A Brief Look at Economic Opportunity in Africa (FT Press Delivers Elements)

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Will more of the same eventually deliver the faster economic growth Indonesia seeks? Or is something else needed? It also outlines the policies needed to realise faster growth while preserving stability. Over the past decade, Indonesia has been a consistent performer in an otherwise weak and volatile global economy. Growth has averaged 5. Growth has, however, remained stubbornly low at about 5 per cent since , down from more than 6 per cent previously Figure 1.

Such views have proven misplaced and expectations of a rapid shift towards manufacturing-led growth have been largely disappointed. Meanwhile, economic policy has continued to prioritise stability over growth. Despite years of abundant global liquidity, government policy has been geared towards limiting external borrowing and keeping the current account deficit in check.

Note: Reserve adequacy in Panel A is the ratio of foreign exchange reserves to gross external financing requirements defined as the current account deficit plus external debt maturing within one year. A ratio above 1 is considered adequate.

In Panel B, reserve adequacy is considered adequate if the ratio is above three months of imports guarding against import financing risks , one year of gross external financing needs guarding against external financing risks , and 20 per cent of broad money guarding against domestic capital flight risks. This trade-off has returned to focus in , with Indonesian financial markets again caught up in generalised capital outflows from emerging economies as US interest rates rise and the US dollar strengthens. Nonetheless, strong stability fundamentals mean Indonesia is well placed to manage, barring a far more serious dislocation in global markets.

Bank Indonesia has also acted decisively to shore up stability. After intervening early in to support the rupiah, by mid-year it had switched to tightening policy — hiking interest rates by basis points and sending a clear signal that it intends to keep Indonesia firmly in the safety zone between growth and stability. In the most basic sense, this trajectory will not be enough to end widespread economic vulnerability, even by on current trends, poverty will persist and about half of Indonesian workers will still work in insecure informal sector jobs.

In a more ambitious sense, the current growth trajectory will not be enough to transform Indonesia into a true global economic power by For example, Indonesia has fewer top global firms than either country; [11] its total overseas direct investment holdings are half that of Malaysia and two-thirds that of Thailand; [12] the market capitalisation of its stock market is only marginally larger than either country; its high-tech exports are considerably smaller; [13] and it registers fewer international patents and trademarks each year.

The Economic Benefits of Globalization for Business and Consumers

For Jokowi, boosting economic growth has been a central policy priority. On taking office in late he inherited an economy under pressure.

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Growth was slowing, a large current account deficit had opened up, and the fiscal deficit was rapidly approaching the legal limit. Decisive early action to cut wasteful fuel subsidies successfully arrested this situation.

A Brief Look at Economic Opportunity in Africa (FT Press Delivers Elements)

Jokowi then launched an ambitious pro-growth agenda focused on large-scale infrastructure development, fiscal reform, and dramatically improving the business climate. Progress has been made by several objective standards. A number of high-profile infrastructure projects are being completed, particularly in and around Jakarta. However, deeper structural problems are also holding the economy back.

Investment growth has been notably weaker since the end of the commodity boom. In fact, it has remained at a higher level than during the commodity boom, hovering at about 32 per cent of GDP compared to 25 per cent on average over — The problem, rather, is that elevated investment is now translating into less economic growth. This is illustrated by the incremental capital-output ratio ICOR , which measures how much investment is needed to generate a given amount of economic growth. However, the trend deterioration in investment efficiency predates the current economic slowdown and has been persistent, meaning cyclical factors cannot be the primary explanation.

Structural explanations seem more relevant. Investment quality appears low in several important ways. For example, the vast majority of investment goes towards constructing buildings rather than public infrastructure or machinery and equipment, where the returns are likely to be higher.

Also, very little investment is intermediated by the financial system. Moreover, economic growth in Indonesia has been heavily capital-intensive, pointing to risks that diminishing returns will persist or even worsen. As Figure 5 shows, economic growth in Indonesia has been more capital-intensive than elsewhere in the region. From to , capital deepening accounted for 73 per cent of Indonesian labour productivity growth compared to 29 per cent in Philippines, 51 per cent in Thailand, and 66 per cent in China, where very high investment has nonetheless been accompanied by solid productivity growth.

A key source of productivity growth in developing economies is moving workers from traditional agriculture to more modern sectors of the economy where labour productivity valued-added per worker is higher and grows faster. Indonesia experienced manufacturing-led growth during the mids through to the mids. Agriculture has continued to shed surplus workers but around two-thirds have moved into low-end services jobs such as drivers and domestic helpers rather than into more modern sectors of the economy Figure 6.

Note: Bubble size represents the share of the workforce in each sector following the nine industry classifications used by the Indonesian Central Statistics Agency. The two sectors labelled low-end services are: personal, public and social services; and trade, restaurants, and accommodation services. Modern sectors include: mining and quarrying; industry; electricity, water and gas; construction; transportation, warehousing and communication; and finance, real estate, rental business, and company services. Relative labour productivity is calculated as the ratio of value-added per worker in each respective sector to the non-agriculture average in This creates two problems.


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First, this shift only provides a small boost to output because low-end services jobs are only slightly more productive than agriculture. More problematic is that it creates a legacy effect, which can depress future growth as a larger share of workers are now in a relatively stagnant part of the economy. The pattern of low-quality structural change has worsened since the end of the commodity boom. As Panel A in Figure 7 shows, economic growth has become more reliant on an expanding workforce while the contribution of structural change has shrunk dramatically as employment gains in higher productivity sectors notably mining, manufacturing, and modern business services have slowed.

Labour productivity growth has nonetheless decelerated sharply Figure 7, Panel B. However, productivity in low-end services — where around 40 per cent of workers are located — has stagnated. As a result, the low-end services segment acts as the default sector of employment. The problem is this creates a surplus labour type situation, where additional influxes of workers only weighs on productivity growth even further.

