This is an excellent account. Another thing not really mentioned is that Indonesia has done a very creditable job of mitigating corruption, which became a real problem in the final years of the Suharto Administration. His family, especially Tommy, took dominant stakes in many key strategic industries (eg. the clove cartel - if you don't think cloves matter in Indonesia, just inhale the air for a few minutes from the second one touches down in the country). And Suharto's wife, Tien Suharto, was jokingly known as "Mrs Ten Percent", which gives you some idea of the scale of the corruption. As an investor in this country during that time, it was very challenging navigating one's way around this problem.
All of that has been substantially reduced in the last 25 years or so, which adds to the extraordinary story of success that Noah has rightly outlined here.
Jun 28, 2022·edited Jun 28, 2022Liked by Noah Smith
An Indonesian here, thanks for writing about Indonesia! Although to me a main limitation of this article is that it leaves out the role of domestic consumption, which has been understood as the primary driver of Indonesian GDP growth - particularly post late-90s crisis.
The main focus on natural resources exports vs industrial exports is also very problematic because the service sector has been the main contributor to the GDP growth in the recent years - helped by the growth of e-commerce sector (in which Indonesia has been the largest market in Southeast Asia) and increased digitalisation across Indonesia.
I must admit whilst I admire Noah's optimism, I - working at a major regional investor - am coming to the opposite view about Indonesia and advocate ramping down new investment there in the longer term. Indonesia simply does not deliver in creating middle class people and has consistently failed to do this over time, particularly in recent years.
I will give some points about this:
- Of course we are all aware of Indonesia's inequality. But how does that feed into the economy? Well for a start, by our calculations the number of people with a household net asset value of US$10,000 or more, a good proxy for "middle class", has remained very static since 2000 (indeed by some calculations this number has actually *declined*, an extraordinary situation).
- This reflects various issues, including the fact that median household wealth growth has actually barely outrun inflation during this period, compared to regional peers. Furthermore an examination of the last commodity super cycle (2006 - 2012) demonstrates that the gap between GDP growth and wage growth was substantial - the "wealth conversion" ratio was much lower than others. Likewise the "consumption conversion" ratio, of GDP growth feeding through into consumption growth, has been negative in Indonesia, the only example of its kind.
- This then feeds into the real economy and both empirical and anecdotal evidence. We do a lot in Indonesia: we are the largest car manufacturer, a retail operator, we build toll roads, do insurance, we are the largest mining contractor, and distributor of heavy machinery, and a large plantations owner. Yet in every consumer category, Indonesia continues to disappoint: the passenger vehicle business for first time four wheel has never really taken off; whilst hypermarkets have struggled everywhere in the region, modern retail has never even had their day in the sun in Indonesia; the ability to upsell from basic banking to basic financial products has been slow.
Overall therefore, we see a "true population" in Indonesia of only 50m-60m, and we do not see this growing strongly even with the upcoming commodity boom. Even when GDP looks healthy, the fact is that both inflation and inequality prevent this from creating middle class people. If you compare Indonesia to its neighbours, it is shockingly poor: it is not creating middle class people at anything like the rate China did in the 2000s or Vietnam is doing now. Indeed both China and Vietnam have added 4,000%+ of nominal GDP since 1990; Indonesia less than 1,000%.
I don't wish to be overly personal but I wonder if Noah has ever set foot in Indonesia? Because when you do, a lot of this becomes more self explanatory. When you walk along the streets of Saigon or Bangkok, you see absurd little shops selling things like female apparel that we could never relate to, but it is *people endeavouring to make their lives better, one step at a time*. In Indonesia, this layer of life is so very thin. There are those that have and those that have not - and the amount of pavement (sidewalk) is a good index: there are none because the rich go everywhere by car and the poor go nowhere at all.
This is not to say Indonesia is in any way "irrelevant". It remains a large natural resource state and could possibly become a staging post for regional trade from Australia in terms of things like energy and metals. But one thing seems fairly clear: it will not have the wherewithal to create, say, an export-quality manufacturing sector within our life times. There are plenty of explanations for this, but coming at it from the perspective of a region where people have been trumping up Indonesia for two decades, the surprise is much more how poorly it has done, rather than how well.
