Indonesia, the Rookie

McKinsey Global Institute (the research center for McKinsey&Company) recently came out with an awesome economic report  on Indonesia.  Among other things, the report said that Indonesia, currently the world's 16th largest economy, could become the world's 7th largest economy by 2030.

Indonesia is really a very young democracy.  In 1945, the country gained independence from the Dutch, but the country had an autocratic system and only two presidents up till 1999 [1]. In October of 1999, Indonesia held its first democratic election, and since then, the country has seen high growth rates, mostly staying between between 5 and 6 percent.

So why is this young democracy doing so well while plenty other "democracies" are failing worldwide?  The best way to examine this is through a framework provided by Paul Collier in his book The Bottom Billion.  The book lists four "traps" that some countries get stuck in that hinder the growth of that country.  The traps are the "Conflict Trap," "Landlocked with Bad Neighbors," "Bad Governance in a Small Country," and the "Natural Resource Trap."  Not a single one of the traps applies to Indonesia.

The Conflict Trap refers to countries that are stuck in constant civil war or has so many coups that no leader has steady control over the country for very long at all.  The last civil conflict that Indonesia had was in 1998-1999 when, fed up with the General Soeherto and hurt by the Asian financial crisis of 1997, the Indonesian population revolted.  Soeherto "resigned" and the country has not seen any war or coups since.

Indonesia is far from Landlocked, and is surrounded by some really great neighbors.  The countries that Indonesia communicates the most with in it's region are Australia, China and Japan.  Indonesia is surrounded by strong, developed nations, and great potential trade partners.  However, as we will see in the Natural Resource Trap, trade with these neighbors is not the reason why Indonesia has consistently high growth rates.

Bad Governance in a Small Country is not a huge deal for Indonesia.  Part of the reason for this is because Indonesia is huge; it is the largest Muslim country in the world and with a population of more than 247 million, it is the fourth most populous country in the world.  And Indonesia does suffer from some corruption but Bad Governance is a bigger problem for a country if it is getting its wealth from large natural resources or foreign Aid.  Indonesia's current corruption problems are not hindering the growth of the country because these leaders do not have the oppurtunity to do too much harm

To look at the Natual Resource Trap, we need to go back to those growth statistics. The 5-6 percent growth rates that Indonesia has maintained since 2000, don't actually tell the true story of Indonesia.  In fact, the country had higher growth under its autocratic leadership from 1945-1999.  However, at that time the country was suffering from a terrible problem, and that was the Natural Resource Trap, in one form.

The Natural Resource Trap is essentially the same thing as Dutch Disease; economies that have large natural resource deposits are unable to grow because all other productive exports that the country has to offer become crowded out by its export of oil, or minerals or whatever else.  For Indonesia it was Oil.  Up till the late 1900s, the Indonesian economy was reliant on oil exports.  This has changed though.

The Indonesian economy is now growing at strong rates because of consumerism.  According to the McKinsey report, 65 percent of Indonesia's GDP growth comes as a result of domestic consumption, a relatively high number.  This means that Indonesia is not just becoming a strong player in the world economy, but they are also becoming a strong Internal economy that is capable of maintaining high growth rates even without exporting.

Indonesia is still a young Democracy, but so far they are looking good.  According to the McKinsey report, the consumer population of Indonesia is still young, and as they age, the Indonesian economy will grow at even higher rates.  Indonesia is still a very young Democracy, but it is so far showing a lot of economic potential.