Cost of doing business hurting Indonesia’s growth

Indonesia is one of Asia’s economic success stories, with the reforms of the reformasi period having laid strong foundations for protracted growth. The country’s economic success looks set to continue but the agenda of reform is far from complete, especially when it comes to competitiveness in South East Asia’s intense business environment

Estimates of Indonesia’s economic growth for 2014 vary widely depending on the source, but are all quite high. The Indonesian government estimates that economic growth in 2014 will be 6.0 per cent, driven mostly by increased spending for the general elections in mid-2014 and increased exports because of strong regional trade growth in Asia.

On the other hand Bank Indonesia, Indonesia’s central bank, estimates that growth in 2014 will range between 5.8 to 6.2 per cent, driven by an increase in credit expansion from 15.3 per cent in 2013 to 16.6 per cent in 2014, and stabilisation efforts to ensure that the current account deficit is more sustainable.

The World Bank has a lower estimate for 2014 than both the Indonesian government and Bank Indonesia, at only 5.3 per cent. This slower growth is attributed to the cumulative impact of the weakening in key commodity prices, a feature since 2011 that has led to a weakening of the current account by tightening domestic and international financing conditions and precipitating a challenging policy environment. At the same time external financing needs have increased, as reflected in the widening current account deficit.
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The International Monetary Fund (IMF) has a slightly higher estimate than the World Bank but, at 5.5 per cent, one that is still lower than the Indonesian government and Bank Indonesia figures. The IMF attributes this more pessimistic estimate to expectations of slower global growth arising from the Fed, America’s central bank, lowering its stimulus spending as America’s economic growth picks up.

The Asian Development Bank (ADB) estimates that Indonesia’s economic growth in 2014 will be 6.0 per cent, in line with the more optimistic estimates of the Indonesian government. This estimate is slightly lower than an earlier Bank forecast due to the Indonesian government’s policy measures to control inflation and lower its current account deficit.

Like the Indonesian government and the Asian Development Bank, the Organization of Economic Cooperation and Development (OECD) also estimates that Indonesia’s growth will be 6.0 per cent. It further expects that Indonesia will achieve this growth rate, its highest ever, over the 2014–2018 period. Indonesia’s economic growth is now the second highest in Asia after China, as India’s economic growth declined to 5.5 per cent in 2012 and a worsening outlook through 2013 and 2014.

Despite these projections, even the most pessimistic of which is still encouraging, Indonesia faces big challenges. Foremost is its competitiveness in respect to the ease of doing business, which the World Bank rates as poor. The World Bank’s 2014 Report on the Ease of Doing Business compares business regulations for domestic firms in 189 economies, including regulations for small- and medium-sized enterprises (SMEs). It reveals that although Indonesia has risen in the global rankings for the ease of doing business, the country (ranked 120), remains far behind its regional peers, including Singapore (which ranked number one, as in previous years), Malaysia (ranked six), Thailand (ranked 18), Brunei Darussalam (ranked 59), and Vietnam (ranked 99).

In a statement clarifying the Report, the World Bank’s Jakarta Office said that Indonesia had improved its credit information system through a new regulation that provides a legal framework for establishing credit bureaus, which will make it easier for Indonesian companies, including SMEs, to obtain credit from lending institutions. The World Bank noted that Indonesia was one of 15 economies among 25 East Asian and Pacific economies that had implemented regulatory reforms in the past year that make it easier for local entrepreneurs to do business. But these regulatory reforms are not enough to enhance Indonesia’s position with respect to its rivals, which are also implementing reforms to improve their competitiveness.

More needs to be done. The Indonesian government should not falter in continuing its regulatory reforms to make doing business in Indonesia still easier and thereby lock-in a higher growth trajectory for the decade ahead. Complacency could see Indonesia follow India on a path downhill to growth that will not generate enough jobs and prospects for its still rapidly growing labour force

Thee Kian Wie is Senior Economist at the Economic Research Centre, Indonesian Institute of Science, Jakarta.
This article is a part of an EAF special feature series on 2013 in review and the year ahead.