Indonesia: Adapting to rising commodity prices

March 16, 2011

Jakarta, March 16, 2011 – The latest Indonesia Economic Quarterly released today by the World Bank highlights recent progress in Indonesia’s economy: GDP growth reached almost 7 percent in the final quarter of 2010, while investment and consumption are all on upward trends.

Investment’s contribution to growth over 2010 has been particularly encouraging, with investment rates now even higher than before the 1997 financial crisis. Foreign direct investment has also increased, reaching record levels. However, rises in domestic and international commodity prices bring many of the same challenges that Indonesia faced in 2008.

“Recent trends in investment, the performance of the manufacturing and services sectors, plus strong commodity demand from China and India, all support a positive growth outlook for 2011,” says Shubham Chaudhuri, Lead Economist for the World Bank in Indonesia. “The flipside however, is that shocks to domestic food prices, as seen recently with Indonesia’s rising rice prices, have been known to increase poverty rates, even in times of economic growth.”

Global commodity prices continue to move upwards, with many now at or above the highs of 2008. For example, energy prices are 28 percent higher year-on-year to February 2011, while agricultural commodity prices are 17 percent higher than their peak in 2008. As a producer of many of these commodities, Indonesia is well-placed to take advantage of these trends although the benefits may be uneven. Households linked to commodity sectors could potentially earn higher incomes, while poorer households may suffer from higher food or energy prices. Policies to promote inclusive growth can help to address such concerns and counter the increase in inequality that was seen during the last ten years; a period in which Indonesia’s middle class grew in size.

“Looking forward, the rise in Indonesia’s middle class will result in profound changes. Over the last 7 years, the country saw 7 million people each year entering the lower middle-income group,” said World Bank Country Director for Indonesia, Stefan Koeberle, referring to the segment of society with expenditures of US$ 2 to US$ 20 per day. “In future this growing middle class will be consuming more and will demand better jobs and higher quality health services and tertiary education. Policy making in the medium term will need to meet these new demands.”

Further increases in oil prices will increase the cost to the budget of Indonesia’s energy subsidies which, for the most part, benefit individuals that are better-off. The Indonesian government has announced plans to improve the targeting of these subsidies. This could enhance an already strong fiscal position, but more importantly, create room for spending on social assistance to the poor and vulnerable, on infrastructure needs and on providing better public goods and services.


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