Todung Mulya Lubis, Senior Partner, Lubis Santosa & Maramis, on the challenges of sustainable economic growth

Amidst the global economic uncertainties of late 2011, Indonesia’s fundamentals are relatively sound. Its foreign currency reserves had surged to $113.9bn as of October 2011, the Jakarta Composite Index is becoming more robust, the rupiah is fairly stable and exports are soaring. The economy registered growth of 6.5% during the third quarter of 2011, and it has been comparatively undisturbed by the economic turbulence in the EU and US. These are all key indicators of the country’s economic health, and this list could easily be longer. Finally, Indonesia has recently played host to a number of international economic conferences, perhaps a signal of the world’s endorsement of the country.

The president’s economic team that has resulted from the recent cabinet reshuffling is also auspicious and will provide strong economic leadership throughout the second half of the administration’s term. Now the important question facing the country is whether or not the recent economic growth is sustainable. One of Indonesia’s defining features is that its economy is driven by the export of its natural resources. The problem here is two-fold. First, some natural resources are non-renewable, which tells us that an economy relying on them is an unsustainable economy. Second, many of these non-renewable commodities are exported in raw form.

While Indonesian coal, gold and nickel command a handsome price on the market, they are exported as unprocessed goods, which is a loss to our economy. To maximise the value of these commodities, the country needs a well-established processing industry. This would support economic growth more than raw materials exports, as well as have a trickle-down effect for the wider society. That is, more Indonesians would be able to benefit from the country’s significant natural resources.

Therefore, to ensure sustainable growth in the future, Indonesia must move beyond an economy that is driven by natural resources. Unfortunately, the country’s economy is also characterised by a lack of infrastructure, which is necessary for such a fundamental reorientation of the economy.

A lack in infrastructure has taken, and will continue to take, its toll on the country’s competitiveness. It also hampers the distribution of the fruits of economic development, which hurts the buying power of the society overall. If appropriate infrastructure were in place, per capita income would increase and wages would improve, enabling people to increase their savings. Robust domestic savings help reduce a country’s dependency on foreign investment.

Another challenge for the country to ensure sustainable economic growth is its human development. The UN Development Programme’s Human Development Index (HDI) for 2011 ranks Indonesia 124 out of 187 countries, with a score of 0.617. Between 1980 and 2011, Indonesia’s HDI value rose from 0.423 to 0.617, an increase of 45.9%. While this is a noteworthy improvement, it is not significant enough for the country to stay on par with its competitors. If Indonesia is to ensure a more sustainable economy, it must rely more on the strength of its human, not natural, resources.

The new economic team is promising. Now the onus is on the president’s legal team to prove that it can work hand-in-hand with the economic team. However, so far the legal team seems to be largely exercising its traditional roles, such as fighting corruption and money laundering. While these tasks are of utmost importance, no less crucial is the creation of a legal environment that boosts economic attractiveness while ensuring justice for the public. For businesses, both domestic and international, Indonesia’s lack of regulatory integration, legal certainty and clarity, and bureaucracy expediency are among the most common complaints about the country. These are among the challenges to address if the current economic growth is to be sustained beyond the term of the present administration.

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Todung Mulya Lubis

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This article is from the Legal Framework chapter of The Report: Indonesia 2012. Explore other chapters from this report.