From Mr Willem Thorbecke.

Sir, Ben Bland’s article paints a more optimistic picture for international investors than for the people of Indonesia (“Indonesia enters ‘new equilibrium’ as economic growth continues to slow”, November 7). He observes that Indonesian consumers are snapping up imported sneakers and clothes and that international investors see “many under-exploited parts of the economy ripe for picking”.

Before the Asian financial crisis, rather than importing footwear and other labour-intensive goods, more than 20 per cent of Indonesia’s exports were labour-intensive manufacturing goods and less than 30 per cent were primary products such as gas and coal.

These labour-intensive goods have since shrunk to less than 10 per cent of exports while primary goods exports have increased to more than 43 per cent. Economists warn that depending on primary exports in this way leads to volatile growth.

Mr Bland notes that the fall in commodity prices has reduced the value of exports and that Indonesia’s current account deficit has risen. As a result, the economic slowdown and the fall in the rupiah are hailed as salutary factors that will reduce imports and rebalance the economy.

It would be far better for Indonesia to rebalance by using the tailwind provided by its weak currency to increase manufacturing exports. There is a well-trodden path that China, Malaysia, Thailand and Vietnam have followed. They attract foreign direct investment from multinational corporations seeking efficient export platforms.

Over time, this vertical FDI leads to the formation of industrial clusters and the transfer of knowhow to local firms. To attract this type of FDI, Indonesia needs to focus on improving infrastructure, fighting corruption and reforming education.

Willem Thorbecke, Research Institute of Economy, Trade and Industry Tokyo, Japan

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