Jakarta. Author photo.
As Jokowi settles in for his second term in office he is being welcomed by the throb of controversy (mainly of his own making) including his decision to relocate the capital, gut the KPK and staff his new cabinet with elite insiders and political bosses. On the economic front, detractors are noting that the economy is flagging and has failed to boost exports even as the US-China trade war could have created opportunities for new global value chains anchored by Indonesian manufacturers. Revenue from tax collection has apparently not reached targets, and there is constant buzz about unsustainable debt and the dominance of the state-owned sector. So, as we prepare for another five years of Jokowinomics I thought I would briefly tackle 4 persistent claims about the Indonesian economy and assess them, at least based on my analysis and interpretation of the data.
Economic Growth is Flagging
Well, this is true in an absolute sense. A recent report by the World Bank lowered Indonesia’s growth forecast from 5.1% to 4.9% for the year, citing the trade war and economic slow-downs in China and Europe as factors. Analysts are worried that if growth continues to slow, it could spark capital flight and drive down the value of the rupiah. That is certainly one possible outcome, but how you interpret these GDP figures depends quite a bit on your perspective. GDP growth of 4.9% is not as a good as it could be, but it’s still quite high relative to virtually every other economy in the world.
Growth has been stuck at around 5% for Jokowi’s entire first term, buoyed by household consumption and fixed capital formation, so this is nothing new. There is still, in my opinion, a lot of slack in Indonesia’s economy and depending on what kind of reforms and policies come to define Jokowinomics 2.0 it could juice growth more than expected or at least keep it from shrinking too steeply. Moreover while capital flight is a perennial risk, Indonesia weathered the threat of capital outflows and currency depreciation at the end of 2018 much better than other emerging markets with large current account deficits like Brazil. This was largely a function of Indonesia’s sounder economic fundamentals, prudent monetary policies and attractive rates of return on corporate and public debt which will probably keep investors sticking around even if growth contracts by a few degrees.
Official Economic Statistics Have Been Fudged
Bloomberg reported this week that some analysts are casting doubts on Indonesia’s suspiciously steady GDP figures. This is kind of a silly argument because, well, OF COURSE they are not accurate! Aggregate economic metrics almost never are, and in emerging economies with huge informal sectors, poor record-keeping, inconsistent tax enforcement and so on, we can be sure that these GDP figures are not all that precise. But this is nothing new. In academia there has long existed an ideological divide between micro- and macro-economists, because people doing micro work contend that macro-level data like GDP is not accurate enough to give you unbiased estimates. Perhaps I am naive, but I don’t really think BPS is deliberately fudging the statistics CCP-style.
I think you just need to always take GDP figures with a grain of salt and understand they are estimates that give you a general idea of macro-economic performance, but do not actually add up all the productive activity of an entire economy. This is also why the difference between 4.9% and 5.1% growth shouldn’t be a cause for panic - the estimates aren’t necessarily as precise as we might think they are. BPS itself is quite up-front about the fallibility of their own figures. If you check their GDP stats on the website, the latest figures will almost always be accompanied by a disclaimer that they are “very, very, very preliminary.” And I didn’t make that up. They themselves used 3 “verys” in one dataset I was looking at, which suggests they are aware of the inherent flaws in aggregate macro data.
Unsustainable Debt
Debt is one of Indonesia’s greatest bogey-men. And for good reason. Running up large foreign debts crashed the economy in the mid 1960s, and again in the 1990s. All emerging markets with volatile currencies must be very wary of how they take on debt, especially dollar-denominated debt. And double especially if they are running current account deficits, like Indonesia. The concern about flagging GDP figures is it will spark capital flight, making servicing existing debt exponentially more expensive, and plunge the economy into another crisis.
Yet debt is not, in and of itself, a poison pill. If capital inflows are being invested in productive purposes - building infrastructure, for instance - then the reward can very much be worth the risk. And critically, Indonesia learned from its past two experiences being burned by foreign creditors. There is now a legal cap on how much the government can borrow to finance a deficit in any year - that figure is 3% of GDP. This means Indonesia’s total public debt is around 30% of GDP - $300 billion or so. That is really quite modest by emerging market standards.
The other, more subtle argument, is that SOEs have been taking on huge amounts of debt. This doesn’t show up as “official” government debt, but is implicitly guaranteed by the state anyway. This is a more valid criticism, but I’ve looked at the balance sheets of major SOEs like PLN, Angkasa Pura, Jasa Marga and Hutama Karya and much of their debt is denominated in rupiah and/or they enjoy healthy cashflows from which to service increasing financial liabilities. Is it possible that situation will change and this will pose a more serious and immediate threat to the systemic health of Indonesia’s economy? Certainly. But in my opinion we are not at, or really very near, that point yet.
Go-Jek Is Not All It’s Cracked Up to Be
Finally, I just want to say a word about Go-Jek, the consumer-facing ride-hailing, food delivery and all-purpose lifestyle and digital wallet app that has taken Indonesia by storm. I haven’t done the math, but Go-Jek is one of Indonesia’s major draws for FDI as billions of dollars have flooded into the company over the last few years. The company, which uses technology to match consumers with suppliers in a variety of sectors, has drastically reduced transaction costs in Indonesia’s traffic choked urban areas. I think we still need a bit more data before we can model it, but I am quite sure that part of the reason household consumption has been such a steady pillar of GDP growth over Jokowi’s first term is because Go-Jek has made it so much easier to, you know, consume things.
The main knock on the company is that, just like Uber, it uses its monopoly power to throttle down driver wages and creates exploitative working conditions. This absolutely heartbreaking story of a driver in Jakarta who got screwed by a customer has been held up as an example of such, and this story in The Conversation got a lot of traction about poor working conditions for drivers. It’s certainly not perfect. Ranking drivers according to the whims of customer feedback is problematic, and creating a system that incentivizes them to take as many orders as possible contributes to over-work.
But, the fact is that Go-Jek has created pretty decent-paying jobs for hundreds of thousands of drivers throughout the archipelago, while also reducing transaction costs and propping up household consumption. Lembaga Demografi at Universitas Indonesia conducted a detailed survey of drivers and businesses in several major cities including Jakarta, Medan, Denpasar and elsewhere and found that Go-Jek drivers almost always make well in excess of the local minimum wage. I spoke to a number of drivers in Jakarta and Yogyakarta who confirmed these findings - they all made a comfortable monthly living, though it often required they work up to 12 hours per day.
Now, you can quite reasonably argue that the minimum wage in Indonesia is not a good metric against which to measure driver earnings, because it is quite low. But this is a structural issue in Indonesia’s labor market due to lack of unionization or bargaining rights stemming from complex historical roots. It is not, in and of itself, a Go-Jek issue. Go-Jek drivers throughout Indonesia can earn 4 or 5 million a month which, while not great, is a decent wage by local standards and more than the minimum wage. There is certainly room for improvement - but it should be targeted at structural reforms of Indonesia’s labor market. Within the confines of the existing institutional structure, Go-Jek actually poses a pretty attractive option for drivers. And it has almost certainly helped keep economic growth from flagging further than it is.
So, as we prepare for another five years of Jokowinomics, I think we can all agree there are many areas that would benefit from reforms and there are many worrying signs and challenges related to rising illiberalism, inequality, corruption, the increasing influence of the state security apparatus, the return of the oligarchs, the erosion of checks and balances and accountability.
But hopefully we can dispense with these four “myths" and focus attention on discussing and working toward solutions for the things that really matter to Indonesia’s economic future.