Author: Peter McCawley, ANU Indonesia Project

Stephen Grenville has an article on the latest OECD report on the Indonesian economy in the Australian Financial Review today (Monday 28 July, p. 23).

In his piece, Stephen notes that there has been a welcome lift in the economic growth rate in Indonesia. Annual growth is now slightly over 6% per annum. But Stephen also notes that there is surely room for a further acceleration in the growth rate. He suggests that a longer-term target of 8% per annum is worth thinking about. This issue – the long-term economic growth rate – is surely the single most important matter that economic policy-makers in Indonesia should focus on.

One of the most important benefits of higher growth is that it helps greatly in tackling the dreadful problem of mass poverty. As Stephen notes, in Indonesia half the population lives on less than $2 per day. This means that like most other developing countries in Asia, Indonesia suffers from “mass poverty”. The type of mass poverty which exists in poor countries is a very different phenomenon to the poverty which exists in rich countries. And because the nature of poverty is different, the policy responses required are different as well.

In rich countries most poverty is localised and affects relatively small numbers of people. Targeted anti-poverty interventions are both affordable and often reasonably effective in rich countries. The situation is quite different in countries like Indonesia where mass poverty affects huge numbers of people. In poor countries, targeted anti-poverty interventions are of limited use because the basic problem (low national income per capita) affects the whole nation. Furthermore, governments in poor countries generally lack both the financial and administrative capacity to focus on specific pockets of poverty. Thus high growth, sustained for a long time, is needed to overcome mass poverty in Indonesia.