Practise market-oriented strategies by linking trade liberalisation, FDI, privatisation and microfinance to growth and development.
Sources for use with Section B
The Indonesian economy
Figure 1 Monthly balance of trade in goods and services, $ billion, January 2019 to December 2022
Extract A Economic outlook In 2022 Indonesia had a population of 276 million people. This was the largest in Southeast Asia and had increased by 26 million since 2012. In 2022 the global economy was weak and many countries experienced high rates of inflation. By contrast, Indonesia’s economy performed better than several advanced economies. The country’s real GDP 5 increased by 5.3%. This was above the forecast rate of economic growth. Its annual rate of inflation of 4.6% was one of the lowest globally. However, this was before the Government removed subsidies on oil and fuel. Indonesia is a net importer of oil. During 2022 Indonesia’s currency, the rupiah, had the best-performing floating exchange rate to the US dollar in Asia. The rupiah depreciated less than the currencies of Vietnam 10 and China, its main trading partners. Indonesia is a resource-rich country and it is a net exporter of commodities such as nickel, coal, rubber and palm oil. In 2022 the country benefited from rising global commodity prices. It is the world’s largest producer of nickel, an important component in electric vehicle batteries. 15 To take advantage of the rising global demand for electric vehicles, the Government announced plans to increase privatisation and promote foreign direct investment (FDI). Exports from the manufacturing sector increased during 2022. These included electronics, machinery, textiles and garments. The Government relaxed its previously strict employment regulations to create more jobs, fill vacancies and promote innovation. 20 This encouraged more FDI, as many foreign producers shifted manufacturing away from China. In 2022 Indonesia’s exports of commodities made a more significant contribution to the country’s current account surplus and to its economic growth rate than its exports of manufactured goods. The country’s current account surplus increased from $3.5 billion in 25 2021 to $13.2 billion in 2022. It was forecast that advanced economies would experience lower rates of economic growth in 2023. This would result in a fall in demand for Indonesia’s commodities. In 2023 it was forecast that Indonesia’s rate of inflation would increase to 5.5% partly as a result of the removal of fuel subsidies. The country’s central bank could respond to the 30 rising rate of inflation by increasing its base rate of interest. There are concerns about the level of corruption in the country. Indonesia scored 38 out of 100 on the corruption index – the lower the score, the greater the level of corruption. This is the same score as Brazil but lower than that of Vietnam and China. This indicates that Indonesia has relatively more corruption than Vietnam and China. 35 To remain internationally competitive, many economists have recommended that Indonesia should diversify away from its dependence on commodities. They have suggested that the Government must aim to develop the country’s human capital and infrastructure, in order to improve the labour mobility of its relatively young population.
With reference to Extract A and your own knowledge, discuss market-orientated strategies that the Indonesian Government might use to increase its rate of economic growth.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
Knowledge, Application and Analysis ( 8 marks) - indicative content
- Definition/understanding of economic growth rate
- Understanding of market-orientated strategies
- Removal of government subsidies - forcing firms to focus on being more competitive rather than relying on subsidies, e.g. by increasing productivity: "removal of government subsidies on oil and fuel"
- Floating exchange rate systems - might make exports more internationally competitive, increasing export-led growth
- Privatisation - increases efficiency in markets due to greater competition; attracts more investment, therefore greater injections into the circular flow of income: "To take advantage of the rising global demand for electric vehicles, the Government announced plans to increase privatisation"
- Deregulation - it reduces the costs for businesses to comply and implement regulation, quicker to employ and lay off workers as required: "Government relaxed its previously strict employment regulations to create more jobs, fill vacancies and promote innovation. This encouraged more FDI"
- Promotion of FDI - e.g. tax breaks could help technology transfer and help with training of the workforce; leads to increased productivity and economic growth: "To take advantage of the rising global demand for electric vehicles, the Government announced plans to ... promote foreign direct investment"
- Trade liberalisation/removal of trade barriers
Level
Mark Descriptor
0 No rewardable material.
Level 1
1-3
Level 2
4-6
reasoning in terms of cause and/or consequence are evident but they
may not be developed fully or some stages are omitted.
Level 3
7-8
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to link knowledge and understanding in context using relevant examples that are fully integrated to address the broad elements of the question. Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (6 marks) - indicative content
- Problems of each of the strategy discussed:
- removal of government subsidies - on e.g. essential goods such as oil, may lead to an increase in absolute poverty
- floating exchange rate systems - the depreciation is likely to make Indonesia's imports relatively more expensive, leading to cost-push inflation and hence poverty
- deregulation- could result in exploitation of labour
- privatisation - could result in monopolies that may exploit their market power and charge higher prices/reduce quality
- promotion of FDI - could lead to TNCs exploiting the environment and labour; engage in tax evasion/avoidance or transfer pricing
- Assessment of the significance of the strategies considered in analysis
- Policy may be less effective as an increase in inflation might reduce economic growth because it could lead to greater uncertainty/lower international competitiveness of firms - "In 2023 it was forecast that Indonesia's rate of inflation would increase to 5.5\%"
- Policy may be less effective if the central bank raises the base interest rate to tackle inflation as this might restrict economic growth in the long-run
- Corruption might limit future economic growth as any Government revenue may be diverted into the wrong channels: "Indonesia scored 38 out of 100 on the corruption index"
- Interventionist strategies could be more successful in increasing economic growth: "the Government must aim to develop the country's human capital and infrastructure"
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-2
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
3-4
Evidence of evaluation of alternative approaches
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
5-6
Evaluation recognises different viewpoints and/or is critical of the evidence. Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.