Academic journal article Journal of Southeast Asian Economies

The Indonesian Economy Amidst the Global Crisis: Good Policy and Good Luck

Academic journal article Journal of Southeast Asian Economies

The Indonesian Economy Amidst the Global Crisis: Good Policy and Good Luck

Article excerpt

I. Introduction

After experiencing high growth for more than four years, the world economy was hit by a very sharp blow in September 2008. World economic growth, which stood at 5.2 per cent in 2007, plummeted to 3 per cent in 2008, and is projected to fall even further to -1.3 per cent in 2009. Consistent with this, the United States also experienced a sharp fall from 2.1 per cent (2007) to 0.4 per cent (2008) and is projected to experience negative growth of -2.9 per cent in 2009. Meanwhile Europe dropped from 2.7 per cent (2007) to 0.7 per cent (2008) and is projected to experience a very sharp contraction of -4.2 per cent in 2009. In line with global contractions and tight liquidity on global markets, the volume of world trade then narrowed. If the volume of world trade continues to narrow, exports of all countries will experience a slowdown, not only Indonesia. As a result of this, economies in emerging markets and developing economies will experience a significant decline, including Indonesia. Economic growth in emerging markets is projected to fall from 6 per cent in 2008 to 1.5 per cent in 2009 (IMF 2009).

Up until now, there has in fact been the idea that there will be "decoupling"; economic growth in Asia will continue to be strong, whereas the United States and Europe will weaken. These authors are however doubtful of the decoupling argument. We are of the opinion that up until now the Asian economies have in fact still been able to grow because the integration of production networks among the Asian countries is very strong. Inter-industry trade in East Asia has caused the effects on Asia to be relatively limited. Many countries in Southeast Asia, including Indonesia for example, export raw materials and intermediate goods to China, Korea and Japan, which are production network centres. In practice, the effects on the Indonesian economy, at least until Q2 2008, was still relatively limited. However, it should not be forgotten that the end-buyers of goods manufactured by production networks in the Asian countries are in fact developed countries, including the United States and Europe. Because of this, if the United States and Europe weaken, the effects will be transmitted to the Asian countries. Also because the Asian countries are integrated in production networks, the effects will take place more quickly. This has been proven with the slowing down in the Asian economies in Q3 2009. For Indonesia itself, the effects of the global financial crisis against the Indonesian economy were seen in Q3 and Q4 2008.

The effects of the global economic crisis on the Indonesian economy came predominantly through trade channels. This symptom had already begun to be seen since Q4 2008. The decline in exports was also reflected in the slowing down of growth in the Indonesian economy. In Q4 2008, economic growth slowed down to 5.2 per cent year-on-year. Compare this to 6.4 per cent growth in Q2 and Q3 2008. Even so, overall Indonesian economic growth still amounted to 6.1 per cent--the highest growth in Asia after China and India. The reason why Indonesia's performance was relatively good was because the Indonesian economy was relatively insulated against the weakening effects of the global economy. The share of Indonesia's total exports against GDP amounted to 29 per cent. This was much lower when compared to other countries like Singapore (234 per cent), Taiwan (74 per cent) and Korea (45 per cent). (1)

From the financial side, the effects from the global financial crisis against the Indonesia economy were also reflected from several indicators such as the weakening rate of exchange. The exchange rate value of the rupiah fell by as much as 30 per cent. For the stock market, in 2008, the Indonesia Stock Market Index experienced a decline of as much as 50 per cent.

However, in Q3 2009, signs of improvements in the world economy were seen. This was good for developed countries, emerging markets and the entire world. …

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