Survey of recent developments

Abstract

Indonesia has so far suffered a relatively mild impact from the global financial crisis. Its economy grew at 4% in the year to June 2009, displaying a more resilient response than some of its neighbours. Fiscal stimulus measures, deft monetary policy and cash transfers to the poor served to soften the impact of the crisis. Parliamentary elections in April and presidential elections in July provided further economic stimulus. Election-related spending and the stimulus measures helped maintain formal sector employment levels and the proportion of casual employees in the workforce. Like the cash transfers, payments by parliamentary candidates to voters contributed to household incomes, particularly among the poor. This is reflected in widespread declines in poverty observed in 2009. The crisis, the stimulus package, the direct cash transfers and the election campaign spending combined to create a mechanism of income redistribution in favour of the poor. On 20 October Susilo Bambang Yudhoyono and Boediono were inaugurated as president and vice president for 2009–14. They announced key economic targets for 2014, including 7% economic growth, 5–6% unemployment and an 8–10% poverty level. It is crucial that the two leaders tackle important reforms – even politically sensitive ones – that will remove obstacles to faster and more employment-friendly growth. However, the plan for their first 100 days focuses on a series of small, politically non-sensitive reforms designed to demonstrate their commitment to, and create momentum for, wider reform. This strategy is unlikely to create an impression that the government is serious about more substantial and essential reforms. Nor is it likely to generate the economic impact necessary to bring the economy closer to the government's key economic targets. The slow expansion of infrastructure since the 1997–98 crisis is a major obstacle to future high and sustained economic growth. Despite some signs of improvement in recent years, Indonesia's rate of infrastructure investment remains far below pre-crisis levels. Tackling this problem should be a high priority for the government. While pursuing ways to grow faster, Indonesia – one of the world's largest CO₂ emitters-needs to respond more vigorously to climate change. The leaders have pledged to place climate change mitigation high on their policy agenda. Yet little has been said about how, as one of the countries most vulnerable to climate change, Indonesia should support her people's adaptation to its effects. The government needs to give high priority to adaptation and promote it at the international level.