Can Indonesia Secure a Development Dividend from Its Resource Export Boom?

Abstract

Indonesia has enjoyed a long spell of sustained and relatively rapid economic expansion, largely on the back of strong commodity prices. No commodity boom lasts forever, however, and threats to the continuation of this growth are mounting. Indonesia now faces the challenge of locking in gains and setting a course to sustain future development in less favourable times. Post-2000 growth differs from earlier experiences in that exports of agricultural products, especially palm oil, now play a leading role. In contrast to the country’s earlier oil and gas export boom, the gains from agricultural export growth accrue mainly to private actors that include corporations, smallholders, and the agricultural labour force, with a much smaller share passing through to government budgets. Government can no longer simply mandate the use of funds for development purposes; many other actors and institutions are involved. It is reasonable to assume that the benefits from such a decentralised export boom would be widely diffused, with relatively large effects on rural and farm households and lower-skilled workers. However, this boom has been accompanied by a sharp rise in inequality and virtually no real wage growth. Moreover, while spending rose robustly during the boom, it is not clear whether poor, farm-based households have chosen (or been able) to use the gains to smooth consumption or to invest for future generations. The capacity to lock in gains at micro and macro levels is subject to significant policy influence. The maxim that ‘while the sun is shining is the best time to repair the roof’ applies: currently healthy global economic conditions present an opportune moment for Indonesian policymakers to reflect and to look ahead, with an eye towards achieving optimal development policy settings.