CLIM8ING 1nL LADDLk 1C nIGn INCCML

S1A1US
LLSSCNS IkCM IN1LkNA1ICNAL LkLkILNCL
Nd|ame D|op, Lead Lconom|st, Indones|a
Ianuary 06, 2013
kL MLSSAGLS
1. A Mlddle lncome 1rap ls noL lnevlLable.buL caLchlng up wlLh PlL requlres:

3. keep|ng growth from fa|||ng too much and for too |ong fo||ow|ng shocks
! Cood macroeconom|c management ls key
2. Imp|emennng good structura| po||c|es Lo converge qulckly Lo Lhe counLry's
growLh poLenual
! Cons|stency of sLrucLural pollcles and eecnve |mp|ementanon are key
" lndonesla's has hlsLorlcally managed shocks well and has a good Lrack record
of growLh and macro sLablllLy
" Cons|stent |mp|ementanon of structura| reforms ls Lhe challenge
CU1LINL
keep|ng growth from fa|||ng too much fo||ow|ng shocks -
|nternanona| exper|ence

Converg|ng toward potenna| growth - Internanona| exper|ence
o||cy Imp||canons for Indones|a
A m|dd|e-|ncome trap |s not |nev|tab|e - |nternanona| exper|ence

kLCLN1 LVIDLNCL - IkLULNC CI SLCWDCWN S nIGnLk
A1 MIDDLL-INCCML LLVLLS (CLIC 1kANSI1ICN)
See Alyar eL al. (2013)
SCML CCUN1kILS nAVL 8LLN "S1UCk" ICk A LCNG 1IML,
LSLCIALL IN kLLA1IVL 1LkMS..


1981, $3,939
2010, $5,618
1981, $6,965
2010, $7,834
1981, $5,486
2010, $5,794
0.0
0.2
0.3
0.5
0.6
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Ratio to USA GDP percapita Ratio to USA GDP per, capita
USA = 1.0
1981, $25,902
2010, $42,001
Mexico
S.Africa
Brazil
AbsoluLe numbers ln consLanL 2003 uSu
8U1 C1nLkS nAVL 8LLN GkADUALL CA1CnING U, A1
DIIILkLN1 SLLDS NCW


0.00
0.03
0.05
0.08
0.10
0.13
0.15
Ratio to USA GDP per capita
China
Indonesia
1996, $846
1996, $1,197
2010, $2,869
2010, $1,570
1996, $34,750 2010, $42,001
USA = 1.0
AbsoluLe numbers ln consLanL 2003 uSu
kCkLA'S CA1Cn U 8LING kLMAkkA8LL!


0.0
0.2
0.4
0.6
0.8
1.0
1.2
Ratio to USA GDP
percapita
S.Korea
1996, $12,868
2010, $20,625
USA, 1996: $34,750 USA 2010: $42,001
AbsoluLe numbers ln consLanL 2003 uSu
Can be avo|ded. but requ|res keep|ng med|um-term growth from
fa|||ng too much fo||ow|ng shocks - ev|dence
CAACI1 1C MANAGL SnCCkS CkUCIAL IN AVCIDING A
CSSI8LL MIDDLL INCCML 1kA
# We llve ln world of frequenL shocks (nanclal markeLs, commodlLy markeLs,
food markeLs, naLural dlsasLers shocks)
# 1he frequency of shocks has lncreased wlLh greaLer lnLerconnecLedness
(borderless supply chalns, nanclal markeL ows, eLc.)
# 1he Lransmlsslon of shocks across counLrles has become fasLer as a resulL
# MosL counLrles LhaL sLruggle Lo cllmb Lhe lncome ladder falled Lo manage
conunual booms and busLs
SCU1n AIkICA - GkLW IAS1 IN 1nL 60S 8U1 1nLN LN1LkLD
A LkL1UAL CCLL CI 8CCM AND 8US1



