Cameron Luke Wilson

University of Cape Town School of Economics Development Economics ECO2008S Indonesia vs Mexico: 2000 – Present Challenges Faced and Growth Paths Compared Wilson, Cameron WLSCAM-, October 1. Introduction 2. Indonesia: Profile Indonesia is an Asian-Pacific Nation with a population of 260 million inhabitants with a Gross Domestic Product (GDP) of $1,036,767.6 million in 2010 US$. Indonesia is an emerging industrial economy which predominantly exports manufactured goods with a share of manufactured exports of 67%, as seen in ​Table 1 (UNIDO, n.d.). The region experienced a currency crisis in 1997 which resulted in the GDP growth rate decreasing more than negative 12% at the height of the crisis in 1998 (World Bank, n.d.). Following the 2008 Global Financial Crisis (GFC), Indonesia saw its GDP growth rate slow from a healthy 6% to a modest 4.5% approximately, as seen in ​Figure 1​ (World Bank, n.d.). Table 1: Indonesia Profile. Source: United Nations Industrial Development Organisations (UNIDO) (n.d.). 2. Mexico: Profile Mexico is a Central American Nation with a population of 128 million inhabitants and a Gross Domestic Product (GDP) of $1,234,522.8 million in 2010 US$. Mexico is an emerging industrial economy which predominantly exports manufactured goods with a share of manufactured exports of 86%, as seen in ​Table 2 (UNIDO, n.d.). Like Indonesia, Mexico experienced a currency crisis in 1994 which resulted in the GDP growth rate decreasing to more than negative 5% at the height of the crisis in 1995 (World Bank, n.d.). Following the 2008 Global Financial Crisis (GFC), Mexico saw its GDP growth rate slow from approximately 5% in 2006 to negative 5% in 2009, as seen in ​Figure 1​ (World Bank, n.d.). Table 2: Mexico Profile. Source: UNIDO (n.d.). Figure 1: GDP Growth Rates, Indonesia & Mexico. Source: World Bank (n.d.) 3. Indonesia and Mexico: Development Resemblances 3.1 Currency Crises Indonesia and Mexico entered the new century in poor form, with Mexico recovering from a “tequila hangover” and Indonesia surviving the sinking of the Asian currencies ship. It is noted that both countries employed greater transparency measures in the wake of each currency crisis to limit future moral hazard and financial market failure. According to Kehoe, Mexico administered fiscal discipline and liberalised the economy with further privatisation which saw GDP growth rates accelerating to pre-crisis levels in 1996, as seen in ​Figure 1​ (1995: 147). Similarly, the International Monetary Fund (IMF) (2000) reported that Indonesia had practised fiscal tightening following the height of the crash in 1997. The IMF (2000) stated that Indonesia strengthened prudential monetary regulations and central bank regulation. Indonesia had closed 16 private insolvent financial institutions to “address the solvency problems in the banking system” and had forgone granting blanket guarantees on the grounds of fiscal cost and moral hazard attached to such a policy (IMF, 2000). 3.2 Natural Disaster Both regions have experienced natural disaster induced economic events due to their proximities to major geological fault lines and climate change driven phenomena. In 2004, Indonesia was subject to an earthquake induced tsunami, a debilitating earthquake in 2006, and another earthquake in 2016. Mexico has endured major flooding in 2007, a Swine Flu outbreak in 2009, and two significant earthquakes in 2017. The effects of the 2004 Indonesian Tsunami were far reaching. 220 000 were reported dead in the region and damages were reported to be in excess of US$4.45 billion (Jayasuriya & McCawley, 2010: 80). Jayasuriya and McCawley (2010) reported that 80% percent of damages and losses were borne by the private sector, which adversely impacted the local region’s immediate economy. The first major issue was that of rising poverty levels, and secondly, the fiscal cost of rebuilding. As seen in ​Figure 2​, Indonesia rolled out reconstruction and development in stages, with emergency aspects taking priority; followed lastly by physical and social infrastructure (Jayasuriya & McCawley, 2010: 94). Curiously, major fiscal stimulus through rebuilding efforts resulted in high unemployment upon completion; also, high inflation occurred partly due to the reconstruction process itself (Jayasuriya & McCawley, 2010: 118). National economic progress was not slowed with GDP growth rates remaining constant; however, major lessons were learnt in disaster management with implementation of key reforms in Natural Disaster Awareness and Natural Disaster Education in school curricula (Jayasuriya & McCawley, 2010: 119). These reforms have lasting impacts on the economic agents in the region and will ensure limited economic costs in the future should such an event ever reoccur. Figure 2: Sequencing, Emergency, and Recovery. Source: The Asian Tsunami (2010). The Mexican Tabasco floods of 2007 left more than 80% of the state flooded, affecting more than 1.2 million people and leaving more than 1 million people homeless (Beard & Santos-Reyes, 2011: 649). The flooding destroyed 6500km of road, 132 bridges, 570 000 ha of agricultural land, and left more than 300 schools in the region flooded and thus inoperable (Beard & Santos-Reyes, 2011: 649). Beard and Santo-Reyes estimate the damages to have been in excess of US$3 billion (2011: 649). Like Indonesia, the disaster left Tabasco’s immediate economy in shambles, only being able to resume once water levels subsided. Major lessons in disaster management were learnt and a push for local disaster awareness policies were made. According to the International Federation of Red Cross and Red Crescent Societies (IFRCRCS) community organisation and preparedness for disasters is an important policy implementation which will allow communities of the future to best respond to disasters should they ever occur again (2010: 2). Finally, major changes at the governmental level should be made with respects to disaster management as to mitigate future economic costs to Mexico, allowing for fiscal freedom when such events occur. (IFRCRCS, 2010: 3). 