8 - The Impact of Global Financial Crisis on the Indonesian Economy

Summary

Introduction

After more than four years of economic boom, global growth was slowing markedly in the second half of 2008. Economic growth in emerging and developing economies was also slowing down as global trade slows and financial conditions tighten. The contraction occurred in major developed economies, with the United States and Europe projected to plunge into negative growths around –2.9 per cent and –4.3 per cent respectively in 2009.

Initially there was an ongoing prevailing presumption about “decoupling” wherein the Asian economic growth is considered relatively detached or not fully connected to the economic growth of developed countries like the United States and Europe. Thus, the impact of the global slowdown was considered limited to the Asian economies. Nevertheless, we are one of those who are doubtful as regards this decoupling argument. The data shows that similar downturns took place in emerging markets, in which the economic growth of this group of countries is forecasted to fall from 6 per cent in 2008 to 1.5 per cent in 2009.

We argue that the Asian economies have actually been able to grow because the existing integration among production networks in Asian countries is extremely strong. Intra-industrial trade in East Asia has made the effects on Asia still relatively limited. Many countries in Southeast Asia, including Indonesia for example, are exporting raw materials and intermediary goods to China, Korea and Japan, which are the production network centres. Therefore, the effects on the Indonesian economy, at least up until the second quarter of 2008, were relatively limited. However, it should not be forgotten that the end-buyers of goods coming from production countries in Asian countries are the developed countries, including the United States and Europe. Because of this, if the United States and Europe weaken, then it is unavoidable that the effects will be transmitted to Asian countries. Furthermore, because Asian countries are integrated in terms of production networks, these effects occurred even more quickly than before.

The impact on Indonesian economic growth had occurred through the trade channel. The signs began to appear as early as the fourth quarter of 2008. The downturn of export growth was reflected in the sluggish growth of the Indonesian economy. Even so, the Indonesian economic growth as a whole still managed to reach 6.1 per cent, and this growth was considered the highest in Asia, following China and India.