Indonesian Embassy, Philippines

An important observation made by the World Bank is that East Asia is now considered to be a major constituent of the world trading system. It is, so to say, on a par with the European Union and the USA.

East Asia comprises a group of countries that are often referred to as the ‘Emerging East Asia’ countries (China, Indonesia, Malaysia, Philippines, Thailand, and some smaller economies). In addition, there are the four Newly Industrialized Economies or NIE’s (Hong Kong, Korea, Singapore, and Taiwan).

In terms of rate of growth, East Asia is much higher than Europe or the United States. It is considered to be the most dynamic region in the region in the world, with China and India taking the lead. During the year 2005, the growth of Emerging East Asia eased, reaching 6.8%, compared to 7.5% in 2004, while the NIE’s went down, ending at 4.8% in 2005. The easing up of growth affected not only East Asia but also the developed countries. Growth in the Development Economies known as OECD also went down, from 3.1% IN 2004 T0 2.7% IN 2005. This is much smaller than the growth of the Emerging east Asia countries, including Indonesia.

A World Bank report relates the high economic growth of East Asia, in particular the emerging countries, to its extraordinary economic openness. This openness is considered to be even greater than that of the European Union. Private consumption as a driving force of the economies in the region continue gaining momentum, but more importantly, exports are close behind, and often taking the lead. Another factor of importance is the growth of China’s imports from the region and the increasing strength in the high tech sector. These are some of the dynamic factors underpinning the East Asia economies.

EAST ASIA ECONOMIC

	2004	2005	2006	2007
Emerging East Asia	7.5	6.8	6.6	6.3
Develop. East Asia	8.5	8.2	7.8	7.5
S.E. Asia	5.9	5.1	5.3	5.7
Indonesia	4.9	5.6	5.5	6.2
Malaysia	7.1	5.3	5.5	5.7
Philippines	6.0	5.1	5.3	5.6
Thailand	6.2	4.5	5.0	5.2
Transition Econ. China	10.1	9.9	9.2	8.5
Vietnam	7.7	8.4	8.0	7.5
Small Economies	5.7	5.2	5.1	4.9
Newly Ind. Econ.	6.1	4.8	4.9	4.6
Korea	4.6	4.0	5.0	4.8
Transition Econ. China	6.2	4.5	5.0	5.2
3 others NIEs	7.3	5.4	4.8	4.4
Japan	2.3	2.8	2.8	2.1

Innovation in East Asia is improving significantly. The generation and application of new technology has become a crucial driving force of economic growth and development. Some 15 to 20 years ago the level of technological development in East Asia was similar to that in other developing regions, such as Latin America, but now it exceeds other developing countries by a wide margin. At the head of the league with regard to the registration of patents is Taiwan, followed by Korea, Hong Kong, and Singapore. Fixed investment has not been doing quite so well, the main reason being the increased uncertainly caused by rising oil prices and the start of monetary tightening.

In East Asia,. Poverty reduction has been improved by sustained economic growth. The number of poor at the US$2 level remained high of some 585 million in 2005. However, progress in poverty reduction is not occurring evenly. Some geographical regions or particular social groups are not doing has well as others, which is also true for Indonesia.

It is worth noting what Dr. Bernard Gordon of the University of New Hamsphire has said in the USINDO forum about Asia’s new trade patterns: first, a decline of Indonesian imports from the USA; secondly, a steady upward slope of Indonesia’s imports from China and thirdly, Indonesia’s imports from China now surpass those from USA. This is a very notable shift of which all traders should be aware in order to be able to take advantage of the changing trade pattern, which also concerns the types of products needed by China, namely traditional commodities.

Gordon also noted that Southeast Asia was shifting away from the region’s 30-year trend of integration with America and the West. The signal was, instead, of a turn towards a resurgent post-crisis Asia and intensification of intra-Asian trade. This proves that Indonesia should realize the importance of developing the ASEAN Economic Community as well as the forthcoming East-Asia Economic Community.

It might be helpful if an economic strategy were developed on how Indonesia should deal with development in Asia. This would have to include greater detail., such as measures to be taken not only by the government but also, and particularly, by the economic players and supporting institutions such as banks.

