Indonesia #1: World-class economic growth is saving millions from poverty

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Under construction: The standard view in inner Jakarta

A few weeks ago I introduced a forthcoming series of blog posts on Six things Australians should learn about Indonesia. I’ve most my time since then on a surprise business trip in Japan, but now it’s on with the show.

By far the single most important aspect of Indonesia today is its success in improving living standards for hundreds of millions of people.

Indonesia ranks near the top of the world in economic growth and poverty reduction. Since 2000, the country’s gross national income per capita has grown six and a half times over – more than twice the growth in Australia.

Indonesia’s poverty rates have fallen rapidly – more than halving from 23.4 per cent in 1999 to 11.3 per cent in 2014.

Asian countries have not received enough respect for their successes in reducing poverty over the past few decades. It is arguably the greatest humanitarian achievement in human history.

Nations like Indonesia achieved their successes, in part, by rejecting advice from Western economic experts. That advice, known as the “Washington Consensus”, was to rapidly reduce the role of government. Asian countries instead maintained substantial government intervention, particularly in industry policy, and this was an important part of their success. South American countries, who bought into the Western medicine, have not seen close to as impressive growth.

When the Washington Consensus did come to Indonesia, through IMF loan conditions in the 1997 Asian Financial Crisis, the results were very bad. Even the IMF has obliquely admitted its mistakes, and somewhat changed tune. The episode remains a cautionary tale that should inspire humility in economic policy advisers everywhere.

Learning about Asian economies has influenced me to moderate my strong pro-free trade intuitions in the context of developing nations. For those who are interested, I recommend the work of Harvard’s Dani Rodrik, the world’s top ranked development economist. The risk of international competition for a developing country is premature deinstrustialisation. Essentially this means flooding a developing economy with imports, killing the domestic industry before it has a chance to become competitive. So far, rapid productivity growth in manufacturing is the only proven pathway for meeting key development milestones.

On a more personal level, the efforts of people determined to drag themselves out of poverty are an inspiration. I think about my personal trainer who starts working at 6am and finishes at 10pm. He works weekends too. Presumably this allows him to scratch out a lower middle class life for his children. I’ve never heard a complaint from him. He’s always laughing and positive.

The construction workers near my apartment drip sweet in the tropical heat as they strain their muscles in hard manual labour from the early morning into the night. They are driving the extraordinary progress and development that can be seen anywhere in central Jakarta.

Obviously there are economic challenges for Indonesia to overcome. Indonesia still has hard work to do in strengthening institutions and ensuring accountability. The iconoclast maverick Governor of Jakarta – Ahok – is doing just that (along with some great trolling of dodgy officials – most recently here).

One of the world’s greatest sub-national leaders, and a personal hero, Ahok’s crash or crash approach to eradicating corruption and incompetence is exhilarating to watch. When it comes to fighting corruption, bad cop Ahok will sack you for being too nice.

ahok_in_outfit_0

Jakarta’s corruption-busting Governor Ahok demonstrates high ethics…and hilarious trolling.

Ahok’s predecessor as Governor and former running mate, Joko Widodo, was also a reformer (the good cop in the combo). This reputation was crucial for Jokowi’s election as Indonesia’s President.

Another challenge for Indonesia is its decentralised system of government. Although this is suited to a highly diverse nation-state, it spreads expertise thin and makes it hard to coordinate national reforms.

In some areas, the Indonesian economy could do with additional competitiveness. Regulations can be convoluted and restrictive. President Widodo is onto it, announcing some smart deregulation. In some ways, however, Indonesia is ahead of Australia on innovation. For example, Indonesians have enthusiastically adopted crowd sourcing apps and uber-style contracting apps (such as the awesome Go Jek).

Another recent economic policy win for Indonesia is Jokowi’s brave decision to abolish fuel subsidies, although the government is still indirectly subsidising fuel at present.

Like any country, Indonesia has some unhelpful policy fads. One is the current emphasis on “food self-sufficiency”, aka agrarian protectionism. Sure Western economists have made mistakes before, but I’d bet my house that Indonesia’s future prosperity will not be built of the back of rice farmers.

I’m confident about that bet, I don’t own a house.

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