Indonesians’ Wrath

Ichiro Suzuki

Indonesians marched the streets in Jakarta lately, displaying their anger against the new president Prabowo. Rising prices are afflicting their life. Though inflation overall was up a relatively ‘reasonable’ 2.6% in September, food prices rose a more acute 5%. Growth of the Indonesian economy has slowed to 5%, not high enough for a country that aspires to be a middle income country. Indonesia’s per capita income was $5,000 in 2024. Global South is full of promises, especially so in Asia that is believed to be the growth center of the world. People think the Indonesian economy should be growing a lot faster than 5%, but a dream of a relatively high growth is slipping away from the hands of Indonesians. 

Unfortunately for Indonesia, the export-driven growth model has already run as far as it could, to begin with. In the post WWII world, Japan rose from the ashes as an aggressive export machine to the western world. Exports gave the country much needed foreign exchanges that were necessary for reconstruction. The model was emulated by other East Asian countries that included South Korea, Taiwan, Hong Kong and Singapore. Exports drove them to the status of high income country. Finally, China adopted the model with its entry into the World Trade Organization, and delivered spectacular results. By 2010 China overtook Japan as the second largest economy and kept pushing exports. The country moved up the ladder of manufacturing value chain with “Made in China 2025” slogan, leaving lower value added industries, such as textiles, to the countries that were following China. Many countries are vying for opportunities to house factories. Indonesia had to compete with India, Bangladesh and Vietnam, to be specific. They are all populous countries with no shortage of people who want to work at factories. Indonesia has not been doing too well in this competition. On top of it, exports markets are no longer as robust as they once were. The developed world is growing less than 2% today. Population growth has stalled in Europe and has turned negative in Japan. The U.S. still has growing population with robust consumption but the current President is shutting the country off imports, obsessed with trade deficits. 

Protectionism is back in a big way. While the United States imposes 19% reciprocal tariffs on imports from Indonesia, that is a relatively minor problem compared to a collateral damage from China. Having been effectively shut out of the U.S. market, China has no intention of slowing its export machine. They don’t want to reduce export dependence at a time when domestic demand is in limbo. Diverted from the largest market, Chinese products thus are finding their ways into all other destinations, into far smaller countries than the U.S. These countries are finding it painfully hard to cope with the flood of Chinese products. Such troubles are noticeably acute among developing countries. It doesn’t matter whether they are close to China or not. Chinese products keep coming. For Asian countries that are aspiring for prosperity on exports, they simply can’t compete with Chinese products that are cheaper and better. In a world of slower growth, exports are increasingly becoming a zero-sum game. Protectionism has made it worse, making life harder for developing countries, much harder than for those in the developed world.

That is a terribly sorry turn of events for developing countries in general. What’s worse for Indonesia is that its new president thinks he can lift growth with aggressive state intervention, through an expansionary fiscal policy and meddling in the market. He promised higher growth on his campaign trail and is determined to deliver it. His economic platform is centered on expensive fiscal programs such as free meals for school children, affordable housing and village cooperatives. These programs can lift growth rate in the short run, but not all the way up to 8% from 5%. Almost certainly, spending largesse leads to a fiscal problem in the long run, in the worst case coupled with a balance of payment crisis caused by excessive consumption that sucks in a greater amount of imports. On top of it, the government is requiring local contents on multi-national corporations’ imports, which are detrimental to productivity and consumer prices. 

Even worse, the President is becoming increasingly authoritarian, concentrating power to his inner circle. In March, a law was passed to allow active military officers to hold more government positions. In the parliament, opposition no longer exists effectively, and what the president wants can be rubber-stamped. The parliament no longer provides checks and balances. Recent developments don’t bode well for the Indonesian economy’s future. Indonesias will have to live with their wrath whether it is displayed publicly or not. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.