Good post. You write India instead of Indonesia when you mention its $11,000 GDP p c.
Wonder if other “premature deindustrializarion” countries (much of Africa comes to mind) have similar stories. Lots of countries had sovereign debt crises in the 80s and 90s and then commodity booms in the 00s.
Glad to see Indonesia getting some love - its one of the countries which gets the least attention compared to its importance.
Looking forward the most exciting prospect is Indonesia becoming a centre for battery and EV production. Its already the biggest producer of nickel in the world and has an absurd proportion of global reserves - which are vital for batteries. The government has been pretty ruthless about leveraging this to push companies to refine and manufacture in Indonesia - including using export bans... Despite predictions otherwise this worked and you can see Hyundai, LG, and Foxconn are all making huge investments already and Tesla is sniffing around.
I don't have anything to add on economics but Eka Kurniawan's novel Beauty Is A Wound is fantastic and takes place across the second half of the 20th century in Indonesia.
It also has one of the best opening lines in literature
"One afternoon on a weekend in May, Dewi Ayu rose from her grave after being dead for twenty-one years…"
I am an economist from Indonesia and always skeptical with the whole deindustrialization debate. Most of the time when people talk about it, they always imagine that a decline in share or relative contribution comes hand in hand with a reduction in absolute production capacity. This is a bad fantasy. What has happened since 1998 is that Indonesian manufacturing sector keeps growing with local businesses opting for manufacturing sector that requires simple and not sophisticated technology like food and beverages manufacturing. They sell the products domestically with a very slim chance for exporting.
Technologically more sophisticated manufacturing like automotive is still the playground for foreign investors. It is difficult for local businesses to enter into such industries, because they are struggling to acquire capabilities in engineering and product design. For example, Astra International (Toyota's local partner and a conglomerate) needs around 40 years to acquire and develop internal capabilities for designing auto parts and components. Astra has partnered with Toyota's first-tier suppliers since late 1970s and early 1980s, but acquiring and developing such critical capabilities to upgrade itself in the whole supply and value chains is not automatic.
I am glad that economics has a new field called organizational economics. It is the key to understand parts of the black box in Indonesia's economic development and business history.
Since 2015, the Chinese has invested heavily in Indonesia's metal manufacturing, specifically nickel smelters and stainless steel factories. Unlike businesses from other countries, they are willing to make massive investments not only constructing the smelters and factories, but also investing in major infrastructures such as power plants, ports, airports and road located in industrial parks near the mining area, owned by the Chinese and facilitated by the government with super sweet incentives.
Why local businesses opt to invest huge in natural resources rather than in manufacturing? I think the global commodity prices boom plays a part, but shortsighted commercial calculation - unwilling to make huge efforts and time investment to acquire complicated capabilities required in manufacturing - is another part of the equation.
Would like to see something similar for the development of an African country. Not Botswana as they are well known for development. But any other that has showed good progress in the last 30 years which is not entirely commodity based. Maybe it will be hard to find in comparison with Indonesia and the other countries you have covered so far.
Also, Indonesia is doing shockingly well at supplying the world with English-speaking Vtubers, which I promise are the most interesting thing to happen on the internet in the last two years (and may replace anime with the poor health of that industry). I’m certain this is the only reason lots of Westerners have thought about Indonesia once in their lives. …But that’s not something a lot of people can get into, and the reason they speak English is the local population don’t make good customers.
I want to quibble on transportation. Water transport is much more efficient than truck or rail transport. Looking at the map it seems most of the country would have easy access to water transport.
This is an excellent account. Another thing not really mentioned is that Indonesia has done a very creditable job of mitigating corruption, which became a real problem in the final years of the Suharto Administration. His family, especially Tommy, took dominant stakes in many key strategic industries (eg. the clove cartel - if you don't think cloves matter in Indonesia, just inhale the air for a few minutes from the second one touches down in the country). And Suharto's wife, Tien Suharto, was jokingly known as "Mrs Ten Percent", which gives you some idea of the scale of the corruption. As an investor in this country during that time, it was very challenging navigating one's way around this problem.
