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Indonesia’s Macroeconomic Health: 2012 Prediction

For the past two years, the macroeconomic situation in Indonesia has improved steadily. The economic growth of Indonesia reached 6.9 percent in Q4 of last year, exceeding the initial estimation of 6.1 percent. Meanwhile, the nation’s economic growth has already reached 6.5 percent in Q1 of this year, exceeding the initial estimation of 6.4 percent. The improvement is contributed by the growth of almost all business sectors – 13.8 percent growth from the transport and communication sector, 4.6 percent growth from the mining sector, and 3.4 percent growth from agricultural sector. While the country’s exports has increased to US$45.31 billion in Q1 2011, imports has increased significantly as well – reaching US$ 38.78 billion or more than 29.46 percent of last year’s imports. The increased number of imports, especially of capital goods and industrial basic materials, indicates that Indonesia is undergoing resurgence in the manufacturing sector. Additionally, it is also contributed by the country’s enhanced purchasing power, lower competitiveness of local products, and free trade agreement between Indonesia and China which results in floods of imported items from that country. On the other hand, also in the first quarter of the year, Indonesia’s Index Harga Saham Gabungan (IHSG) or the composite stock price index went down from 3,684 points ( December 2010) to 3,678 (March 2011). This slow growth is caused by several external factors such as the after effects of the global financial crisis.

However, not all individuals are satisfied with the country’s economic growth this year. Faisal Basri, a respected economist at the University of Indonesia, revealed that the 6.5 percent GDP growth in Q1 2011 cannot be considered a good indication of improved macroeconomic health. Basri stated that although the GDP increases, welfare does not improve and unemployment does not lessen. He also said that the business sectors that have undergone significant improvements are those with no direct connection to the people’s welfare. Basri noted that that 7.9 percent growth in the hotel and restaurant industry and the 13.8 percent growth in the transport and communication sector have no significant effect towards the people’s welfare. Ironically, sectors which are based on natural resources or those which require a lot of man power do not show significant growth. Faisal Basri was confident that significant economic growth which is also beneficial for the people of the country can be reached with the improvement on economic policies from the government.

When asked about the nation’s macroeconomic prospects in 2012, Indonesia’s Coordinating Minister for Economic Affairs Hatta Rajasa was confident that the country will assume to reach 6.6 to 6.7 percent of economic growth while in the future, the growth in 2014 is hoped to reach at least 7 percent. While several parties expect up to 7 percent of growth in the following year, Rajasa, on behalf of the government, stated that the government sets a more realistic approach to the country’s macroeconomic condition. Reasonable explanations behind his estimation are none other than the fact that Indonesia this year shows prospective improvement in domestic investments, increase in exports, and sufficient supplies on almost all sectors including agricultural and manufacturing sectors.

Almost similar to Hatta Rajasa’s estimation, Indonesia’s Finance Minister Agus D. W. Martowardojo also stated that 6.7 percent is a realistic target for the country’s economic growth next year. This statement was delivered in front of the member of the House of Representatives during the discussion about the country’s 2012 Draft of National Budget Expenditure or Rancangan Anggaran Pendapatan Belanja Negara (Rancangan APBN) on September 7, 2011. To increase the economic growth, the minister said, the government will focus on supporting the development of infrastructures especially in the agricultural, energy, and communication sectors. He also said that the estimated 6.7 percent economic growth has been included in the next year’s APBN.

Unlike the two ministers mentioned previously, Executive Director of the Institute for Economic and Social Research and lecturer at the Faculty of Economics, University of Indonesia, Muhammad Chatib Basri was confident that Indonesia can reach up to 6.9 percent of economic growth in 2012 with certain conditions. He stated that that number can be reached if the government succeeds to improve the investment power through improved savings. According to Muhammad Chatib Basri, his economic growth estimation is not impossible to achieve if the government is able to improve the ratio between the country’s investment and GDP. The government has been able to achieve a 32 percent ratio, but to be able to achieve the estimated goal, the ratio must be at least 35 percent. However, Muhammad Chatib Basri admitted that Indonesia is not yet ready to achieve a 7-9 percent growth. In fact, it will only overheat the economic situation of the country, and to cope with this, he suggested that the government should renovate the country’s infrastructures.

A country’s economic growth is determined by its macroeconomic stabilization. Hence, macroeconomic stabilization is a necessary condition for all countries, including Indonesia. Within a stable economy, all established monetary and fiscal institutions and policies can decrease volatility as well as improve welfare-enhancing growth of a country. To achieve this stable state, a country must conduct a set of complicated tasks which include aligning its currency to market levels, developing a national budget, managing inflation, generating revenue, establishing foreign exchange facilities, establishing a transparent system of public expenditure, and preventing predatory actors to protect the country’s resources. In addition, to create a healthier macroeconomic environment, a country should also set a strong economic framework which includes the laws and regulations of central bank operations, domestic commerce, budgetary processes, international trade, and economic governance institution.

In general, Indonesia’s macroeconomic situation has improved since 2008. The country’s natural resources and exports of commodities such as coal, palm oil, and rubber have improved significantly. Other business sectors such as financial services, automotive, telecommunications, plantations, consumer goods, and mining industries have also shown stable growth. Most importantly, the political situation of the country has remained stable for the past five years. However, Indonesia has to tackle more problems to become a stronger country. Issues like religion-based conflicts, decentralization of power, and insufficient infrastructures may disrupt national security at any time. As far as we are concerned, an ideal environment which is conducive to higher economic growth is an environment with small risk of violence.