3.3 Social Strife Indonesia and Mexico have dealt with major social issues this century. Mexico continues to fight a bloody drug war against the cartels of the area whilst Indonesia dealt with rebel insurgency from 1976 to 2005. A positive outcome from the 2004 Aceh Tsunami was the laying down of rebel arms to rebuild the region (Jayasuriya & McCawley, 2010: 125). Indonesia has not dealt with insurgents since. Mexico has not had a region altering event to put a stop to drug trafficking activity. Due to the increased profitability of drug running, cartels continue smuggling operations through Mexican-United States boarders. The Mexican “Drug War” has killed between 30,000 and 40,000 people - including civilians, cartel members and federal agents (Dean et al. 2012: 7). This is of major concern for foreign direct investment as drug related violence has led to instability in the region. Mexico’s key policy reforms for drug trafficking includes an anti-money laundering strategy and has increased the capacity of supervisors to oversee the operation (Dean et al. 2012: 22). Mexico has worked closely with the United States on the matter as violence has spread to Southern Texas (Dean et al. 2012: 8). The Mexican government has also initiated drug related education, thus promoting healthy lifestyles and reducing the initiation of young males into drug cartels; so far it has proven helpful (Dean et al. 2012: 33). 4. Indonesia and Mexico: Development Differences 4.1 Energy Reforms Mexico and Indonesia have both embarked on energy reforms with Indonesia employing policies to control energy demand instead of energy supply due to fiscal constraints through subsidy cuts (Beaton, Clarke & Lontoh. 2014: 23). Whereas Mexico has gone to lengths to stimulate the energy sector through liberalisation (Sheldahl-Thomason & Vietor. 2017: 4). Indonesia struggles with their budget on energy matters. Beaton et al. attribute Indonesia’s energy problem to subsidies being focussed at consumption and not production-oriented activities. Its state-owned enterprise, Pertamina, takes a back seat to multinationals in the field of oil exploration and drilling (2014: 23). It is felt that Indonesia’s energy policy is not on track due to many reforms getting hung up because of bureaucratic processes; Indonesia also needs to refocus its subsidies to productive sectors so that budget deficits are reduced and the current account returned to surplus (Beaton et al. 2014: 24). Mexico’s reform takes a separate path, allowing for competition through open market practises thus giving private players and foreign companies access to the energy sector (Sheldahl-Thomason & Vietor. 2017: 4). The aim of this reform is to lower electricity and fuel prices through competition-induced efficiency as well as to improve the balance of payments through foreign direct investment (Sheldahl-Thomason & Vietor. 2017: 4). Finally, the reform hopes to achieve greater social benefits and increase the amount of clean energy produced (Sheldahl-Thomason & Vietor. 2017: 4). Great progress has been made since the reforms with auctions on tenders for various energy projects being made to the private sector; also, foreign direct investment has increased in light of the energy reforms (Sheldahl-Thomason & Vietor. 2017: 12) 4.2 The Global Financial Crisis The 2008 Global Financial Crisis (GFC) had various impacts on each country with Mexico being affected far worse than Indonesia. This is due to the relative openness of each economy and their exposure to the western world. Mexico is heavily dependent on the United States as an export market and having 86% of manufactures being exported, as per ​Table 2​, Mexico was vulnerable to market downturns in export market countries. As recession hit the US, Mexican export demand dropped, leading to a deterioration of the balance of payments as seen in ​Figure 3 (Cuadra, Ramos-Francia & Sidaoui. n.d.:284). Indonesia was not as adversely impacted as Mexico. Indonesia was a relatively closed economy in 2008 and thus global contagion did not affect the region as negatively as countries exposed to western economies were. As per ​Figure 3​, Indonesia’s balance of payments did not decrease as much as Mexico’s, but still decreased significantly as Indonesia had a large export market. Figure 3: Current account balance, Indonesia & Mexico. Source: World Bank (n.d.) Comparing further statistics from the World Bank, differing impacts on Mexico and Indonesia from the 2008 GFC are evident. Indonesia’s financial reforms saw savings rates increase dramatically during the GFC where Mexico’s savings rates decline as evident in ​Figure 4​ (World Bank, n.d.). Figure 4: Adjusted Savings, Indonesia & Mexico. Source: World Bank (n.d.) It is interesting to note how unemployment in Indonesia continued to decline through the crisis whereas Mexico experienced a sharp increase in unemployment as per ​Figure 5​. Tambunan attributes the constant decrease in unemployment rates in Indonesia to the regions large informal sector; saying that officially laid-off workers would either continue working their second job in the informal sector or move to the informal sector altogether (2010: 165). It is also hypothesised that the lack of social safety nets, as present in most western economies, resulted in more labour moving to the informal sector following the crash (Tambunan. 