Indonesian Economic Development: I. Start-Up Activity

INDONESIAN ECONOMIC DEVELOPMENT
Learning objectives:
By the end of this chapter, the students are able to:
1. Comprehend an English reading passage related to Indonesian economic
development
2. Understand the techniques used in guessing difficult vocabulary
3. Guess the meaning of vocabulary using techniques already learnt.
I. Start-up Activity
(MacKenzie, 2002, p. 145)
Try to scan the words in “quotation mark”

1. What does the word “business cycle” in line 1 mean?
2. The word “recession” in line 5 is best replaced with
a. rise
b. decline
c. break
3. What is “depression”?
4. What can be called as “trough”?
5. How is contraction described by the “economists”?
II. Reading Comprehension
Indonesia’s economy has expanded strongly over recent decades,

notwithstanding the sharp economic contraction that occurred during the 1997–1998
Asian financial crisis (Graph 1 and Table 1). This strong pace of growth has seen
Indonesia become an increasingly important part of the global economy. It is now the
fourth largest economy in East Asia1– after China, Japan, and South Korea – and the
15th largest economy in the world on a purchasing power parity1 (PPP) basis.
Furthermore, its share of global output – currently just under 1½ per cent – is expected
to continue to rise over the years ahead (Graph 2).
Over time, the structure of the Indonesian economy has changed considerably.
Historically, the economy has been heavily weighted towards the agricultural sector2,
reflecting both its stage of economic development and government policies in the
1950s and 1960s to promote agricultural self-sufficiency2. A gradual process of
industrialization and urbanization began in the late 1960s, and accelerated in the
1980s as falling oil prices saw the Indonesian Government focus on diversifying away
from oil exports and towards manufactured exports (Goeltom, 2007). From the mid-
1980s, trade barriers were reduced and the Indonesian economy became more
globally integrated. Since the Asian crisis, Indonesia’s relatively strong growth
outcomes have been accompanied by reduced output volatility3. Notably, economic
growth in Indonesia slowed only moderately during the 2008–2009 global downturn4,
while there was a marked decline in output in most advanced economies and other
East Asian economies (except China).
Indonesia is the fourth most populous nation in the world, with 242 million
people, and the second most populous in East Asia after China. While Indonesia’s
population growth has been slowing, in the 2000s it outpaced that in China and the
major advanced economies (Graph 3). By 2010, Indonesia accounted for 11 per cent
of the population of East Asia and 3½ per cent of the global population. Importantly,
Indonesia’s population is relatively young. The median age in Indonesia is 28, which
is the third youngest in East Asia and around 10 years younger than in most major
advanced countries. The dependency ratio – the number of children and elderly
relative to the working-age population– is low and the working-age population has
been rising. These demographics have provided a boost to GDP growth that should
continue for much of the next two decades3, up from 70 per cent in 1975, while more
than two-thirds of secondary school-aged children were enrolled in school (up from
less than 20 per cent 35 years ago). Indonesia is likely to see strong productivity gains
from further investment in its human capital, as it will allow more workers to be
employed in industries with relatively high value added5 (Granado, et al., 2007).
1
Unless otherwise specified, East Asia refers to the economies of China, South Korea, Taiwan, Hong
Kong, Singapore, Indonesia, Thailand, Malaysia and the Philippines.
2 In this article the agricultural sector is defined to include forestry, fishing and hunting.
3 As explored in Hall and Stone (2010), this boost is expected to fade gradually with demographic
factors starting to drag on growth in the late 2020s
Indonesia’s recent strong economic growth has also been accompanied by
relatively steady inflation6. This followed a rapid increase in the price level during the
Asian crisis driven by the sharp depreciation7 of the Rupiah (Graph 4). Since an
inflation target was introduced in Indonesia in 2000, the GDP deflator8 and the CPI
have grown at an average annual pace of 10¾ per cent and 9 per cent, respectively,
similar to the pace recorded in the two decades prior to the Asian crisis, but well below
the pace in the 1960s and 1970s. Inflation has also generally trended lower through
the 2000s, with some of the fluctuations in inflation reflecting government policy
initiatives such as the changes in fiscal9 subsidies in 2005 and 2008 which caused
large temporary spikes in CPI growth.
Graph 1
Indonesia – Real GDP*
1980 = 100, log scale
(*The authors are from Economic Analysis Department)
Table 1: Indonesia – GDP and Population
Per cent
\\
Graph 2
Indonesia – Share of World GDP*
At PPP exchange rates
Graph 3
Population
Average annual growth, 2000–2009
(Elias & Noone, 2011, p. 33-34)
Glossary:
1Parity (n) : equality or equivalence, especially as regards status, pay, or value
2Self-sufficiency
(n) : an ability to satisfy one's basic needs without outside help, especially
with regard to the production of food
3Volatility (n) :an ability to change rapidly and unpredictably, especially for the worse
4Downturn (n) : a decline in economic or other activity
5Value added (n) : the amount by which the value of an article is increased at each stage of its
production, exclusive of initial costs
6Inflation (n) : a general increase in prices and fall in the purchasing value of money
7Depreciation (n) : diminishing in value over a period of time; reducing the recorded value of (an
asset) over a predetermined period
8Deflator (n) : a means of reducing price levels in (an economy)
9Fiscal (adj) : relating to government revenue, especially taxes
Answer the questions by referring to the reading passage above.
1. Why is Indonesia role is vital in global economic?

2. Look at Graph 1. Why does the line show a decrease in the middle of the period?
3. Look at paragraph 2 under heading ‘Economic Development’. What basis is used
to discuss Indonesia’s economic development?
4. Why did Indonesian government vary the exports in 1980s?
5. Why did Granado mention that Indonesia would see strong productivity gains from
its investment in human capital?

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INDONESIAN ECONOMIC DEVELOPMENT

(MacKenzie, 2002, p. 145)

Try to scan the words in “quotation mark”

Indonesia’s economy has expanded strongly over recent decades,

(Elias & Noone, 2011, p. 33-34)

Answer the questions by referring to the reading passage above.

1. Why is Indonesia role is vital in global economic?

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