-8%
-3%
2%
7%
12%
8.0 8.5 9.0
2000-2012 1990-1999 1980-1989 1970-1979 1961-1969
Ln GDP per capita (constant 2005 USD)

R
e
a
l

G
D
P

p
e
r

c
a
p
i
t
a

g
r
o
w
t
h

(
%
)


! CrowLh recovered ln Lhe years 2000 buL Lhen conLracLed sharply wlLh Lhe ClC ln
2009
MLkICC - 1nL DL81 CkISIS IN 1982 CLNLD A LCNG
LkICD CI GkCW1n INS1A8ILI1
! GD p|unged |n 1982 (debt cr|s|s)
! 1he return to stab|||ty |n end 1990s-ear|y 2000s was then stopped by the GIC


-8%
-3%
2%
7%
12%
8.0 8.5 9.0 9.5
2000-2012 1990-1999 1980-1989 1970-1979 1961-1969
Ln GDP per capita (constant 2005 USD)

8kA2IL- 8CCM, 8US1, "8kICS 8U22" AND 1nLN?
-8%
-3%
2%
7%
12%
7.0 7.5 8.0 8.5 9.0
2000-2012 1990-1999 1980-1989 1970-1979 1961-1969
Ln GDP per capita (constant 2005 USD)

SCU1n kCkLA - kLMAkkA8LL GkCW1n S1A8ILI1,
S1kCNG CAACI1 1C MANAGL SnCCkS
! CrowLh conLracLed ln 1998 (AlC) buL Lhen rebounded Lhe nexL year
! CrowLh conLracLed agaln ln 2009 (ClC) buL rebounded ln 2010
-8%
-3%
2%
7%
12%
7.0 8.0 9.0 10.0
2000-2012 1990-1999 1980-1989 1970-1979 1961-1969
Ln GDP per capita (constant 2005 USD)

CnINA - nAS DCNL WLLL SINCL I1 CLNLD U IN
1nL LA1L 1970S
! CrowLh ln Lhe 1960s and 1970s was exLremely volaule
! Shocks occurred aerwards buL dld noL break" sLrucLurally Lhe growLh paLh!!!
-8%
-3%
2%
7%
12%
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0
2000-2012 1990-1999 1980-1989 1970-1979 1961-1969
Ln GDP per capita (constant 2005 USD)

Ln GDP per capita (constant 2005 USD)

