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Indonesia’s economy

Indonesians hope that their new president will be able to speed up reforms to stimulate
economic growth and economic development. These reforms include upgrading
infrastructure, reducing red tape (excessive regulations) and reducing corruption. It is also
hoped that he will increase Indonesia’s global competitiveness, create new jobs and educate
one of the world’s youngest workforces.

Some government policies are already being implemented. These include a large power
plant construction programme, tax incentives to infant industries and tax cuts for industries
like transport, telecommunications, metal production and agricultural processing. In addition,
there has been a decision to reduce fuel subsidies in order to contribute funds towards the
government’s record US$22 billion investment in infrastructure projects. The subsidies had
kept fuel prices low in a country where millions of people live in poverty.

Despite the policies, Indonesia is struggling. Economic growth is slow and consumer
confidence has deteriorated. Indonesia’s main export commodities are coal, gold and palm
oil, for which prices have fallen. The inflation rate is 7.26%, which is above the central
bank’s target range of 3 to 5%. Slower growth in the world economy makes the situation
even worse for Indonesia’s struggling economy. Economists have said that the president
must put his efforts into improving export competitiveness by making investments in
education and training.

The costs of doing business in Indonesia are high due to paperwork and confusing
regulations. The government has adopted policies to improve this. These policies aim to
create certainty and transparency for foreign investors and to empower small businesses,
which play a critical part in Indonesia’s economy. Other policies, such as obtaining loans and
encouraging micro-credit institutions, make it easier to gain access to credit.

Indonesian development statistics

2013 2014 2015 2016 2017 2018 2019


Relative poverty % 11.5 11.0 10.80 10.64 10.12 9.87 9.5
Absolute poverty (%) 64 63 60 58 57 54 52
Gini coefficient 0.41 0.41 0.40 0.39 0.39 0.38 0.37
Human development 0.68 0.69 0.7 0.7 0.71 0.71 0.72
index (HDI)

© Mark Johnson,
InThinking www.thinkib.net/Economics 1
Questions:

(a) (i) Define the term infrastructure indicated in bold in the text (paragraph 1). [2]

(ii) Define the term micro-credit indicated in bold in the text (paragraph 4). [2]

(b) i. Complete the following table which expresses HDI as an index. The year 2013 has
been set to 100. [3]

2013 2014 2015 2016 2017 2018 2019


Human development 100
index (HDI)

(ii) Explain 2 ways that making ‘it easier to gain access to credit’ might help the Indonesian
economy? [2]

(c) Using a demand and supply diagram, explain the impact on the market for fuel of the
government’s decision to reduce fuel subsidies (paragraph 2). [4]

(d) Using a production possibilities curve (PPC) diagram, explain how “the government’s
record US$22 billion investment in infrastructure projects” will affect Indonesia’s
production possibilities (paragraph 2). [4]

(e) Using an appropriate diagram illustrate the change to income inequality in the Asian
nation during this period. [4]

(f) Using an AD/AS diagram, explain how “slower growth in the world economy makes the
situation even worse for Indonesia’s struggling economy” (paragraph 3). [4]

(g) Using information from the text/data and your knowledge of economics, discuss
the possible impacts of market-oriented and interventionist policies on Indonesia’s
economic development. [15]

© Mark Johnson,
InThinking www.thinkib.net/Economics 2

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