GROWTH AND INEQUALITY in Indonesia Mohammad Faisal CORE Indonesia (Center of Reform on Economics)

GDP Growth: Survived the Global Crisis, but weakening due to the fall of commodity prices

Component Q1 Q1Q2Q3Q4 Private consumption Government ,21 Investment Export of goods and services Import of goods and services GDP ,71 GDP Growth: Stagnant private consumption, declining exports Sumber: BPS

China's Economic Slowdown -Import growth -15% -PBC policy on yuan Low Commodity Prices - Oversupply - El-Nino Impact The Fed Policy Uncertainty - US$ Appreciation 10% - Low inflation rate -2% (Sept.15) Indonesia’s Export - 10% market share to China - 59% in primary ommodities - Current account deficit (US$12,4 bill. [Q1-Q3]) - Gov. budget deficit (2,6% GDP) Rp/US$ - BI tight monetery policy (BI Rate 7,5%) -High leverage on US$ debt Domestic consumption & investment - High lending interest rate - Unemployment & Poverty rate hike Recent external challenges

Declining commodity prices Declining exports

Declining farmers purchasing power following low commodity prices Declining farmers trade index impacted on 12,8 million households

Rupiah & Asian currency exchange rates Weakening Rupiah exchange rates due to fundamental factor and the sentiment in the financial sector

Trade Balance: Weak export growth, slight trade surplus, depite Rupiah depreciation Deepening fuel and gas deficit, marginal surplus in non fuel and gas 8

Poverty in Indonesia The rates of poverty reduction is slowing down Source: BPS Percentafe of poor people

Gini Ratio: Increasing inequality Urban National Rural Source: BPS

Increasing Inequality Income Distribution & Gini Ratio % poorest people 20% richest people Gini Ratio

3,5% 23% 5,1% 58% 8,9% 3% 1,0% 8% 7,3% 5,7% 3,7% 2% Growth Q – Q GDP Contribution (Q1-2015) Regional Contribution to GDP, 2015 Minimum contribution of regions outside Java, depending on export commodities Source: BPS

New Jobs created per 1% GDP Growth: Fewer jobs created 1%GDP = 433,000 jobs (2008)  1%GDP = 164,000 jobs (2012)

Open Unemployment Rates

Open Unemployment rates among ASEAN countries Source: World Bank

Unemployment, Agustus 2015 Large proportion of workers in Informal sectors, Unpaid Workers, and part-time Source: BPS Million

Larger Proportion Working in Informal Sector

Stagnant growth of real wages

Bank Loan Interest Rates Tight monetary policy, High loan interest rates Sumber: BI

High Central Bank Rates

Current Indonesia Economic Growth: Decoupled from World Downturn, but also from Economic Competitiveness and People Welfare 1. Indonesian economy still grew relatively strong, even amids global economic down turn. 2. Some factor has supported Indonesia to be relatively resistance from global economic down turn : a) GDP structure: dominated by private consumption b) Export structure: dominated by primary comodities c) Maintaining high cost support (maintaining high interest rate and minimum of control capital inflows) 3. Indonesia experienced a relative long time lag of negative impact of global crisis. Such positive performance did not result in the improvement of competitiveness as well as the people’s quality of live.

Conclusions Although Indonesia has survived the global economic crisis in 2008, the economic growth has been weakening since 2011 due mainly to the fall of commodity prices. Inequality has increased in the last fifteen years despite relatively strong GDP growth. The Monetary Authority has persistently imposed tight policy by keeping the central bank rate high despite domestic economic slowdown, due to a fear of capital outflow following the FFR increase. Tight monetary policy has impeded the real sector growth and banking credit has become even more difficult to get especially for SMEs. Competitiveness of agricultural sector and farmer real wages continue to decline, resulting in widening income ineqality between rural and urban sectors. Unemployment and poverty rates have only marginally declined in recent years, and has even increased in 2015.

Thank you!