International Community But Holds Promise Essay

Question:

Discuss About The International Community But Holds Huge Promise?

Answer:

Introduction

Indonesia is a rising Asian giant which has been largely ignored by the international community but holds huge promise for the future based on the recent economic performance and rising political stability. The GDP of the nation is 9th largest in the world on PPP basis and has witnessed rapid strides in the last decade or so. This is apparent from the fact that even at the height of the financial crisis in 2008-2009, Indonesia was the second fastest growing economy in the world placed only after China (Elias and Noone, 2011). The objective of the current paper is to critically analyse the country’s economic performance based on three key aspects namely production output, labour and price. A period of 10 years starting from 2004 onwards has been taken for consideration. Further, the report also aims to provide an outline of the key indicators along with the government initiatives in order to ensure robust performance across these three key aspects which are pivotal for sustainable growth.

Production Output Performance Analysis

In order to analyse the production output performance of the country, it is essential to discuss the major performance indicators which are highlighted below (Mankiw, 2012):

The real gross domestic product (GDP) is the total of the market values of all the goods and services which are produced in the country at constant prices in a specified price time period. This specified time frame is generally the income year.

For a specified time period (mostly yearly or quarterly) the % change in the GDP at constant prices is termed as real GDP growth rate. It is considered to be a main performance indicator which is used in order to determine the economic growth rate of the country.


The living standards of the residents of the respective country are generally measured based on the GDP per capita. The value of GDP per capita is determined as furnished below:

The high value of GDP per capita is the indicator of the improvement of the living standards of the citizens of the country which then indicates the economic growth of the country (Hoover, 2012).

GDP Growth Rate

Figure 1: INDONESIA GDP GROWTH RATE (2004-2013)

Based on the above chart, it can be seen that for the ten years starting from year 2004 to 2013, the real GDP growth rate was in the excess of 4%. Further, the minimal value of 4.1% had been recorded at the end of year 2009. However, it can be noticed that there was not much effect of global financial crisis on the economy of Indonesia because the economic growth of the country is more dependent on the domestic demand. Therefore, GDP growth rate attracted high capital after the financial crisis. In ten periods, the maximum real GDP growth rate i.e. 7.2% had been recorded at the end of the financial year 2004 (Trading Economics, 2017).

GDP Per Capita

Figure 2: INDONESIA GDP PER CAPITAL (2004-2013)

It is apparent from the above highlighted GDP per capita trend that the living standards of the residents of Indonesia have kept on increasing. This fact is also supported from the growth of the real GDP of Indonesia which illustrates the growth of the population of Indonesia. Further, the lowest value of GDP per capita has been recorded in the year 2004 with a value of $ 2,420.58. This value had been reached a maximum value of $3,570.93 at the end of financial year 2013 (Trading Economics, 2017).

Performance Trends of Indonesia

Based on the above performance analysis, it is evident that the economy of Indonesia is not much dependent on the exports as compared with the other Asian economies. Therefore, it is the main reason that the economy of Indonesia has stood and maintain the constant growth even when the global financial crisis struck. Also, the strong base condition of the domestic growth of the country resulted in significant economic growth of Indonesia during these 10 years. High value of GDP per capita is also highlighted in the incremental spending of the consumers, which enhanced the confidence level of the citizens of country. The effective, stable policies of country and political support enhanced the total capital usually after 2010 which also lead to the increase in the purchasing power of the residents of Indonesia (Goodwin et al., 2013).

Government Measurement GDP to Achieve the Economic Performance

It has been observed that Indonesian government has taken several effective steps in order to enhance the economic performance of the country. The main features of government measurements are as furnished below (Elias & Noone, 2011):

  • Simplification of law and regulation - Indonesian government has provided the opportunity to investors to bring in capital by providing a stable legal and political regime.
  • Significant investment in the infrastructure - In the process of improving the exports and supporting the economy of Indonesia, the government has taken cost competitive steps by investing in hard and soft infrastructure investment.
  • Low interest credit has been offered to the respective SME’s in order to attract and support entrepreneurs which has created a positive impact on the economy of the country.
  • Government is focusing on enhancement and development of the service sector
  • During the peak phase of global financial crisis, the government has implemented “monetary policy and prudent fiscal measure” in order to spur healthy domestic demand in the country (Mankiw, 2012).

