Indonesia in the leadership of Mr. Joko Widodo has set it's goal to transform the economy from consumption-led growth to investment-led growth. An approach that has led several countries like Japan, Hong Kong, Taiwan, Singapore, South Korea and China from low income country to distinguished economic powers. These countries increase capacity of production and stimulate firms to increase their capital, and expect that bigger supply will eventually increase demand and support growth and employment. A side of the monetary terminology, investment-led growth may also means building a better human capital, i.e. health, education, and productivity.
For Indonesia, this could be a good solution since the country has strong demand, in particular household consumption which over the last decades consumption expenditure share has been around 60% of the GDP. With the strong growth of consumption accompanied by the supply side inelasticity, this has caused Indonesia is heavily reliant on import. An argument that support Jokowi's decision on this matter.
So where should the investment be directed to? First, investing to make production in Indonesia more efficient or in other words to lower the cost of production. Infrastructure is a good way to make logistic cost lower, additionally efforts like to reduce transportation barrier, red tapes are essentially needed. Java island, the biggest consumer and producer base, must have lower cost of distribution, on the other hand Eastern Indonesia infrastructure projects should also be mended. Another area of improvement, is the cost of energy. Until now, the availability and continuity of electricity is a big problem in Indonesia which leads to higher electricity cost of the industry. Second, producing the right product to meet domestic demand. We have seen how investment-led growth created Great Depression in America which the increase of supply insufficiently considers the power of demand. Thus, Indonesia should increase the basic industries and sectors, i.e. food, agriculture, processed food products.
Now, the next question is 'Can Indonesia achieve it?'. Challenges for the government are to ensure good business climate, reducing corruption and creating political stability, investment and infrastructure should avoid to compete over land which creates asset price hikes, plus the labor market and wage must be competitive. Financially, the financial sector should have the intermediation capacity to distribute loans, giving low cost of capital, and better resource allocation. This also means encouraging people to have higher saving rates, and curtailing consumptive. Business wise, does the firms eager to invest? since government capacity is limited, private business investment should be the locus of growth.
All in all investment led growth might look like a solution to Indonesia, however if planned carelessly would made investment wasteful. Moreover, excessive and wrongly directed expansionary policies may lead to stagflation like Japan.
