Indonesia’s Middle Class: Missing BRIC In The Wall

Courtesy of The Economist, an interesting article on how a consumer boom is masking familiar problems in South-East Asia’s biggest economy:

THE hoardings on the slow car journey out of the centre of Jakarta are advertising just two items at the moment: smartphones and scooters. Banks occasionally intrude, but only to offer cheap loans to buy one or the other. Lucky customers. And at the moment, what’s good for the customer is good for Indonesia.

The country is in the middle of a consumer boom, which is fuelling growth in South-East Asia’s giant. With a population of 238m, Indonesia has long had the potential to become one of the world’s biggest economies—if it could get the economic fundamentals right. Can it?

Last year Indonesia had one of the best-performing economies in the G20 club, growing by 6%. Even as the rating agencies busily revise rich countries’ creditworthiness downwards, Indonesia’s has been going the other way. It is now only a notch below investment grade. Indonesians think their economy could soon join the informal club of Brazil, Russia, India and China as a leader of the new world economic order: they want to be among the BRIICs.

Yet this is optimistic. Like Brazil, but unlike China and India, Indonesia owes much of its success to nothing smarter or more high-tech than a commodities boom. Coal and gas go to China and India, palm oil to the world. Money is pouring into the country, yet little goes into fixing long-term problems that impede growth. Indonesia has a once-in-a-generation chance to move beyond its commodities-based economy. It is not clear it will take it.

At the moment, consumption accounts for almost half of GDP growth. Nomura, a Japanese bank, reckons Indonesia is creating a middle class (defined as one with disposable household income of over $3,000 per year) helter-skelter. The country’s bourgeoisie, 1.6m in 2004, now numbers about 50m. On Nomura’s measure, that is more than India and bigger than elsewhere in the region (see chart). The number could reach almost 150m by 2014, representing one of the world’s most enticing markets. Newly affluent Indonesians are certainly spending.

Take one of their principal objects of desire, two-wheel scooters. Last year about 8m were sold in Indonesia, dwarfing sales in the rest of South-East Asia (1.7m in Thailand, for instance). Sales in India were only slightly greater, at 11.3m (China sold 16m). With rising incomes comes a desire for flashier brands. For years Honda and Yamaha had the market largely to themselves. But Italy’s Piaggio has relaunched its relatively expensive Vespa in Jakarta, after being squeezed out in the 1980s. Car sales are also growing rapidly, to about 750,000 last year.

Or take smartphones. Indonesians have leap-frogged a generation of technology, and now download data and use social media largely through smartphones, rather than mobile phones and personal computers. The increase in sales has been extraordinary; the country is one of the largest markets for Research in Motion (RIM), makers of the BlackBerry. Indonesia claims the second-largest number of Facebook members in the world, and the third-largest number of Twitter users. Companies struggle to keep up with demand for the essentials of a consumer society. Unilever has been squeezing out most of Indonesia’s toothpaste for decades; now its fastest-growing product is ice-cream, followed by skincare products.

James Castle, a consultant and former head of Indonesia’s International Business Chamber, argues that, whereas big companies used to be able to ignore Indonesia for more obvious destinations, nowadays “if you’re not here, you have to have a reason.” That is a big change. But Mr Castle also gives warning that too many companies do find a reason—and certainly do not set up manufacturing plants. Unlike in regional competitors such as Vietnam, manufacturing has lagged behind almost every other sector of the economy. It is noticeable that a high share of the new consumer desirables is imported.

For Indonesia remains, in many respects, a hard country to do business in, especially compared with the rest of the region. Its infrastructure is poor, adding hugely to production costs. Almost every other neighbour is building new ports or expanding old ones, but Indonesia’s lag far behind in efficiency and productivity. In the World Bank’s 2010 Logistics Performance Index, it ranks a lowly 75th, well below Thailand, Malaysia and even the Philippines. This means a lot of foreign investment that might want to go to Indonesia now goes elsewhere.

And then there are continuing problems of corruption and what Mr Castle calls “non-transparent random regulations”, which he says are the biggest impediments to business. In Indonesia’s murky political system, regulations often emerge out of the blue, and can contradict existing ones. At least there are signs of change. A land-acquisition bill wending its way through parliament would, if passed, make it easier to force through infrastructure projects. The government even wants to ban some raw-material exports, hoping to dragoon mining companies into building smelters and exporting higher-value goods. But more needs to be done while the going is good.

This entry was posted on Saturday, July 30th, 2011 at 12:21 pm and is filed under Indonesia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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