WnA1 DCLS IN1LkNA1ICNAL LkLkILNCL 1LLL US?
# CounLrles LhaL broke lnLo hlgh lncome sLaLus dlsplayed a sLrong capaclLy
Lo manage shocks for a susLalned perlod of ume
! South korea has always faced uncerLalnues and rlsks ln global
markeLs buL has been reslllenL due Lo (1) sLrengLhened banklng and
corporaLe secLors posL-1997, (2) dlversled exporLs, boLh ln producLs
and markeLs and (3) eecuve governmenL response Lo shocks
# lallure Lo malnLaln scal buers and shock absorbers ls cosLly for growLh
! lL Look 16 years for Mex|co Lo reLrleve lLs Cu of caplLa of 1981
($6900)
! ln conLrasL, lL Look South korea only one year Lo reLrleve lLs Cu per
caplLa of 1997 aer Cu per caplLa growLh conLracLed by 7.3 ln
1998
# 1he lnsuLuuonal dlmenslon of crlsls managemenL and response ls cruclal
Can be avo|ded.but a|so requ|res converg|ng toward potenna|
growth - Internanona| exper|ence
1C1AL IAC1Ck kCDUC1IVI1 (1I) IS 1nL MCS1
CnALLLNGING IAC1Ck IN CCNVLkGING 1C C1LN1IAL
GkCW1n
# 1l growLh ls Lhe parL of growLh noL explalned by lncreases ln physlcal caplLal
and physlcal labor (number of workers or hours worked)
# 1l reecLs wheLher resources (LalenLs, nance/credlLs, land) are movlng Lo Lhe
secLors where Lhey are besL used or noL (emclency ln Lhe allocauon of resources
across and wlLhln secLors).
# !usL changlng how land ls used (from low value crops Lo hlgher value crops)
can change Lhe producuvlLy of agrlculLure and Lhe nauon.
# lf LalenLs are bouled up ln low producuvlLy secLors and cannoL move Lo
hlgher producuvlLy secLors, Lhe overall nauonal producuvlLy remalns low
# lf poLenually lnnovauve rms cannoL nd Lhe rlghL skllls Lhey need, Lhey
wlll remaln less producuve Lhan oLherwlse.
# lf regulauons prevenL Lhe enLry of newer and more lnnovauve rms ln any
secLor, Lhen producuvlLy wlll remaln lower Lhan oLherwlse
# AL Lhe rm level, hlgher producuvlLy helps malnLaln compeuuveness
# lor workers, hlgher producuvlLy should mean hlgher real wages
IALLS IN 1C1AL IAC1Ck kCDUC1IVI1: A kL IAC1Ck
8LnIND AS1 GkCW1n SLCWDCWNS
kCDUC1IVI1 GkCW1n ASSCCIA1LD WI1n
SUCCLSSLS IN ASIA
1I GkCW1n IS DkIVLN 8 S1kUC1UkAL
kLICkMS
# MarkeL compeuuon (buslness regulauons, Lrade
regulauons, ease of buslness enLry and exlL) - uS
# lacLor markeLs (land, labor, nance) emclency
(labor markeL regulauons, access Lo land and access
Lo nance) - uS/ Chlle
# lnfrasLrucLure developmenL - Chlna/ Slngapore
# Skllls developmenL and lnnovauon - korea
# 8esearch and developmenL - korea
# Successful counLrles are noL Lhe besL ln all areas.
1hey have rsL besL pollcles ln a few areas!
o||cy Imp||canons for Indones|a
INDCNLSIA IS CN 1nL kIGn1 1kACk IkCM A MACkC
S1A8ILI1 LkSLC1IVL.
-8%
-3%
2%
7%
12%
5.0 5.5 6.0 6.5 7.0 7.5 8.0
2000-2012 1990-1999 1980-1989 1970-1979 1961-1969
Ln GDP per capita (constant 2005 USD)

Indones|a retr|eved |ts GD per cap|ta of 1997 aher 8 years fo||ow|ng a 14.S
dec||ne of GD per cap|ta |n 1998.
8U1 S1kUC1UkAL kLICkMS nAVL LAGGLD IN CkI1ICAL AkLAS
ILLUS1kA1ICN: WnLkL U8LIC MCNL IS SLN1?

Lnergy subs|d|es ( government
spend|ng) were |arge
!"#$%&# $#%( )*+ &$,-./ ,"#$ 0112322 456#$
678#$#5. 759$%:.$4;.4$# ;%<7.%( :.,;= &$,-./
:;#5%$7,:> <#$;#5.

0.0
3.0
10.0
13.0
20.0
23.0
2
0
0
3

2
0
0
4

2
0
0
3

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

luel subsldles
LlecLrlclLy subsldles
1oLal Lnergy
Subsldles
0
1
2
3
4
5
6
7
8
Actual
(3 percent)
Scenario I
(5 percent)
Scenario II
(10 percent)
kLICkMS 1C kCDUC1ICN AND IAC1Ck MAkkL1S
CAN ALSC 8L IMkCVLD
# Are key markeLs compeuuve?
# Can skllled and lnnovauve lndoneslans easlly enLer any
secLor and grow?
# Wlll banks nance Lhem on Lhe basls of Lhe posslble reLurn
on Lhe lnvesLmenL raLher Lhan requlrlng collaLerals?
# ln splLe of greaL progress reallzed ln educauon, are Lhere
enough skllls compared Lo Lhe needs of Lhe markeL?
# Can rms and governmenLs access land for producuon and
lnfrasLrucLure qulckly? Pow much 1l ls foregone because
of delays ln access Lo land?
1nUS "LUCk" (e.g. CCMMCDI1 8CCM) nAS nAD A
DISkCCk1ICNA1L IMAC1 CN 1nL LCCNCM
Commod|ty export earn|ngs drove the
trade surp|us (uS$ bllllon)
Nom|na| GD |s h|gh|y corre|ated w|th
growth of the commod|ty sector ()
Commodity
sectors
Overall economy
0
5
10
15
20
25
30
1
9
9
5