Labor Market Analysis

Unemployment would take place when the educated and skilled individuals who want to work but unfortunately they are not able to get job opportunity. It is known that Indonesia is a labor intensive economy which means that unemployment rate is a core measure to determine the economic growth of the country. Also, unemployment comes in the category of one of the major macroeconomic indicator to know about the economic scenario and position of the country (McTaggart, Findlay & Parkin, 2012).

Types of Unemployment

There are three type of unemployment that are generally seen which are illustrated below (Trading Economics, 2016):

  1. Frictional Unemployment

When an individual has left the current job in order to find more suitable or high payoff job then the incurred unemployment is termed as frictional unemployment (Mankiw, 2012).

  1. Cyclical Unemployment

This type of unemployment arises when the business cycle changes and due to this significant reduction in the demand of employee incurred (Suryadarma et., al. 2007).

  1. Structural Unemployment

This type of unemployment arises when there is automation of the existing process or sudden change in operation or in technology and the current employees are not enough competent to work in the new environment and become unemployed (Goodwin et al., 2013).

Unemployment Trend in Indonesia

Figure 3: INDONESIA UNEMPLOYMENT RATE (2004-2014)

From the above highlighted line graph, it can be concluded that the maximum unemployment rate i.e. 11.6% was recorded in the middle of year 2005. From this time onwards, the unemployment rate in Indonesia had dropped steadily and become 6.1% in the year 2013. Also, it is noteworthy that the drop in the unemployment rate is caused due to the increase in the economic growth of Indonesia which continued even during the global financial crisis. This is also evident from high value of GDP per capita of the residents (Weale & Christodoulakis, 2015).

Unemployment Type in Indonesia

From the past research work, it has been found that structural unemployment is the most common type of unemployment occurring in Indonesia. Major part of the employment opportunity is extended only by agriculture sector because the service sector is still in the growing phase and very limited job opportunities are available. Further, the recent college graduates tend to face unemployment even after they have knowledge and skill. Moreover, there is slight presence of cyclical unemployment in the country (Indonesia-Investments. 2015). The economy of Indonesia is kept on improving which has resulted in development of the new business cyclic and hence, cyclic unemployment is kept on decreasing especially in the last decade. It is noteworthy that presence of frictional unemployment is very limited because due to lack of employment, the current employees are not much interested to leave the current job with the objective to get suitable job (Pigou, 2013).

Government Measure to Achieve Full Employment

The main positive steps taken by the Indonesian government in order to achieve full employment in the country are as highlighted below (G20, 2014):

  • Development of rural infrastructure in regards to create job opportunity in service sector rather than agriculture sector in the rural area
  • Simplicity of law and regulation and extending suitable and stable policies which would provide platform to SMS’s especially in the manufacturing industry
  • Development of National Entrepreneurship Program in country so that entrepreneur would be able to start small and medium scale business in all part of the country
  • Offering public vocational training program to the population so that structural unemployment can be reduced and current employees are able to work in the new advance work environment (McTaggart, Findlay & Parkin, 2012).

It is a market condition when the purchasing power of currency of the respective country has been reduced because the price of the goods and services has significantly increased from their base rate.

Rate of inflation

On an annual basis, the percentage change in the “Consumer Price Index (CPI)” is termed as rate of inflation. This rate interprets the determination of percent change in the selling price of goods or service on annual basis (McTaggart, Findlay & Parkin, 2012).

Inflation Trend in Indonesia

Figure 4: INDONESIA INFLATION RATE TREND (2004-2014)

It is shown in the above line graph that Indonesia has suffered from high inflation rate throughout the ten years period (2004 to 2013). The maximum inflation rate i.e. 17.1% had been recorded in the year 2005 while the lowest inflation rate i.e. 2.5% had been recorded at the peak of financial crisis i.e. in 2009. Also, in 2013 the inflation has reached a value 9% that is greater than inflation rate target of central bank i.e. (Trading Economics, 2017).

It has been assumed that “increase in demand of goods/service” and “incremental cost of goods/service” is the two main cause of high inflation.