Capital-intensive growth is giving way to diminishing returns while the benefits of an expanding workforce are faltering as more workers find themselves stuck in low-productivity jobs. The problems are not yet acute. Ostensibly progress has been made. Inadequate infrastructure is the most widely cited constraint to faster economic growth. Roads, ports, and airports are all heavily congested, power shortages are common, and access to modern water and sanitation systems is limited.

A common refrain is it is cheaper for Jakarta to get its oranges from China than nearby Kalimantan. Despite various difficulties, sustained attention has seen a number of high-profile projects, notably in and around Jakarta, either completed or on track for completion. Of national strategic projects, 26 have been completed while seven top priority projects are to be completed by A systematic way to consider how far this has gone in closing the infrastructure deficit is to examine the size of the total stock of infrastructure — that is, taking into account the accumulation of past investment while adjusting for the physical depreciation of these assets over time.

Figure 8 shows estimates for the infrastructure stock and annual investment since based on data for realised investment in core infrastructure subsectors energy, telecoms, transport, water and sanitation, and irrigation financed by the government central and subnational , state-owned enterprises SOEs , and the private sector. The adequacy of the infrastructure stock-to-GDP ratio has fallen consistently since the Asian financial crisis, with investment failing to keep pace with physical depreciation and rising demand measured by real GDP growth. Recent efforts have increased investment from about 3 per cent of GDP in to 4 per cent of GDP in and likely slightly higher in However, ongoing economic growth means this has only been enough to stabilise the infrastructure stock-to-GDP ratio.

Meaningfully closing the infrastructure deficit will therefore require a further substantial increase in investment. Note: The rise in the stock-to-GDP ratio for both measures in and reflects the sharp drop in GDP due to the Asian financial crisis, which more than offset a simultaneous decline in investment.

Similar institutional problems plague most emerging economies. Empirical studies nonetheless tend to conclude that the economic returns on infrastructure investment are still strongly positive even in the presence of such inefficiencies although returns are of course lower than they could otherwise be. At the same time, however, more restrictive FDI rules were introduced in other sectors, particularly in public works.


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Minimum wage increases have significantly outpaced average wage growth and now stand at over 80 per cent of average wages. Yet compliance is also low. However, other tax policy changes have gone in the opposite direction, including raising the tax-free threshold for personal income tax and offering various tax incentives e. Google Tag Manager. Latest Research. Lowy Institute Pacific Aid Map. The Prime Ministers in America. Kremlinology: What does Russia want? The dawn of the African economic boom which is in place since the s has been compared to the Chinese economic boom that had emerged in Asia since late 's.

Oil-rich countries such as Algeria , Libya and Gabon , and mineral-rich Botswana emerged among the top economies since the 21st century, while Zimbabwe and the Democratic Republic of Congo , potentially among the world's richest nations, have sunk into the list of the world's poorest nations due to pervasive political corruption, warfare and braindrain of workforce.

Africa rising? The economic history of sub-Saharan Africa

Botswana remains the site of Africa's longest and one of the world's longest periods of economic boom — Data suggest parts of the continent are now experiencing fast growth, thanks to their resources and increasing political stability and 'has steadily increased levels of peacefulness since '.

The World Bank reports the economy of Sub-Saharan African countries grew at rates that match or surpass global rates. The economies of the fastest growing African nations experienced growth significantly above the global average rates. The top nations in include Mauritania with growth at Nonetheless, growth has been dismal, negative or sluggish in many parts of Africa including Zimbabwe , the Democratic Republic of the Congo , the Republic of the Congo and Burundi.

Many international agencies are increasingly interested in investing in emerging African economies. Debt relief is being addressed by some international institutions in the interests of supporting economic development in Africa.

Guide A Brief Look at Economic Opportunity in Africa (FT Press Delivers Elements)

As of , the initiative has given partial debt relief to 30 African countries. Trade has driven much of the growth in Africa's economy in the early 21st century. China and India are increasingly important trade partners; Africa's economy—with expanding trade, English language skills official in many Sub-Saharan countries , improving literacy and education, availability of splendid resources and cheaper labour force—is expected to continue to perform better into the future.

Africa will only experience a "demographic dividend" by , when its young and growing labour force will have fewer children and retired people as dependents as a proportion of the population, making it more demographically comparable to the US and Europe. A consumer class is also emerging in Africa and is expected to keep booming.

This number could reach a projected million by A new program named Trade Africa, designed to boost trade within the continent as well as between Africa and the U. With the introduction of the new economic growth and development plan introduced by the African Union members pricely about 27 of it members who are averagely some of the most developinmm economies of the continent it will further boost economic social and political integrations of the continent. This will further reduce too much reliance on importation of finished products and raw materials in to the continent. The seemingly intractable nature of Africa's poverty has led to debate concerning its root causes.

Endemic warfare and unrest, widespread corruption, and despotic regimes are both causes and effects of the continued economic problems. The decolonization of Africa was fraught with instability aggravated by cold war conflict. Since the midth century, the Cold War and increased corruption and despotism have also contributed to Africa's poor economy. According to the researchers at the Overseas Development Institute , the lack of infrastructure in many developing countries represents one of the most significant limitations to economic growth and achievement of the Millennium Development Goals MDGs.

It has been argued that infrastructure investments contributed to more than half of Africa's improved growth performance between and and increased investment is necessary to maintain growth and tackle poverty.

go to site In irrigation, SSA states represent almost all spending; in transport and energy a majority of investment is state spending; in Information and communication technologies and water supply and sanitation, the private sector represents the majority of capital expenditure. China , in particular, has emerged as an important investor.