Jakarta – Conventional wisdom has it that, while Indonesia may have all sorts of problems, at least the country's macroeconomic fundamentals are in order.

After all, economic growth, barring the COVID 19 pandemic, has remained around 5 percent for years, inflation is well under control and the state budget is in good shape, especially when compared with many more developed economies running on high deficits and debt.

The latest GDP report, published by Statistics Indonesia (BPS) last Monday, provides further reassurance.

At 5.05 percent, year-on-year (yoy) growth may have slowed a tad in the second quarter from the rates measured in the preceding quarter and in the same period a year earlier, but it remained in line with the solid trend to which we have become accustomed.

Coordinating Economic Minister Airlangga Hartarto commented that the figure showed "that our economic fundamentals are still good", supported by "inflation that remains under control".

Indeed, annual inflation slowed to 2.13 percent last month, as figures published earlier in August showed.

We must not let these numbers lull us into false confidence about the state of our economy. That 5 percent figure is based on real economic activity that is susceptible to changing circumstances, some of which lie outside of the government's control.

One area of concern is the manufacturing sector, which has long been an underperformer in Indonesia's economy. Its annual growth has slowed from 4.13 percent in the first quarter to 3.95 in the second, well below the overall GDP growth.

Of course, that means other sectors must be doing much better to pull up the average, and those include transportation and storage, up 9.56 percent yoy in the most recent quarter, as well as hospitality, up 10.17 percent yoy.

However, manufacturing is particularly important for Indonesia's overall economic development.

For one, it accounts for a large share of exports, making it vital for the country's trade balance and as a source of foreign exchange revenue. It can also lessen dependence on imports, with a similar effect on the trade balance.

Furthermore, manufacturing includes many labor-intensive industries that provide formal-sector employment for many millions. This makes it advantageous to the widespread informal employment of the primary sector and the high qualifications often needed in the tertiary sector.

The vital role of manufacturing for emerging economies with growing populations makes the latest manufacturing purchasing managers' index (PMI) for Indonesia particularly concerning. The report published earlier this month points to weakening activity in the sector after 34 months of expansion.

The Industry Ministry said last week that the number of textile industry jobs had decreased 7.5 percent yoy, extending a long-term decline in that industry's employment.

Macroeconomic data, including that 5 percent growth rate we have achieved with remarkable consistency, reflects the current state of the economy but not the risks that lie far ahead.

In the long term, we face perplexing issues with profound impacts far beyond the economy, and the only consolidation, if it is any, is that we are not alone. The world as a whole has yet to figure out how to ensure current trends do not destabilize economies and societies.

The jobs falling away in our textile industry are not coming back, because the factories we need in order to make competitive products for the global market will employ just a fraction of the ones shutting down. The same goes for almost every other industry, including in the service sector.

Some countries are trialing driverless cabs, and it is only a matter of time until they hit the road here, too. One fears to think what will happen to social cohesion in this country if all those ride-hailing drivers find themselves crowded out by robo-taxis.

How do we ensure sustainable productivity and employment in a world where automation and artificial intelligence drive rapid efficiency gains?

If we cannot tackle those issues, why even worry about whether our GDP growth is 5 percent or 6 percent?

Source: https://www.thejakartapost.com/opinion/2024/08/14/dont-let-the-5-fool-you.htm