Cost-push inflation

The manufacturing cost essentially depends on a myriad of input factors which includes labour, land, capital along with entrepreneurship. The market price tends to increase when the manufacturing cost of the given underlying product tends to increase and this leads to cost push inflation. Due to higher manufacturing cost, temporary shortage of good may be observed till the price is revised to a higher value (Mankiw, 2012).

Demand-pull inflation

The demand pull inflation is caused when there is higher demand which the supply is not able to cater to. This may result from full level of employment or increase in income levels of the individuals. This essentially leads to availability of higher disposable income which lead to higher demand for various products thus leading to higher price for goods and services as in the short term, the supply cannot make adjustments (McTaggart, Findlay & Parkin, 2012).

Cause of inflation - Indonesia

On account of the reasons outlined below, high inflation has been witnessed in Indonesia (UNAND, 2013).

  • The fuel subsidies are significant and prevalent even in the present and higher revision of subsidies when oil price increases leads to higher inflation. An example of this was witnessed in 2005 when inflation in excess of 15% was observed.
  • Demand led inflation is also prevalent on back of the economic growth that the country has witnessed leading to higher per capita income for people.
  • Ever since 2010, there have been quite frequent fluctuations in currency value caused on account of foreign money inflow and outflow which has also led to inflation.
  • Considering the staple food rice and rising international prices, food inflation has been a factor responsible for overall inflationary trend in certain periods.

Techniques taken by Government to contain inflation

The government has taken a slew of measures in order to ensure that inflation is within limits and these are outlined below (Manurung, 2013).

  • In order to control the increasing demand, a tight or restrictive monetary policy is put into place to avoid demand led inflation as and when required.
  • In order to streamline the supply, initiatives have been undertaken by the government in order to resolve the supply related constraints particularly in the context of rice (Sambijantoro, 2014). A critical role in this regard is played by the State Logistics Agency.
  • The government is taking active measures so as to bring down the duel related subsidies by rationalization of the same and thereby containing inflation.

Conclusion

On the basis of the above discussion, it may be concludes that in the period under consideration, Indonesia has witnessed rapid economic growth. Even though the global financial crisis did have some impact of economic growth but it was not sufficient to reverse the growth story. There has been a decline in the unemployment as economic progress has been witnessed primarily on account of higher labour demand which may be attributed to the initiatives taken by the government. But structural issues still need to be sorted out for future growth and government intervention is required for the same. The level of inflation witnessed has been on the higher side driven by food related inflation along with ill-targeted fuel subsidies. However, measures have been taken by the government in association with the central bank to keep the rising prices under control which have achieved only moderate success till now.

References

G20 (2014), Employment Plan 2014 – Indonesia, Retrieved on August 16, 2017 from www.g20ewg.org/index.php/.../5-employmentplans?...47...employment...indonesia

Goodwin, N., Nelson, J., Harris, J., Torras, M. & Roach, B., (2013). Macroeconomics in context, New York : ME Sharpe.

Hoover, K. (2012). Applied intermediate macroeconomics, Cambridge: Cambridge University Press.

Indonesia-Investments (2015), Unemployment In Indonesia, Retrieved on August 16, 2017 from

Mankiw, N. (2012). Macroeconomics, New York: Worth Publishers

Manurung, N. (2013), Indonesia Inflation Rate at 4-Year High as Economy Set to Slow, Retrieved on August 16, 2017 from

McTaggart, D., Findlay, C., & Parkin, M. (2012). Macroeconomics, French Forest, N.S.W.: Pearson

Pigou, A. C. (2013). Theory of unemployment, New York: Routledge

Sambijantoro, S. (2014), Bank Indonesia shifts focus to supply-side of inflation, Retrieved 16 August 2017, from

Suryadarma, D.,Suryahadi, A. & Sumarto, S. (2007), Reducing Unemployment in Indonesia: Results from a Growth-Employment Elasticity Model, Retrieved 16 August 2017, from

Trading Economics (2017), 300,000 Indicators from 196 countries, Retrieved 16 August 2017, from

Weale, M., Blake, A., & Christodoulakis, N. (2015). Macroeconomic Policy, Florence: Taylor and Francis.

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