All of that has been substantially reduced in the last 25 years or so, which adds to the extraordinary story of success that Noah has rightly outlined here.
An Indonesian here, thanks for writing about Indonesia! Although to me a main limitation of this article is that it leaves out the role of domestic consumption, which has been understood as the primary driver of Indonesian GDP growth - particularly post late-90s crisis.
The main focus on natural resources exports vs industrial exports is also very problematic because the service sector has been the main contributor to the GDP growth in the recent years - helped by the growth of e-commerce sector (in which Indonesia has been the largest market in Southeast Asia) and increased digitalisation across Indonesia.
I must admit whilst I admire Noah's optimism, I - working at a major regional investor - am coming to the opposite view about Indonesia and advocate ramping down new investment there in the longer term. Indonesia simply does not deliver in creating middle class people and has consistently failed to do this over time, particularly in recent years.
I will give some points about this:
- Of course we are all aware of Indonesia's inequality. But how does that feed into the economy? Well for a start, by our calculations the number of people with a household net asset value of US$10,000 or more, a good proxy for "middle class", has remained very static since 2000 (indeed by some calculations this number has actually *declined*, an extraordinary situation).
- This reflects various issues, including the fact that median household wealth growth has actually barely outrun inflation during this period, compared to regional peers. Furthermore an examination of the last commodity super cycle (2006 - 2012) demonstrates that the gap between GDP growth and wage growth was substantial - the "wealth conversion" ratio was much lower than others. Likewise the "consumption conversion" ratio, of GDP growth feeding through into consumption growth, has been negative in Indonesia, the only example of its kind.
- This then feeds into the real economy and both empirical and anecdotal evidence. We do a lot in Indonesia: we are the largest car manufacturer, a retail operator, we build toll roads, do insurance, we are the largest mining contractor, and distributor of heavy machinery, and a large plantations owner. Yet in every consumer category, Indonesia continues to disappoint: the passenger vehicle business for first time four wheel has never really taken off; whilst hypermarkets have struggled everywhere in the region, modern retail has never even had their day in the sun in Indonesia; the ability to upsell from basic banking to basic financial products has been slow.
Overall therefore, we see a "true population" in Indonesia of only 50m-60m, and we do not see this growing strongly even with the upcoming commodity boom. Even when GDP looks healthy, the fact is that both inflation and inequality prevent this from creating middle class people. If you compare Indonesia to its neighbours, it is shockingly poor: it is not creating middle class people at anything like the rate China did in the 2000s or Vietnam is doing now. Indeed both China and Vietnam have added 4,000%+ of nominal GDP since 1990; Indonesia less than 1,000%.
I don't wish to be overly personal but I wonder if Noah has ever set foot in Indonesia? Because when you do, a lot of this becomes more self explanatory. When you walk along the streets of Saigon or Bangkok, you see absurd little shops selling things like female apparel that we could never relate to, but it is *people endeavouring to make their lives better, one step at a time*. In Indonesia, this layer of life is so very thin. There are those that have and those that have not - and the amount of pavement (sidewalk) is a good index: there are none because the rich go everywhere by car and the poor go nowhere at all.
This is not to say Indonesia is in any way "irrelevant". It remains a large natural resource state and could possibly become a staging post for regional trade from Australia in terms of things like energy and metals. But one thing seems fairly clear: it will not have the wherewithal to create, say, an export-quality manufacturing sector within our life times. There are plenty of explanations for this, but coming at it from the perspective of a region where people have been trumping up Indonesia for two decades, the surprise is much more how poorly it has done, rather than how well.
Good post. You write India instead of Indonesia when you mention its $11,000 GDP p c.
Wonder if other “premature deindustrializarion” countries (much of Africa comes to mind) have similar stories. Lots of countries had sovereign debt crises in the 80s and 90s and then commodity booms in the 00s.
Glad to see Indonesia getting some love - its one of the countries which gets the least attention compared to its importance.
