How far can Indonesia's consumption-driven growth go?

loading A shopping mall in Indonesia.

At his lecture in Penang for the Asean Coalition for Clean Governance (ACCG) on December 4, 2012, former Indonesian president Dr BJ Habibie presented statistics about Indonesia's growing economic strength. The numbers were impressive, showing Indonesia’s rapid growth and vast GDP, both in leading position in the Asean region. But is this growth sustainable?

The economic boom is visible in Jakarta, where construction leads the capital city's entry into a 21st century economy; the drive from the airport into the central city is dominated by high-rise shopping and office complexes. Indonesia wants to be the second I in “Briic”, and is using its natural riches to become one of Asia’s newest engines of growth.

It is indeed natural resources that are driving economic growth both within Indonesia and in Asia as a whole; Indonesian coal powers many of China’s industrial plants, and its minerals make Asia’s expanding tech sector possible. Mining alone still accounts for almost 13% of Indonesia’s GDP, and many economists believe that a rise in commodity prices is most responsible for the country’s recent growth. With strong consumer spending, Indonesia looks, on the surface at least, ready to take its place at the top end of the global economic table.

Its emergence as an economic power has caused ripple effects throughout the region, especially for its neighbour Malaysia. The relationship between the two countries is a unique one. From a state of near-war in the 1960s during former president Sukarno's Konfrontasi campaign, Malaysia and Indonesia now have mutual visa-free border policies and growing bilateral trade. In 2008 trade between the two totalled US$6.5bil, and grew to nearly US$17bil by 20101; both aim to increase mutual trade to US$30bil by 20152. Currently, imports from Indonesia make up about two-thirds of that trade on Malaysia’s part, while exports form the balance. Asean’s move towards a single market will only increase economic integration between the two countries. And consumer spending is playing a major role in this.

It makes sense – strong consumer spending is a sign of a developed economy. In the US, one of the first things President George W. Bush said to Americans after the September 11 terrorist attacks was to “keep shopping” in order to avoid a potential post-attack recession. Consumer spending forms the vast portion of the US economy. In Indonesia, it now accounts for nearly half, and a far higher portion within cities. The western model of consumer-driven economic growth has been exported to Asia, and along with it, the idea that economic growth trumps other determinants of social wellbeing.

This is not just an Indonesian phenomenon. There are now nine shopping malls in East and South-East Asia larger than the Mall of America in Minnesota, with malls in China and the Philippines leading the way. And Malaysia not far behind.

In fact, it was resilient consumer spending that allowed Malaysia to weather the recent global economic downturn. Consumer spending accounts for only a slightly lower percentage of GDP than in Indonesia, but household indebtedness is much higher, at nearly 80% of GDP, a dramatic increase from 50% in 2000. This is partly due to the fact that spending has been strong in Malaysia for far longer than in Indonesia. Economic growth is heavily dependent on this spending – a recent analysis of the 2000-2008 period found that 3.7% of the average 5.4% in GDP growth was due to private consumption3.

But there is a limit to growing debt as an engine of growth. Just look across the ocean at the US where, in 2007, the household debt to GDP ratio reached a post-1929 record of nearly 100%, and was quickly followed by a major economic downturn. Is this also South- East Asia's future? Or is consumer spending more sustainable as Malaysia and Indonesia rise in the global economic order?

Basic development theories state that economic growth should be reinvested into productive infrastructure, while social theories argue that the first priorities should be to reduce poverty, increase education and invest in human health. Both can positively impact a society by building both human and productive capital. In Malaysia, investment in roads and airports has connected the country and allowed for greater inter-regional trade, while, conversely, less investment in public transit and higher education are proving to be two of the major challenges facing the country, and Penang, in the coming years.

Khalzuri Yazid

In Indonesia, though malls are being built, other infrastructures are not. The World Bank’s 2010 Logistics Performance Index ranked Indonesia 75th globally – below Honduras, the Dominican Republic and Benin, all countries with lower per-capita GDP. Conversely, Malaysia is ranked 29th, second in South-East Asia and ahead of New Zealand, Slovenia and Argentina, all countries with higher per-capita GDP. While Malaysians may, rightly, lament inadequate public transit, the situation looks rather good in comparison to Jakarta, with its notorious traffic jams and its slow, crowded and mostly privately-run transit system. Indonesia’s infrastructure deficiencies also hamper its trade; its port is overcrowded and inefficient, and things are worse in the outlying islands. The commodity-driven boom there is accelerating consumerism, but not infrastructure, education or health, and this has potentially devastating long-term consequences for the economy.

It did not have to be this way. Raw materials were the driving force behind Dutch colonial exploitation. Then, the products in demand were rubber, coffee, indigo, pepper, sugar and tea, grown on the fertile soil of Java. These commodities brought incredible prices on the European market, and the vast wealth created went to a select few. As a result the country as a whole remained poor. After independence in 1945, many thought that the country would quickly grow and that its resources would provide a strong base for future prosperity.

Some growth did occur, but then came civil war, population growth, cronyism, a repressive dictatorship and the aforementioned Konfrontasi with Malaysia. Even today educated Indonesians lament that “we were once a colony of the Dutch – now we are a colony of America and Japan,” Indonesia’s top two trading partners. Dutch profiteering was replaced by that of foreign corporations like Freeport McMoran, Chevron and Japanese timber conglomerates. Malaysian corporations also play a role, controlling nearly a quarter of Sumatra and Borneo's lucrative palm oil production4. Some Indonesians are prospering, but Jakarta’s shopping malls, far away from the open-pit mines of Papua or the deforestation of Borneo, are a sign of misplaced priorities.

A resource-driven boom should be, in theory, the most equitable, because a country’s natural wealth is supposed to be for all of its citizens. Yet the majority of Indonesians, especially outside of Jakarta, remain only marginally better off today than before the boom. Indonesia is 105th in the UN Human Development Index, again far behind several countries with similar per-capita GDP. Malaysia, with far less natural resources, is ranked much higher at 69th.

Malaysia's current standard of living, and growth, is being partly subsidised by the availability of cheap resources and exports from Indonesia. As trade with Indonesia increases, so does Malaysia's vulnerability to a resource crunch or to political instability in Indonesia. Instead of just focusing on trading goods, Malaysia could play a stronger role in developing Indonesia's infrastructure, or using its knowledge in palm oil to increase yields. Currently, Malaysia gets far more per-acre productivity from its plantations than Indonesia does, and increasing efficiency would reduce the need to deforest millions of acres of tropical rainforest.

Unlike KL or Penang, there is little green space in Jakarta. Jakarta is western consumerism taken to its logical conclusion: shopping as the symbol of growth. But Indonesia still has a long way to go to fulfil the promise of sharing its natural wealth with all of its citizens. If consumerism is the sole determinant of economic growth, then Indonesia is more than ready to become a global economic power. But sustainable, long-term equitable growth may be just as much of a dream today as it was after independence.

1 European Union. European Commission, Trade, N.p., 2006. Retrieved from: http://trade. htm>.
2"Malaysia-Indonesia Trade Target Achievable", Business Times, December 29, 2012. Retrieved from: www.btimes. articles/20121219160920/Article/ index_html
3 userfiles/file/241110_Consumer spending.pdf
4 "For Palm-Oil Firms, Indonesia Wage Hike Worrisome", Wall Street Journal , December 28, 2012.

Nithin Coca was born in San Diego, California, US to parents from South India, and has taken his international upbringing to the maximum, having lived and worked in the US, France, Spain, and South-East Asia, where he hopes to play a role in protecting environmental and cultural heritage through education, economics and social activism.

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