Muhamad Chatib Basri: Criticism Saves Development
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25 May 2024 14:00 WIB
TEMPO.CO, Jakarta - Economist Muhamad Chatib Basri explains the challenges facing the Indonesian economy.
INDONESIA’s economic indicators appear to show no sign of trouble. Statistics Indonesia (BPS) recorded 5.11 percent gross domestic product (GDP) growth in the first quarter of 2024. Muhamad Chatib Basri, a lecturer at the Faculty of Economics, University of Indonesia, described the growth rate as relatively good but not sufficient.
According to Chatib, Indonesia will face real challenges in 2050. By that time, the majority of the Indonesian population will not be productive, potentially resulting in revenue decline. On the other hand, the government must still bear the burden of public health insurance. “We need to increase economic growth in the same way we save before retirement,” he said.
In the short term, the former Finance Minister pointed out, the government still had the homework to increase the tax ratio. Chatib considers the current tax-to-GDP ratio of 10 percent to be too small as the government always finds itself on the horns of a dilemma when it comes to determining priority programs due to the limited funds available.
Chatib outlined Indonesia’s economic challenges to Tempo reporters Sunudyantoro and Raymundus Rikang in an interview that lasted for over one hour at the Common Grounds coffee shop in Central Jakarta, on Wednesday, May 15. The 58-year-old economist also commented on rumors about him being one of the prospective Finance Minister candidates in Prabowo Subianto’s cabinet. “The only rumor I’ve never heard is that I would be the National Police Chief or the Indonesian Military Commander,” he said, and burst into laughter.
Indonesia’s economy is under pressure: the rupiah is struggling and the rising food commodity prices can cause inflation. What happened?
Our economy has been able to grow by 5 percent. This rate is relatively good compared to other countries in the region. Singapore’s growth in the first quarter of 2024 is around 2.7 percent. Our position is also less integrated globally as our export-to-GDP ratio is around 25 percent. In case of global economic shocks, the impact on us will be relatively small. But this achievement is not enough.
Why aren’t these indicators enough?
Indonesia will enter an aging population phase by 2050. Many people will no longer work or be productive, so they will not pay taxes. It means our revenues will decline, while the state must still provide health insurance. You can imagine the fiscal conditions when revenues decrease while expenses increase.
How can we mitigate it before it happens?
We must increase economic growth by 6 to 7 percent. It’s like working and saving money before retirement. The problem is that our investment costs are high because to push for an additional 1 percent economic growth, we need an additional 6.8 percent investment share to GDP. If we want to grow 7 percent, it means we need a 48 percent investment. Meanwhile, our gross domestic savings are still 37 percent of GDP, so there is a gap of 11 percent, or around Rp1,800 trillion (around US$112.8 million), that needs to be closed.
During President Joko Widodo’s term, the growth engine relied on downstream minerals (industry). As a result, exports increased but we were highly dependent on commodity prices. How do we tackle this situation?
Downstreaming began in 2014 when I, as the Finance Minister, imposed export taxes. The objective was to have companies process (minerals) domestically. What needs to be done next is to make Indonesia part of the global supply chain network. For example, for battery production, Australia has lithium. Like it or not, we have to work with Australia. The experience with rubber commodities should serve as a lesson for us. When rubber prices rose, synthetic rubber appeared and weakened the prices of natural rubber.
There is a view that Indonesia’s trade tie with China is too close…
Southeast Asian countries don’t have the luxury to choose between China and the United States. Even Singapore, which has been close to the US, doesn’t dare to keep its distance from China. Because the Chinese government is not just a trade partner, its investments are real.
