Comment: Indonesia requires the right policies for tough times to increase its average growth

Unfortunately, high economic costs hamper these industries. In highly competitive, export-oriented manufacturing sectors, producers take prices from the global market; they usually cannot pass on high costs to consumers. As a result, profit margins can shrink, reducing incentives for innovation and further investment.

In contrast, Indonesia’s natural resource sectors, where the country is a global price-setter for some products, can pass on high costs to consumers, allowing for higher profit margins. Investors often shift from manufacturing to natural resources, a trend exacerbated by a recent boom in commodity prices. Unfortunately, the natural resource sector is capital intensive and does not create many jobs, which limits its ability to create middle class jobs.

OPPORTUNITY FOR STRONGER AND MORE INCLUSIVE GROWTH

Indonesia’s domestic market is large, but its purchasing power is limited. Therefore, Indonesia must become a global production center, like Vietnam. Encouraging FDI in export-oriented sectors is essential. Export earnings help avoid balance of payments pressures when profits are repatriated, reducing currency mismatches.

If Indonesia is to help drive economic growth without jeopardizing the stability of the rupiah, FDI must be channeled into export-oriented sectors. Like Vietnam, Indonesia should benefit from the relocation of China’s production bases to continue improving its investment climate.

Data shows, however, that Indonesia’s FDI/GDP ratio has declined from 2.8% in 2014 to 1.9% in 2022. This is one of the reasons why economic growth in Indonesia has remained around 5% since 2014.