statistics

The lowest contribution to GDP was from electricity, gas, and water supply, about

0,6% to 0,8%. Fortunately, its proportion was bigger and bigger every year. Above all,

Government should give more attention to the sectors that contribution tend to decrease every

year, particularly to manufacturing industry, and agriculture, livestock, forestry and fishery.

2. Inflation Rate

In simple definition, inflation is an increasing of price generally and continually.

Inflation is happened because of the pressured from supply side (cost push inflation), demand

side (demand pull inflation), and the expectation of inflation4. Information about inflation is

very important, particularly for policy maker and firms, because it can affect income

distribution. On the other hand, inflation might influence the decision of firms to invest

because of the uncertainty in price.

As can be seen in the graph below, inflation rate at the beginning of independence of

Indonesia (1951-1960) remained stable at average 18,29%. However, started from 1961,

inflation rate increased dramatically above 100 % and reached the highest rate of inflation in

1966, which was 635,35 %. This condition depicted that price of goods and services

4 http://www.bi.go.id/web/id/Moneter/ Inflation /disagregation.htm

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increased dramatically; and it forced the government to work hard by providing economic

and food assistance to poor people.

In President Soeharto era, started in 1967 the inflation rate can be pushed to 16,78 %

in 1971–1980 and to 8,0 % in 1981-1990. Government had successfully stabilizing economic

condition by developing all sectors that gave higher impact to economy growth. Government

could cut and sustained the goods price to improve the domestic consumption. This era, we

called it “the golden era” of Indonesia.

Figure 3. The Change of Inflation Rate in Indonesia 1951-2010

(a)

(b)

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(c)

Remarks for Inflation Rate (%) :

Year 1951-1965 using the base year 1950

Year 1966-1978 using the base year (September 1966=100)

Year 1979-1989 using the base year (March 1977- April 1978=100)

Year 1990-1997 using the base year (March 1998- April 1989=100)

Year 1998-2003 using the base year 1996=100

Year 2004- May 2008 using the base year 2002=100

June 2008 and so on using the base year 2007=100

However, the average of inflation rate began to rise again in the period of 1990 to

2007, which was about 8,52 % to 15,33 % respectively. Afterwards, it went down to 11,06 %

in 2008 and 2,78% in 2009 (which was the lowest point of inflation rate), but increased again

in 2010 to 6,96 %. The stability in inflation is the first order for a sustainable economic

growth and indirectly will give a big impact to national prosperity5. The urgency to hold the

movement of inflation is based on the consideration that high and unstable inflation can cause

negative influence on socio-economic conditions of society.

3. Unemployment Rate

The unemployment rate is the ratio of the number of people who do not have a job but

are looking for one. This data is very important because it has a direct effect to the welfare of

the unemployed, and a signal that the economy may not be using some of its resources

efficiently6.

Figure 4. The Unemployment Rate for the Last 29 Years

5 http://www.bi.go.id/web/id/Moneter/Inflation/Introduction.htm

6 See Blanchard, 2009 (p.50)

Source: Central Bureau of Statistics

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Source: Central Bureau of Statistics The graph clearly illustrates that the unemployment rate remained stable from 1986 to

1993 at average 2,71 %. Afterwards, there was an upward trend in the period of 1994 until

2005 with average rate 6,99 %, and reached a peak in 2005 with unemployment rate about

10, 75%. From this point, the unemployment rate tended to decline slowly. In 2006 the rate

went down to 10,36 %, and in 2007 touched 9,43%. This trend continued in 2008 with the

unemployment rate decreased slightly to 8,42 %, then to 8,01% in 2009, and 7,27 % in 2010.

Decreasing number of unemployment rate reflects that government could provide more jobs

opportunities for people and it will also be related to their welfare growth rate.

Labor force in Indonesia is quite high, it is proven by the percentage between labors

forces with respect to population that above 46 % every year with participation rate

approximately 66 % per year constantly. This condition describe that Indonesia has many

productive workers (working-age) that standing up to fulfill the need in the labor market.

Comparing-with other countries, such as Japan and other developed countries, which have

negative growth of productive workers (majority of the population are elderly), the

companies employ workers with old ages because the limited of workers supply (productive

workers). Indeed, it threat Japan from the productivity side, and that is the reason why Japan

and other developed countries now are facing the fact to be “an aging nations”.

Figure 5. The Percentage of Labor Force to Population and Participation Rate

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Source: Central Bureau of Statistics

Labor force (economically active) consists of employment and unemployment. It can

be seen that on average 91,18 % of labor force were working, and the rest (on average) 9,70%

were unemployment in the last 10 years. It also depicts that the percentage of unemployment

tend to decline which means absorbing rate in labor market was high. However, government

still needs to provide and to open new job opportunities to reduce unemployment rate.

Additionally, it is government responsibility to facilitate and to train the labor force with

standard skills that companies expect.

4. Conclusion

From the details explanation above, it can be concluded:

- GDP growth in Indonesia continued to grow significantly, although a few years ago,

suffering from shock (negative growth of GDP). This is evidenced by increasing the real

value of Indonesia's GDP from year to year

- Domestic consumption and exports remains the largest contributor to Indonesia's GDP

and this needs to be improved, particularly for domestic consumption. As we know, high

domestic consumption is quite good in warding off the economic crisis because national

economy is not too dependent on the influence of foreign markets.

- Inflation rate in Indonesia despite fluctuating but it is still maintained and quite well

controlled by government to support good economic performance. This can be seen from

the exchange rate and prices of goods remained stable in recent years.

- Unemployment rate is still quite high, although there is a tendency to decline in the last 5

years. Work participation rate is still pretty good (above 60%), and the employment rate

has reached above 90% of the total labor force.