Will Indonesia succumb to a secular growth slow-down? If so, does it matter?

In an iconoclastic paper, Lant Pritchett and Larry Summers (2015), question the standard view that emerging economies in the Asian region that are currently growing rapidly are expected to do so for the next decade and beyond. The authors call this a case of ‘Asiaphoria’. Yet, they argue, an enduring feature of growth statistics is that there is ‘regression to the mean’, that is, over time even rapidly growing economies converge to mean rates that lie between two and four percent.  Hence, ‘abnormally rapid growth’ does not last too long. As countries grow richer, their growth rates slow down. One can also call this a case of secular growth slow-down. Summers and Pritchett argue that the most popular case of Asiaphoria is represented by China. Yet, China is not immune to the phenomenon of a secular growth slow-down – see Figure 1 below.

Figure 1

Source: Pritchett and Summers (2015)

What about other Asian economies, such as Indonesia? It had the misfortune of suffering from a historically unprecedented double-digit recession in the wake of the 1997-1998 Asian Financial Crisis. This was followed by decades of solid growth of just over 5 percent.

Despite such impressive achievements , there is a yearning among policymakers to grow at an even faster rate that is at par with the rapid growth era of the Suharto regime when, between 1980-1996, the economy grew at an average rate of seven percent. This aspiration is one of the reasons behind the current push for comprehensive structural and regulatory reforms. The expectation is that such reforms will allow the replication of the golden period of growth of the 1980s and mid-1990s – or at least a growth rate in the six percent range.

Figures 2 and 3 depict the average long run growth rate of Indonesia (5.5 percent) – measured over four decades – relative to seven selected economies from ASEAN and OECD and adds a new metric: the number of recessions per country over forty years. Indonesia’s long-run growth performance is commendable relative to regional and OECD norms. It is noteworthy that Indonesia had fewer recessions (two) than the selected OECD economies (five to seven) and some ASEAN economies (three).

Derived from IMF DataMapper

Derived from IMF DataMapper

The key issue is whether it is reasonable to expect that Indonesia should aspire to grow at even faster rates – six percent seems to be one of the aspirations – for the next decade and beyond.

Will Indonesia succumb to a secular growth slow-down? If so, does it matter? Figure 4, derived from long-run projections by the OECD (2018), suggest that aggregate growth rate will decline by one percentage point between now and 2030 – thus corroborating the notion of a (partial) regression to the mean.

Source: Derived from OECD (2018)

Optimists suggest that it is possible to avoid the phenomenon of secular growth slow-down by adopting an ambitious agenda of structural and regulatory reforms cutting across governance and education. In the case of Indonesia, such reforms are projected to increase the aggregate growth to a moderate degree – but not to the six percent threshold. It is, however, reassuring to note that, even in the case of a ‘business-as-usual’ scenario, Indonesia’s per capita GDP is expected to increase from 30.5 percent of OECD-wide per capita GDP to 48 percent by 2045 . At that point, Indonesia will be celebrating its 100th year as a sovereign nation.

This terse, but important, discourse on secular growth slow-down implies that one should avoid the temptation to succumb to ‘Asiaphoria’. The emphasis should be on the quality of growth rather than its quantity. This, in turn, entails an understanding of the employment and social dividends that accrue at a given rate of growth and how to enhance such dividends with an appropriate mix of policies.

How hard will the Indonesian economy be hit by the current pandemic?

Indonesia rose from the ruins of the 1997-1998 financial crisis in a commendable fashion. Economic recovery from a historically unprecedented double-digit recession was followed by decades of solid growth of just over 5 per cent (Figure 1) . This led to more than doubling of per capita GDP between 1998 (the nadir of the Asian Financial Crisis) and 2019 (Figure 2). Furthermore, Indonesia managed to consolidate democratic and decentralized governance in a country with an entrenched tradition of an authoritarian and centralized political system.

As data from the national statistical agency (BPS) show, poverty has come down significantly over the last decade and is now below 10 percent based on a national poverty line. Unemployment too has come down from double digits to a little over 5 per cent. Of course, there are persistent labour market challenges: a high degree of informality, a significant proportion of the population at risk of poverty, more than 20 percent of young Indonesians who are not in employment, education or training (NEET), and persistent gender disparities. Despite these challenges, one cannot overlook Indonesia’s achievements after the 1997/1998 Asian financial crisis.

Source IMF datamapper

The pernicious influence of the current global pandemic – COVID-19 – has not escaped Indonesia. It has affected both lives and livelihoods and is threatening the country’s sustained increase in living standards. So far, there has been more than 100,000 cases and nearly 5,000 deaths (Johns Hopkins University as at July 30).

The GDP growth projections for 2020 are universally negative, ranging from moderate to severe (Figure 3). This is the result of mobility restrictions and partial lockdowns to contain the pandemic with their inevitable dampening effect on economic activity.

It is worth noting that even the most pessimistic projection does not come close to the double digit recession of the late 1990s. Still, like many nations today, Indonesia faces an uncertain future as it seeks to cope with the malevolent consequences of the current global pandemic.

Alternative growth projections for Indonesia – ADB, IMF, OECD, World Bank. OECD has two scenarios: (a) pandemic is time-bound with a ‘single hit’; (b) pandemic has a second wave and economy suffers a ‘double hit’
Source: World Bank