Agus D W Martowardojo: Growth diagnostic for Indonesia - focusing on
human capital and infrastructure
Keynote speech by Mr Agus D W Martowardojo, Governor of Bank Indonesia, at the Bank
Indonesia-Asian Development Bank International Seminar "Structural Reform in Emerging
Asia", Jakarta, 23 March 2016.
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Distinguished speakers, seminar participants, ladies and gentlemen,
Good Morning.
1. It is such a pleasure for Bank Indonesia to host this international seminar jointly
organized with Asian Development Bank, and I am very delighted to welcome you all to this
event.
2. I find the theme of this seminar "Structural Reform in Emerging Asia" both
relevant and important for all of us today, with the global economy still in a state of growth
deficit, and the future path seems to look bleak if not uncertain.
3. I believe that the seminar will provide a great opportunity to discuss how structural
reform can provide a breakthrough which accelerates growth, and make it more sustainable
and inclusive. The discussion will also be a good platform for sharing of experiences on the
implementation of structural reforms in various countries, and from that we can draw valuable
lessons.
4. I am also excited to know that the seminar has been preceded by a technical
workshop on issues surrounding the similar topic, particularly the use of Growth Diagnostic
method and relevant economic models to identify the growth most binding constraints and
the needed policy reforms.
Ladies and gentlemen,
Global and Indonesia's recent economic development and challenges
5. Entering 2016, the global economy continues its period of uncertainty that has
lingered since the global financial crises in 2008. With global growth declining and inflation
remaining low, another sign of ambiguity in the global economy emerged, which is
divergence of economy and monetary policies among major economies.
6. Pressures in the financial market in the beginning of 2016, in the middle of uncertain
bottoming-up of oil prices, have added to concerns about global growth. Conversely, the
deteriorating macroeconomic outlook and worries about medium-term vulnerabilities in the
global economy have unsettled financial markets. With financial institutions under renewed
pressure, adverse feedback effects between finance and the real economy could become
significant.
7. The emerging economies have once withstood the recent global economic turmoil
by taking advantage of credit-fuelled growth as a spillover effect from large accommodative
monetary policy in advanced economy. What may happen next after the recent normalization
of US monetary policy and China's current economic rebalancing process could be a
heightened pressure in emerging economies' growth and financial market. We may simply
face a period of emerging market-originating spillbacks, from the previous emerging
marketreceiving spillovers.
8. Despite tangible results from efforts to increase resilience to external shocks, the
vulnerability of emerging economies remain, due to their rather weak economic structure.
Indonesia's economy in particular, has managed to pick up its growth in 2015 with the help of
increased government consumption on goods and investment in infrastructure projects.
9. In the meantime, dissipating global economic uncertainty and improved confidence
on Indonesia's economy have led to a surplus in capital and financial account during the last
quarter of 2015, bolstered by increase in foreign capital inflows, mainly to government
securities.
10. The confidence on Indonesia's economy also contributed to a more stable Rupiah
with an upward trend and less volatility, while foreign exchange reserves still hover well
above the international standards. Moreover, the low global prices amid weakened domestic
demand also brought domestic CPI inflation to slow down.
Outlook, risks and policies
11. Against the background of maintained stability with carefully monitored
vulnerabilities, we are still optimistic that domestic economic growth is going to be slightly
higher in 2016, supported by the acceleration of infrastructure projects on the fiscal side, and
increased private investment as a result of government policy packages and measurable
monetary easing while maintaining macroeconomic stability.
12. Inflation is expected to be at around of the 4±1% inflation target, with the current
account deficit projected to be below 3% of GDP.
13. However, this outlook is presented with some overshadowing risks in the horizon,
both external and domestic, including another FFR increase expected in the second half of
2016, the slowdown in the Chinese economy, the continuing decline in commodity prices,
and domestically, rising volatile food inflation.
Distinguished guests, ladies and gentlemen,
14. The recent economic dynamics show us the significance impact of external
economic conditions on Indonesia's economy, and emerging economies in general. While
Indonesia is still optimistic toward rising growth, risks are weighing down, especially those
from the external sector, normally uncontrollable to a small open economy or emerging
markets in general.
15. In this juncture, we are arriving at the point why domestic economic strength needs
to be increased, and the effective way to do it is by rising its own growth potential. Monetary
and fiscal policies are mainly aimed at supporting demand, but demand cannot be
optimized if structural problems are not addressed well. Therefore, I believe it is timely
for policymakers in emerging economies, Indonesia included, to focus on structural reform to
boost economic growth in a sustainable manner.
Growth dynamic analysis
16. On that note, it is important to point out that reform needs will differ from one country
to another. History reveals that reform packages commonly prescribed only provide small
benefits for countries that tried to adopt it. On the other hand, countries that implemented
well-focused reforms in key areas have accelerated their growth. Having that said, we
certainly need growth strategy that cater to domestic opportunities and constraints.
17. Economists have concluded that growth accelerations materialize when binding
constraints on growth are removed. Many countries including Indonesia, have keen
interest in a growth diagnostic approach, which aims at identifying the most binding
constraints on economic activity, and the respective set of policies that should be prioritized
and implemented to allow for accelerated and sustainable growth.