II) The Indonesian economy

One of the main accomplishments recorded by Indonesian during the post-crisis period is macro-economic stability. This involved a great deal of work in the monetary, fiscal, and banking sectors. It required a near-overhaul and complete reformation in those sectors. Yet, it is still a fragile macro-stability, achieved with so much pain. This was revealed with the August/September 2005 events resulting from a sky-rocketing international oil price. Luckily, there was enough macro-economic stability for the government to make some daring policy decisions, especially the cutting of ever-increasing subsidies by raising domestic fuel prices. The increase in domestic fuel prices and the hike in interest rates worked well in restoring capability. However, the increase in fuel prices did have a widespread negative effect on the public’s socio-economic situation.

In addition, near-term growth and the inflation outlook weakened as a result of the economic turbulence of 2005 GDP growth for the year 2005 was 5.6%. Although lower than the targeted rate, it is still relatively good, compared to the 2004 rate of 4.89%, and compared also to many other countries. The source of growth was private and government consumption coupled with exports.

GDP growth-by-sector reveals that some sectors have experienced negative growth. These include petroleum and gas, iron and basic steel, and wood and wood products. High-growth sectors were transportation sales, chemicals, and construction. Services also experienced adequate growth. It is not clear how the SME’s performed in these sectors.

GDP Growth-by-sector in 2005

Other sectors have had lower growth rates: food, beverages and tobacco, 2.73%, textiles, leather products, and footwear, 1.28%. These are labor-intensive industries which are suffering from labor problems which have forced many factories to close down and move to other countries such as Vietnam.

A development not generally known to the public is significant growth in income-per-capita, with the result that it is now back on pre-crisis levels. However, it took some six years from income-per-capita to reach the pre-crisis level, which means that we have lost so many years because of the economic crisis and the initial period of reformasi involving a wide spectrum of political, economic, and social sectors.

As is known, there are various assessments positive and negative, on the ongoing process of reform. Notwithstanding the many unresolved issues, many positive results have been achieved in the economic area, such as in per-capita income.

Most analysts agree that Indonesia is on the path of growth, but the forecasts for the year 2006 and 2007 are wide-ranging. There seems to be a consensus that a change will come in the second half of this year.

At a panel discussion held recently by ICWA (Indonesian Council of World Affairs), IMF’s senior resident representatives very cautiously stated that financial market sentiment had improved and prospects were good for strong growth later this year and beyond. As he firmly suggested, priorities should be to keep macro-economic conditions stable and to press ahead with reforms to support investment.

Chatib Basri predicted that the economy would slow down, particularly in the first quarter of 2006 and especially for manufacturing, including electronics, textiles, and automotives. However, there was a probability that the economy would turn around in the second quarter and recover in the third quarter of 2006. He was quite up-beat about growth in investment, export, and imports. Another panelist, Sofjan Wanandi, warned in very strong words about the pitfalls country is still facing, which makes the country a high facing, which makes the country a high-cost economy with very low competitive stance.

Macro economic summary

Indicators	2005	2006	2006
GDP growth (%)	5.6	5.5-5.8	6-6.3
Exchange rate (Rp./USD	9830	9700	9500
Inflation (%)	17.10	8-9	7-8
SBI 3 months	12.75	11-12	9-10
Oil price	51.80	57	50
Budget Deficit/GDP (%)	0.6	1-1.5	0.7

There are, of course, different views on the above macro-economic indicators, but Chatib’s Basri’s summary does give us an indication as to where the economy is going for the year 2006 and 2007. These indicators look quite reasonable. The GDP growth rate is forecast to go up to some 6-6.3% in 2007, which is somewhat lower than the government’s target. What will be astonishing achievement is one-digit inflation of 7-8% and a decrease in the budget deficit to 0.7% in 2007.These indicators certainly should be reviewed from time to time, as they can affected by unknown internal and external factors and by the international economic environment.

Some important policies that can be anticipated concern such matters as: speeding up the disbursement of government spending, measures to reduce the high cost of the economy, and implementation of the infrastructure policy package.

Exports are doing quite well, meanwhile, mainly because of high international prices and increased demand for a number of exports products.

Total investment (foreign and domestic) has gone up, but the existing trend is still very unsatisfactory. The long-awaited investment law is now in the hands of the parliament and will hopefully have a positive result. Many already-known factors are obstructing the flow of investment, however, and there are a number of high-profile cases scaring away investors, particularly in the mining area. The current Freeport debacle is a very pertinent and unfortunate case-in-port.

Ambitious politicking has entered the investment arena. If wrongly handled, it could make investment an unattractive business venture. Yet the country is in urgent need of investment to help solve the current problem of poverty and unemployment and the upcoming problem of underdeveloped regions, in particular the eastern part of Indonesia (with its rich natural resources). This is another dilemma currently facing the country.