TEMPO.CO, Jakarta - Professor Hal Hill assesses the Indonesian economy as having progressed adequately. Yet it is still not competitive enough compared to Vietnam and Thailand.

Hal Hill, who authored The Indonesian Economy (2000), considers the country’s economy under President Joko Widodo as having progressed well with an average annual growth of 5.2 percent. Neither was Indonesia on the list of developing countries predicted by the International Monetary Fund (IMF) to suffer a debt crisis. Yet despite this progress at the macro level, Hal Hill sees problems on the micro-scale.

The professor in economics from the Australian National University gauged that Indonesia did not make use of the opportunity opened up by globalization. As a result, Indonesia’s economy and business, and investment climate are not competitive in Southeast Asia. On the investment side, Indonesia has lost out against Thailand and Vietnam. Those two countries are the big investment targets in Asia.

Because of this, Hal Hill predicts Indonesia will miss out on huge economic potential in the global economy despite enjoying an aggregate developed economy. “Indonesia’s economic issues are at the micro-social, environments, and institutional level,” he told Tempo in an online interview on December 15, 2023.

In a conversation that lasted over an hour, the 76-year-old economist explained at length several economic problems faced by Indonesia since the 1998 Reformasi to the administration under President Jokowi. He highlighted the fuel subsidy, limited fiscal space, energy transition, and education.

How do you view the Indonesian economy under Jokowi?

Indonesia’s economy developed adequately. In the 1980s, the World Bank dubbed Indonesia an economic miracle. We held a discussion in Canberra with Finance Minister Sri Mulyani Indrawati in December 2023. She was right in saying, that currently in the world there are around 60 developing countries undergoing a debt crisis. IMF predicted the number of countries at 62 or 63 nations. Indonesia was not on the list. Despite Indonesia facing a number of problems, it was not an economic debt crisis.

Looking at the economic development model, what made Jokowi different from the president before him?

There weren’t too many differences. I saw two pictures. One is in macroeconomics. In that picture, Indonesia made much progress. For example, you have a Central Bank that is professional and independent. Currently government debt hovers at around 40 percent of the gross domestic product (GDP). This is considered low compared to other countries, which can go over 100 percent. The problems are at the microeconomic level, social, environmental, and institutional. Jokowi’s perspective is not much different from that of Susilo Bambang Yudhoyono or Megawati Soekarnoputri. The government before Megawati cannot be put into comparison because there was a monetary crisis.

If compared to the New Order development model?

There is a huge difference. The economic growth rate in the New Order was at an average of 7.1 percent. In the democratic period, it came down to 5.2 percent. This is an irony or paradox, that in an era when political freedom was much curtailed, the economy grew at a rapid clip, while poverty levels fell away much more quickly than in the democratic era.

<!--more-->

Why was this?

One needs a doctoral dissertation to find the answer to that. But, this could be important. In the first 20 years of the Suharto era, the commitment to economic development was very strong. We know that under Suharto there was the Berkeley Mafia, namely Pak Widjojo (Nitisastro), Pak Ali Wardana, and others. In the democratic era, creating economic policies is far more difficult. Prior, there was only one important figure, Suharto.

From the political side, democracy is much better. But the political process is more difficult, and far more complicated because there are more veto players, meaning parties who could obstruct policies.

What is crucial in microeconomics?

Globalization. I think it can be considered that Indonesia is missing out. World industrial institutions today are almost all global production networks. The components of your computer were probably produced in 10 different countries. And it was probably put together in China. The country that is well and truly developed today, besides China, is Vietnam. The percentage of world exports for items from Vietnam is far higher than in Indonesia. We know that many multinational companies moved to Vietnam.

Why does Indonesia seem unattractive?

Participation in global production networks depends on the commercial business environment. For instance, this computer has components from 10 countries. This means it has to be sold inter-country rapidly. This calls for very efficient international logistics. We know, according to the World Bank Indicator, the logistics performance index in Indonesia is not that high.

Meaning we are not competitive?

Yes. For example, if compared to Malaysia, Thailand, and Vietnam. They are far more advanced. So multinational corporations, and foreign investors, probably choose locations that are adequate to their needs for global production networks. Let me be frank here: Indonesia is hesitant about the role of foreign investment. These two factors could be the explanation for why Indonesia is missing out on so many good business opportunities.

This is not to criticize, but I am a little concerned about the education sector, particularly primary education. Look at the PISA (Programme for International Student Assessment) comparison created by the OECD (Organisation for Economic Co-operation and Development). The latest PISA results show students in Vietnam are far more advanced than their peers in Indonesia.

Investors probably compare locations A, B, and C. They choose locations that have good education, good logistics, good infrastructure, are open to investment, and have a friendly business environment. Indonesia is okay, but is not as competitive as countries like Vietnam.

Read the Full Interview in Tempo English Magazine