As noted in the Asia-Pacific Conference of German Businesses (APK) Digital 2020, the Asia Pacific region will continue to drive global economic growth. Indonesia, being the 7th largest economy in the world in terms of GDP (PPP), is ready to become one of its fastest running engines.
Over the past few of decades, Asia has been leading the world鈥檚 economic growth, contributing roughly 60% of global growth with the region鈥檚 GDP standing at 5.2% in 2018 and 4.4% in 2019 according to the IMF. This has resulted in about a billion people lifted out of poverty as successive waves of Asian economies made the transition to middle-income and even advanced-economy status.
Governor of the Bank Japan Kuroda Haruhiko, in his speech at the 62nd annual meeting of the National Association for Business Economics this October, attributed Asia Pacific鈥檚 economic growth to three factors. The first is the development of advanced regional supply chain networks, spanning raw materials and intermediate good, as well as final goods. The second is the progress made in trade liberalization through the concerted enhancement of trade agreements both within and outside the region. Third is the self-sustained growth of domestic demand supported by rising incomes from increases in production and trading activities. In short, Asia is the world's manufacturing base as well as its consumer base.
As mentioned in APK Digital 2020, this is unlikely to change. The COVID-19 pandemic has devastated economies and lives all across the globe. Asia Pacific countries experience the crisis first following the first outbreak in Wuhan, China. But that the region would be able to handle the crisis well in comparison to other regions is no small feat. The early health response and significant fiscal and non-fiscal policy stimulus played a major role in preventing further deaths and deep economic recessions. The IMF predicts only a 2.3% contraction by the end of 2020 for the Asia Pacific region. In comparison, the European economy is predicted to contract by -7.2%, and North America at -4.9%. The institution further predicts an economic rebound for the Asia Pacific region of 6.9% in 2021.
Indonesia, having the world鈥檚 fourth largest population at over 270 million, is poised to take on a leading role in this rebound. As in many countries, the COVID-19 pandemic has pushed Indonesia鈥檚 economy downwards, contracting by 5.32% in the second quarter of 2020 after growing only by 2.97% in the previous quarter. Indonesia has taken concrete steps to overcome the stupor by injecting fiscal and non-fiscal stimuli with a budget of US$43 billion. At the APK Digital 2020, Indonesian Coordinating Minister of Economic Affairs Airlangga Hartarto expressed confidence that Indonesia鈥檚 economy will rebound in 2021 to its pre-COVID-19 economic growth rate of between 4.5% and 5.5%.
This is due to the country鈥檚 awareness of the opportunities that COVID-19 also brings: momentum to upgrade the skill of its workers and the acceleration in digital transformation.
For at least the last couple of decades, Indonesia鈥檚 economy has largely been driven by domestic consumption with a share of 60% of GDP. And while its manufacturing capacity still lags behind countries like China and India, it has outpaced the country's more natural resource heavy sectors such as agriculture and mining with a 19.7% share of GDP contribution by industry as of the end of 2019.
This is set to be further boosted by the issuance of the Omnibus bill on Job Creation, which was signed into law on October 3, 2020. Designated as Law No. 11/2020, this 1,187-page document amends 77 laws and thousands of articles deemed to be obstructive to the Ease of Doing Business. The document opens the gate to significant changes in the country鈥檚 less-than-friendy business policies such as the notorious negative investment list (to be eliminated entirely to be replaced by a so-called positive investment list), as well as the country鈥檚 high worker severance payment levels (notable as being among the highest in the world). And while the implementing regulations to the law are still being developed, the signing of the bill into law is a significant step in Indonesia鈥檚 economic reform efforts.
Multi-speed recovery
There still lies however the danger of non-inclusive growth. China, which suffered the pandemic鈥檚 blow earlier than other countries, has seen a strong recovery after the first quarter lockdown, with the IMF revising the country鈥檚 economic growth up to 1.9% this year 鈥� one of the very few countries that may still post positive growth in 2020. Advanced economies such as Australia, Korea, Japan and New Zealand, while still in recession, are expected to do somewhat better than expected in 2020, having been able to stop their nations from locking down longer thanks to their quick health response.
The same cannot yet be said about other countries and the sub-regions of Asia Pacific. The IMF predicts a deep 8.4% contraction for South Asia. Countries that rely heavily on tourism, such as Thailand, will take longer to recover. This will give way to income and wealth inequality, which is already increasing even before the pandemic. Unless decisive policy action is taken, the region could experience financial turbulence.
At APK Digital 2020, much was said about the German policy guidelines for the Indo-Pacific region, in which Germany acknowledge the region as key to develop towards rule-based international order. As Mr. Hartarto mentioned in his speech at APK Digital 2020: 鈥淚 believe this is the time for our two countries to take advantages of this momentum. I therefore would like to invite German business and industry community, to be our investment partners in supporting and developing Indonesia economic transformation... By investing in Indonesia, you are not only benefitting from our strategic location at the heart of the growing market of East and Southeast Asia, most importantly, it will also place Germany in the forefront of the regional drive towards economic recovery and economic transformation.鈥