18. Growth diagnostic method has been profound and used by a number of countries as
well as international organizations such as the IMF, the World Bank and the ADB itself for
their country analysis. A number of donor agencies has also used this approach as part of
their toolkit when formulating their operational strategies in developing countries.
Growth diagnostic analysis for Indonesia
19. Bank Indonesia has also conducted research using growth diagnostic analysis,
which takes into account the view that development priorities should not only put emphasis
on factor-driven aspects, but also efficiency-driven and innovation-driven areas, all combined
to avoid middle-income trap.
20. BI's growth diagnostic research is unique since it takes into account different
characteristics of Indonesia's regional economies and brings up quantified analysis for policy
response. The result reveals that the low level of return from economic activities is the main
factor that hinders Indonesia's economic growth.
21. Further analysis shows that the root of the problem, which is the most binding
constraints hindering the country's economic growth, are in the area of human capital
enhancement and infrastructure development, particularly in relation to connectivity and
logistics.
22. Human capital issues is indeed a classical problem for middle income countries.
Human development is certainly important for inclusive growth. Currently, Indonesia is in the
period of demographic bonus for up to 30 years ahead, where the period of 2015-2045 will
be marked by 70% working class out of the total population.
23. However, having large population without appropriately large proportion of highly
skilled and educated people would make it difficult to exit the middle income trap. Labor force
with high education is crucial to shift the existing majority of labor-intensive/low-technology
and resource-based industry up to the middle or high technology industry.
24. The development of human capital would lift up the productivity level of the labor
force, which would in turn enhance Indonesia's competitive advantage, which is an important
prerequisite to excel within the current ASEAN Economic Community Era.
25. Infrastructure problem also poses as Indonesia's major constraint for accelerated
growth. Connectivity issues among regions, including the need for high quality and high
capacity harbors, airports, roads and railways in Indonesia have spurred logistical costs.
Manufacturing activities related to exports and imports are especially in need of appropriate
harbors, even for Java region which contribute the largest part to the national economy.
26. In addition, energy particularly electricity, also becomes a crucial issue and serves
as important prerequisite for domestic industry's development. A reliable and adequate
supply of electricity would attract investors' interest to build manufacturing facilities in
Indonesia. The increased foreign direct investment will enhance Indonesia's role within the
global value chain.
27. Policy simulation in our growth diagnostic research indicates the importance of
resolving these human capital and infrastructure issues for growth acceleration
process. Bank Indonesia found that modest increase in electricity capacity and human
development will each enhance growth of around 0.25% per year, while enhancement in the
quality human capital will contribute to an increase in employment of around 0.50%.
Ladies and gentlemen,
Policy priorities
28. To address the existing challenges, I believe we have come to a common
understanding that reforms to improve the economic structure should be underlined
and properly implemented. Cyclical policies from monetary and fiscal domains remain
indispensable indeed, but not sufficient as it only responds to short term recurrent symptoms.
29. Thus far, Bank Indonesia's monetary and macroprudential policies have been
among the key factors in safeguarding macroeconomic stability, which support the structural
reforms pursued by both central and regional government.
30. Bank Indonesia has lowered BI Rate and Primary Reserve Requirement as
available room to ease monetary policy became apparent on the back of solid
macroeconomic stability, including lower inflationary pressures going forward. However,
stability remains the priority.
31. In this regards, Bank Indonesia will also continue to strengthen coordination with
the Government. In addition, by cooperating in harmony with other authorities such as
Indonesia Financial Service Authority (OJK), Bank Indonesia also strives to maintain financial
stability, which together with macroeconomic stability, will provide strong ground for the
country's accelerated and sustainable growth.
32. The needed structural reforms itself should be targeted to address the most binding
constraints. For Indonesia in particular, it may include building more education facilities,
providing highly competent teaching resources, as well as increasing funds for education
both from government and private sector.
33. To address infrastructure problem, providing sufficient land for power plants,
improving business climate for investment in infrastructure, and enhancing regional tax
collection, as well as public private partnership to raise funds for infrastructure projects can
become priority policies to implement.
Ladies and gentlemen,
Going forward
34. Let me reiterate that a good balance of monetary policy, fiscal policy and structural
reform will altogether bring out a policy mix that will take the country many steps forward
toward faster and more sustainable growth. Lessons from countries that are successful in
implementing structural reforms to boost their economic growth such as China and India, will
be especially valuable.
35. Let me also express my special appreciation for the successful collaboration
between ADB and BI in producing a joint book entitled "Growth Diagnostic of Indonesia." I
am looking forward to the launching of the book, which I am certain will provide valuable
insight to all of us.
36. As a final note, I would like to wish you a pleasant and fruitful experience during this
one day seminar. I believe that ideas, insights, and experiences shared among international
and domestic experts as well as the audiences during the sessions will contribute to better
understanding on the important topic of Growth Diagnostic, and bring refreshed ideas for
policy formulation and priorities.
Thank you.