Looking forward the most exciting prospect is Indonesia becoming a centre for battery and EV production. Its already the biggest producer of nickel in the world and has an absurd proportion of global reserves - which are vital for batteries. The government has been pretty ruthless about leveraging this to push companies to refine and manufacture in Indonesia - including using export bans... Despite predictions otherwise this worked and you can see Hyundai, LG, and Foxconn are all making huge investments already and Tesla is sniffing around.
There’s a reason that whenever a new Labor Govt is elected their first international trip is to Indonesia
Sadly our right wing Coalition don’t do the same when they win Govt
I don't have anything to add on economics but Eka Kurniawan's novel Beauty Is A Wound is fantastic and takes place across the second half of the 20th century in Indonesia.
It also has one of the best opening lines in literature
"One afternoon on a weekend in May, Dewi Ayu rose from her grave after being dead for twenty-one years…"
Good piece Noah,
I am an economist from Indonesia and always skeptical with the whole deindustrialization debate. Most of the time when people talk about it, they always imagine that a decline in share or relative contribution comes hand in hand with a reduction in absolute production capacity. This is a bad fantasy. What has happened since 1998 is that Indonesian manufacturing sector keeps growing with local businesses opting for manufacturing sector that requires simple and not sophisticated technology like food and beverages manufacturing. They sell the products domestically with a very slim chance for exporting.
Technologically more sophisticated manufacturing like automotive is still the playground for foreign investors. It is difficult for local businesses to enter into such industries, because they are struggling to acquire capabilities in engineering and product design. For example, Astra International (Toyota's local partner and a conglomerate) needs around 40 years to acquire and develop internal capabilities for designing auto parts and components. Astra has partnered with Toyota's first-tier suppliers since late 1970s and early 1980s, but acquiring and developing such critical capabilities to upgrade itself in the whole supply and value chains is not automatic.
I am glad that economics has a new field called organizational economics. It is the key to understand parts of the black box in Indonesia's economic development and business history.
Since 2015, the Chinese has invested heavily in Indonesia's metal manufacturing, specifically nickel smelters and stainless steel factories. Unlike businesses from other countries, they are willing to make massive investments not only constructing the smelters and factories, but also investing in major infrastructures such as power plants, ports, airports and road located in industrial parks near the mining area, owned by the Chinese and facilitated by the government with super sweet incentives.
Why local businesses opt to invest huge in natural resources rather than in manufacturing? I think the global commodity prices boom plays a part, but shortsighted commercial calculation - unwilling to make huge efforts and time investment to acquire complicated capabilities required in manufacturing - is another part of the equation.
Australia reached developed nation status with an economy based on resource extraction and primary industries
Would like to see something similar for the development of an African country. Not Botswana as they are well known for development. But any other that has showed good progress in the last 30 years which is not entirely commodity based. Maybe it will be hard to find in comparison with Indonesia and the other countries you have covered so far.
The last sentence is missing a period.
Also, Indonesia is doing shockingly well at supplying the world with English-speaking Vtubers, which I promise are the most interesting thing to happen on the internet in the last two years (and may replace anime with the poor health of that industry). I’m certain this is the only reason lots of Westerners have thought about Indonesia once in their lives. …But that’s not something a lot of people can get into, and the reason they speak English is the local population don’t make good customers.
I want to quibble on transportation. Water transport is much more efficient than truck or rail transport. Looking at the map it seems most of the country would have easy access to water transport.
Indonesia is one of the few countries in the world, where non-Muslims are taxed, because they are not Muslims.
I have three questions here:
1. Are only Jews and Christians taxed?
2. What happens to those, who are not Muslims, Christians, or Jews?
3. What is the rate of taxation on non-Muslims? (For Muslims, last time I checked, there is a 2% tax, too.)
No idea it had come such a long way and achieved so much under the radar.
Thanks
Amr
Interesting case for Indonesia.
Now do Malaysia. And isn't it time for a larger piece/book on the latest generation of Asian nations.
Where did you get the imports/exports map for Indonesia, I want to look at more of them for other countries.