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View all search resultsThe micro foundations of Indonesia’s growth
Seen from the ground up, careful households, busy factories and confident investors explain Indonesia’s 5.47 percent growth, while the next gains will depend on jobs and exports.
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A buyer scans a Quick Response Code Indonesian Standard (QRIS) to settle a transaction in Rangkasbitung, Banten, on Dec. 9, 2023. ( Antara/Muhammad Bagus Khoirunas)
I
n 1976, Robert Lucas issued a warning now known as the Lucas critique: relationships observed in past aggregate data can break down the moment policy changes, because households and firms adapt. The oil shocks of the 1970s exposed the limits of the models then in use. This year’s Nobel laureates, Robert Hall and Michael Woodford, are honored for helping build the answer: macroeconomic models rooted in the decisions of households, firms and workers.
That lens helps us read Indonesia’s latest data. On Nov. 5, Statistics Indonesia (BPS) reported that the economy grew 5.47 percent year-on-year (yoy) in the third quarter, up from 5.29 percent in the second quarter and 5.04 percent a year earlier. Growth was broad-based, with investment up 6.06 percent and manufacturing, the largest sector, up 5.87 percent. The acceleration is welcome, but more instructive is what households, firms and workers are doing beneath the headline. The picture is encouraging.
Hall’s classic 1978 result showed that if people smooth consumption over their lifetime, spending should respond mainly to news about permanent income, not to predictable changes, and only modestly to temporary ones. The third-quarter data fit this reading. Consumer spending grew 5.04 percent, slightly faster than the 4.89 percent of a year earlier but slower than the economy as a whole. Consumer credit grew only about 5 percent. Households are spending steadily and borrowing carefully, while government spending grew 8.95 percent. Transport discounts and other temporary support help at the margin, especially for families that cannot easily borrow, but durable spending growth will come from rising permanent incomes: jobs, wages and productivity.
Here Indonesia has an advantage. The BPS itself attributed the resilience of household spending partly to rising online transactions, alongside greater mobility and tourism. According to Bank Indonesia (BI), QRIS transactions grew about 76 percent year on year in the third quarter, and electronic money spending in July and August, at Rp 226 trillion (US$12.5 billion) now exceeds spending by card. Every digital payment is also a data point, and policymakers who can observe millions of households and merchants almost in real time can design and time stabilization measures more precisely. That is the laureates’ practical promise.
Hall’s research on labor markets, alongside the search-and-matching models behind the 2010 prize, explains why jobs and workers take time to find one another. Manufacturing grew 5.87 percent, faster than the economy, and was the largest source of growth on the production side, with basic metals up 9.94 percent. Yet the employment component of BI’s manufacturing index, though improving, stayed slightly below 50, at 49.58. Factories are producing more without yet hiring proportionally. This is better read as friction than failure.
Foreign investment grew 27 percent while domestic investment fell 7.5 percent, according to the Investment and Downstream Ministry/Investment Coordinating Board (BKPM) and nearly a quarter of total investment now goes to basic metals, a capital-intensive industry. Vocational training aligned with industry demand, better job-matching information and stronger links between large plants and labor-intensive suppliers would all shorten the distance between a new factory and a new paycheck.
Woodford showed that today’s decisions depend on what households and firms expect tomorrow, so policy credibility does much of the work. Two signs suggest expectations are holding. Inflation stood at 3.28 percent in September, within the government’s 2.5 ± 1 percent target, after briefly exceeding the band earlier this year. Investment credit, a forward-looking signal of business confidence, grew 23.2 percent, the fastest of any category. That confidence is now visible in the national accounts: investment grew 6.06 percent, outpacing GDP, led by vehicles. Firms borrow to build when they believe the future is stable enough to repay. Preserving that belief, through predictable regulation and consistent macroeconomic policy, is among the cheapest growth policies available.