1
9
9
6

1
9
9
7

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

Percent
0
20
40
60
80
100
120
140
2003 2004 2005 2006 2007 2008 2009 2010 2011
Commodity export
Non-commodity export
Trade balance
.INCkLASING VULNLkA8ILI1 1C CCMMCDI1 MAkkL1
SnCCkS
Dec||ne |n commod|ty pr|ces
s|nce 2011 h|mng trade ba|ance
.and sohen|ng |nvestments and
growth
-6
-4
-2
0
2
4
6
8
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Major trading partners
Indonesia
-2
0
2
4
6
8
10
12
Sep-83 Sep-89 Sep-95 Sep-01 Sep-07 Sep-13
uarter|y merchand|se trade ba|ance (8||||on USD)
MACkC ADIUS1MLN1 NLLDLD AGAIN, SLCWING
GkCW1n
# In 2008, Indones|a responded we|| to a d|erent cr|s|s (GIC) .
! Allowlng Lhe exchange raLe Lo move (auLomauc ad[usLmenL)
! lnLroduclng a scal sumulus focused on Lax rellef
! umng ln place a conungenL nanclng faclllLy Lo address posslble rlse ln Lhe
cosL of markeL nanclng of governmenL nanclng needs
! LsLabllshlng mechanlsms for crlsls monlLorlng, preparedness and response
! 1hls helped lndonesla malnLaln growLh (4.6 ln 2009)!!!
# In 2013-2014, r|sk of d|erent nature and thus ad[ustment enta||s:
! 8uplah depreclauon
! MoneLary ughLenlng
! ackage of sLrucLural reforms (AugusL 23 package, anoLher one ln
progress).
! 8uL umes are dlerenL, currenL accounL declL llkely Lo remaln for a whlle
due Lo slow sLrucLural reforms/ supply-slde boulenecks (excess demand)
GCCD NLWS - S1kUC1UkAL kLICkMS CAN nLL INDCNLSIA
GkCW IAS1, DUL 1C LAkGL kCDUC1IVI1 GAS IN 1nL
LCCNCM
Sector 1990-96 2000-2003 200S-2008 2009-2012
Agr|cu|ture 1.0 1.0 1.0 1.0
Low-end serv|ces 2.S 2.4 2.S 2.2
Manufactur|ng |ndustr|es S.6 S.7 S.8 S
1ransport and
commun|canon 3.3 2.8 3.S S.S
I|nanc|a| serv|ces 37 21.S 20.S 14.6
M|n|ng and quarry|ng 43.6 46.8 26.7 18
SecLoral labor producuvlLy compared Lo agrlculLure (normallzed aL 1)
1AkLAWAS
# Ml1 noL lnevlLable even lf pollcy Lransluon dlmculL
# lndonesla has a key asseL: capaclLy and dexLerlLy ln
macroeconomlc managemenL
# 8uL macro cannoL do alone all Lhe heavy lllng!
# Convergence Loward poLenual growLh depends on
sLrucLural reforms
# ln Lhe shorL Lo medlum-Lerm, excess demand (due to
r|s|ng |ncomes) |n the face of supp|y bou|enecks presenLs
ma[or rlsks. Can creaLe a Lrade-o beLween growLh and
exLernal balance and/or lnauon
# 1he soluuon lles ln ensurlng LhaL Lhe supply-slde of Lhe
economlc caLches up wlLh Lhe demand-slde