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Analysis & opinionAugust 31 2018

Sri Mulyani Indrawati: Indonesia's two-decade transformation

The Asian crisis of two decades ago provided the spur for deep reforms in Indonesia, which have brought better governance and reduced poverty, writes finance minister Sri Mulyani Indrawati.
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Sri Mulyani Indrawati

Twenty years ago, Indonesia underwent tectonic shifts that paved the way for democratisation and reform. To this day, the 1998 Reformasi Movement is still fresh in my mind. For many Indonesians who lived through it, that year was a tumultuous period that brought despair and hope at the same time. 

I was then an academic, and many of my students were involved in the movement and selflessly marched the streets to advocate for change. As much as I feared for their safety at that time, I could also relate to their struggle and ideals. They were courageous – a generation of brave souls who put their lives on the line for the greater good and carried a vision of how they see this nation should be.

Cracks in the façade exposed

The 1998 Reformasi Movement happened against the backdrop of the Asian financial crisis that crippled Indonesia’s economy and affected the lives and livelihoods of many Indonesians. The impact of the crisis was indiscriminate: people from all socioeconomic strata were hit hard. Overnight, our economy tanked and policy-makers were struggling to contain the impact. Our currency plunged, inflation skyrocketed, jobs were lost, and many fell into poverty. Behind the façade of what were thought to be good fundamentals were structural weaknesses – in the form of acute and pervasive corruption in our economy and weak governance in our financial system – which were exposed by the crisis.

Two decades have passed since that tragic period of our history. The Indonesia story is still a work in progress, but much progress has been made since then. Most importantly, Indonesia’s transition to democracy has sustained to this day. 

This republic has strived to make democracy work and efforts are continuously being made to increase participation, transparency and accountability. It is truly encouraging to see that, 20 years on, Indonesia has evolved into a thriving nation. It is becoming a main growth engine and source of stability for the region.

Hundreds of pieces of legislation have been passed since Reformasi, to rebuild Indonesia’s new foundation based on the rule of law, transparency, accountability, good governance, and fair competition. Financial, monetary and fiscal reforms were instituted to promote prudent management of our economy. The independence of the central bank was introduced to ensure sound monetary policy and stability, while the Financial Services Authority was established to provide sufficient oversight of the financial services sector. 

Furthermore, on the fiscal side, issuance of the State Finance, Treasury and Accountability laws provided a constitutional mandate for the Ministry of Finance to be accountable and effectively manage the country's resources. Seamless coordination of the monetary, fiscal and financial dimension is imperative for the country's economy.

In 2000, decentralisation laws were introduced and paved the way for the devolution of authorities and fiscal resources to sub-national governments. 

From local to national level 

A country the size of Indonesia requires effective governance, not just at the central level, but also at the provincial and sub-provincial levels. This, too, is still a work in progress. But for the first time in our country’s history, we are seeing national leaders being born and elevated from the local level. 

President Joko Widodo is a case in point. After his success as mayor of Surakarta and governor of Jakarta, the electorate trusted him to lead this country. Decentralisation has enabled leaders to prove their mettle from the grassroots all the way to the national level.

Like building a house brick by brick, institutional and regulatory gaps were addressed one by one. Promoting good governance and building institutions is an ongoing work that continues to this day, namely through the bureaucratic reform of our public institutions. The establishment of the Corruption Eradication Commission further bolstered oversight to ensure public entities and the people that run them perform as they are supposed to.

Since the 1998 Reformasi Movement, our economy is now in a much better shape and was more resilient in weathering the subsequent global crisis that followed. In 2017, our gross domestic product (GDP) grew by 5.07% – better than most emerging economies – and our GDP per capita has multiplied sevenfold to about $3600 in the past two decades. 

The inflation rate, which used to be pervasively in double digits, has been kept low and stable at about 3.5%. Our debt-to-GDP ratio is well below 30% – among the lowest compared with peer countries. Furthermore, the poverty rate – which reached almost one-quarter of the population during the height of the crisis – is now at about 10%. Last year, Indonesia’s economy hit the $1000bn mark and it is now becoming more diversified. And thanks to our fiscal discipline rule, our budget deficit has been kept below 3% of GDP.

Rising in the rankings

This is a testament of stronger economic fundamentals, the fruit of comprehensive and continued reforms in Indonesia in the past 20 years. This vibrant economy has been supported by prudent fiscal management, a credible budget and cohesive structural reforms. The policy reforms in Indonesia aims to boost three elements: consumption, investments and exports.

These continued reform efforts are also translated to international accolades. Our sovereign credit ratings have been further upgraded – they are investment grade from all rating agencies. In the World Bank’s Doing Business report, Indonesia’s ranking has jumped to number 72 – better than most BRICS countries. 

Our score in the Global Competitiveness Index has improved significantly. Also, the Gallup World Poll puts Indonesia in the top two countries worldwide – along with Switzerland – when it comes to having the most trusted government. Furthermore, Indonesia’s longer term outlook is bright. We are predicted to become a major powerhouse in the global economy. In a 2017 report, PwC predicted that Indonesia will become the fifth largest economy in the world in 2030 and the fourth largest by 2050.

The equality gap

But we are not complacent and there is more work to be done. We need to address the challenge of regional disparities. Java and Sumatra currently make up more than 80% of Indonesia’s GDP, while the other large islands of Kalimantan, Sulawesi and Papua respectively account for merely 8.2%, 6.1% and 2.4% of national GDP. 

Bridging this disparity and inequality is a key agenda. Indonesia needs to further diversify its economy to be less dependent on commodities, increase the value added of the manufacturing sector, and improve the quality of the services sector. These transformations require a better quality of human capital as well as efficient, clean and effective public institutions, along with an efficient and competitive private sector. Hence institutional reform is a must and needs to be continued.

The government, under the leadership of Mr Widodo, will continue to reduce poverty, address inequality, as well as increase competitiveness and productivity. We are investing heavily in our human capital and bridging our infrastructure gap. The government has allocated 20% of this year’s budget for education and vocational studies, and another 5% for healthcare. We have to make sure that this will result in better quality of human resources, both in skills and well-being. 

Furthermore, Indonesia is undergoing an infrastructure renaissance that will improve our connectivity and bring down our logistic costs across the regions. All of these efforts are aimed at increasing our competitiveness. The national budget has become the most crucial element in supporting this goal. The government is not only aiming for higher economic growth, but also sustainable, better quality and inclusive growth.

The journey to build a strong, resilient, prosperous and equitable Indonesia will continue. By the time Indonesia commemorates its 100th year as an independent nation in 2045, the students of the 1998 generation will be in their senior years. By that time, our per capita income will have reached $29,300. Indonesia's population will have reached 309 million people, 52% of whom will be of working age. By then, our urban population will have reached 75% and our strong middle class will make up 80% of the population. Indonesia will be a formidable economy and the government is laying the foundations for that brighter tomorrow.

Looking back at the Asian economic crisis of 20 years ago, we have learned that there are no short cuts to reforming a system. We have also learned that we should always have an open mind in looking at probable solutions. I am optimistic that Indonesia will prevail – and believe the 1998 Reformasi Movement provided that turning point in our nation’s history.

Sri Mulyani Indrawati is the finance minister of Indonesia. Note: The piece has also been published in the Jakarta Post.

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