What’s new in the August issue of BIES

by Pierre van der Eng

Vikram Nehru‘s ‘Survey of recent developments’ draws attention to Indonesia’s still fluid political situation, in the lead-up to the parliamentary and presidential elections in April 2014 and July 2014, respectively. It explains that the balance of power between key institutions in the young democracy remains unsettled, and that constitutional checks and balances continue to be tested.

Annualised economic growth exceeded 6%, in a challenging international environment, yet several developments call for caution about Indonesia’s near-term growth prospects. For example, investment growth continued to slow, and both the current and the capital accounts of the balance of payments were in deficit, putting depreciating pressure on the rupiah. Nehru points out that the recent rise in global interest rates reversed the major capital inflow that Indonesia had experienced up until May, which contributed to a stock-market correction and placed the rupiah under further pressure. Non-residents still have relatively large holdings of Indonesian stocks and bonds; the ratios of foreign debt relative to export earnings and of short-term debt to reserves remain relatively high. With firms bracing for a possible combination of rising interest and exchange rates, the survey predicts that this pressure may persist for the foreseeable future.

The survey also notes mixed policy developments. The appointment of Chatib Basri as finance minister, in May, and parliament’s approving the revised budget, in June, may have reassured markets and investors. The revised budget is based on more realistic assumptions and, in particular, on an increase in the subsidised fuel price, which is likely to prevent a further blowout in the cost of fuel subsidies. Nehru predicts that this achievement should encourage investor confidence and also free up public funds for urgent infrastructure and social-assistance programs. In contrast, he considers restrictions on imports of horticultural products and beef, and also the draft trade and industry laws, to be part of a new economic nationalism in Indonesia. The survey concludes with a close look at the efficacy of Indonesia’s social-assistance programs in the light of the fuel-price increase and the current government’s ambitious poverty-reduction target for 2014.

The three articles that follow Nehru’s survey discuss topical issues. First, Chris Manning and Devanto S. Pratomo ask, ‘Do migrants get stuck in the informal sector?’ – a pertinent question, given the growing numbers of migrant workers in Indonesia who move from rural to urban areas in search of better opportunities for themselves and their families. Using new empirical data from a tailor-made household survey, they test the often heard argument that most migrant workers and their offspring face great difficulties moving from low-paid, casual jobs in the informal sector to better-paid, continuing positions in the formal sector. The household survey enables the authors to go beyond the usual formal–informal dichotomy of the National Labour Force Survey. Manning and Pratomo find that long-term migrants tend to gravitate to jobs with regular wages in the small-business sector, whereas recent migrants are more likely to work in the informal sector. The article also argues that distortionary labour-market regulations appear to discourage formal employment and thus diminish the overall benefits of migration.

Yogi Vidyattama contributes a significant study of a regular theme in BIES: regional inequality in Indonesia. He investigates one of the main challenges of analysing sub-national data: how to account for the possible ‘neighbourhood effect’ (or how one region’s development can encourage development in its neighbouring regions) on the speed of regional convergence. Vidyattama focuses on the period since the start of decentralisation, in 1999, and analyses data at the provincial and district levels for 1999, 2002, 2005 and 2008. Rather than using only regional GDP-per-capita data (which can suffer from distortion caused by large mining ventures whose income benefits not only the regional economy, and from not accounting for cross-border transactions between regions), Vidyattama also uses Human Development Index (HDI) numbers in his analysis. After accounting for the neighbourhood effect, the article finds that the GDP-per-capita data reveal a degree of divergence, especially because of the economic growth concentrated in Jakarta. The HDI data, in contrast, clearly identify convergence, although its rate decreased over time.

Losina Purnastuti, Paul W. Miller and Ruhul Salim investigate the returns to education, as Indonesia endeavours to reach the United Nations’ Millennium Development Goals as well as meet the national priority, as laid out in the 2010–14 National Medium-Term Development Plan, of improving access to and the quality of schooling. Using income and educational-attainment data from two rounds of the Indonesia Family Life Survey, 1993 and 2007–08, this article investigates whether the rate of return to investment in education is likely to fall as the country’s education sector expands. The authors find rates of return that are lower than those of other studies for Indonesia in earlier years, and also lower than those of other Asian countries. They also find that the rates of return for the same levels of education were generally marginally lower in 2007–08 than in 1993. The rates of return generally remained higher, however, in levels of education beyond junior secondary school, which suggests that investment in such forms of further education, in a growing economy, is likely to remain a paying proposition for young people and their families in Indonesia.

This issue’s collection of recent abstracts of doctoral theses on the Indonesian economy includes studies of the country’s expanding electric power system; informal gold, tin and coal mining; corporate governance, firm performance and firm bribery; and the effects of trade-discriminative arrangements on foreign direct investment and foreign trade. Our book reviews discuss Indonesia’s economic history from 1800 to 2010; poverty and social protection; corporate governance in Indonesian organisations; the effect of the global crisis on East Asia; ASEAN regionalism; the politics of religious identities in Southeast Asia; and the international-relations policies that have shaped the region. Selamat membaca!

The August 2013 issue of the Bulletin of Indonesian Economic Studies is now available. For more information, visit Taylor & Francis Online.