2010: 165). Figure 5: Unemployment Rate, Indonesia & Mexico. Source: World Bank (n.d.) 5. Future Growth Paths Indonesia’s government aims to create jobs through growth which will in turn reduce inequality (Aji & Ginting. 2014: 5). Aji and Ginting say that Indonesia will focus primarily on demographic transition, rapid urbanisation, increased economic integration, and boost exports on the back of China’s increasing labour costs (2014: 5). Finally, “easy global liquidity” due to the US Federal Reserve’s quantitative easing is expected to stop, with the US Federal Reserve normalising its monetary policy again, this will force Indonesia to rely on productivity growth to maintain current levels of economic growth (Aji & Ginting. 2014:5). Indonesia plans on growing productivity through closing any infrastructure gaps that exist in all key sectors of its economy; these sectors are manufacturing, agriculture, and high-end services (Aji and Ginting 2014:5). Conversely, Mexico plans to improve its financial institutions as to create a deeper financial sector to absorb any macroeconomic shocks of the future (G20, 2016:2). The G20 report of Mexico’s growth strategy states that the nation has planned 11 structural reforms to boost productivity in key economic sectors; these include energy, telecommunications, financial, and fiscal (2016). Finally, Mexico plans to maintain macroeconomic stability and improve its financial sector to resist future exogenous shocks; this will be accomplished through maintaining fiscal policy, continuing to anchor inflation expectations, maintaining foreign reserve buffers, and keeping a watchful eye on the financial sector (G20, 2016:2). 6. Conclusion Mexico and Indonesia are middle income developing nations located in Central America and the Asian Pacific respectively. Both nations endured nasty currency crises in the 1990’s and recovered relatively well. The 21​st century has been one of hardship and slow growth for both nations. Indonesia struggled with a rebel insurgency only to have it end through the worst natural disaster to affect the region. It stood against the 2008 GFC well only to have its export market hampered by a slump in global commodity prices. Mexico has dealt with terrible disasters and a destabilising drug war which has had foreign investors question the regions stability. The 2008 GFC adversely affected Mexico due to its connections to the west, and continued to struggle given the slump in global commodity prices. However, given the recent increase in global prices and a relatively stable decade since the Great Recession, both nations are experiencing stable economic growth with the high hopes of accelerating growth through key reforms. Words: 2156 Reference list UNIDO, Data. Mexico Basic Information. Available: http://www.unido.org/Data1/IndStatBrief/Basic_Information.cfm?print=no&ttype=C1&Cou ntry=MEX&Group= [2017, October 19] UNIDO, Data. Indonesia Basic Information. Available: http://www.unido.org/Data1/IndStatBrief/Basic_Information.cfm?print=no&ttype=C1&Cou ntry=INS&Group= [2017, October 19] World Bank, Data. World Bank national accounts data, and OECD National Accounts data files. GDP growth annual, Mexico, Indonesia. Available: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2016&locations=MXID&start=1994​ ​[2017, October 19] Kehoe, T. n.d. What happened to Mexico in 1994-95? Available: http://users.econ.umn.edu/~tkehoe/papers/Mexico1994-95.pdf [2017, October 19] IMF Staff. 2000, Recovery from the Asian crisis and the role of the IMF. Available: https://www.imf.org/external/np/exr/ib/2000/062300.htm [2017, October 19] Jayasuriya, S & McCawley, P. 2010. ​The Asian Tsunami, A ​ id and reconstruction after a disaster. Available: https://www.adb.org/sites/default/files/publication/159342/adbi-asian-tsunami-aid-reconstruction.pdf [2017, October 19] International Federation of Red Cross and Red Crescent Societies. 2010. ​Final report, ​Mexico Floods. Available: https://reliefweb.int/sites/reliefweb.int/files/resources/A76434FC78DEAF7D852576BE00589E5EFull_Report.pdf [2017, October 19] Beard, A & Santos-Reyes, J. n.d. ​Human and Ecological Risk Assessment: An International Journal​, Applying the SDMS Model to the Analysis of the Tabasco Flood Disaster in Mexico. Available: http://www.tandfonline.com/doi/pdf/10.1080/-?needAccess=true [2017, October 19] Dean, W et al. 2012. ​The war on Mexican Cartels, OPTIONS FOR U.S. AND MEXICAN POLICYMAKERS. ​Available: http://www.iop.harvard.edu/sites/default/files_new/research-policypapers/TheWarOnMexicanCartels_0.pdf [2017, October 19] Beaton, C. Clarke, K. & Lontoh, L. 2014. ​Indonesia energy subsidy review, A ​ biannual survey of energy subsidy policies. Available: https://www.iisd.org/gsi/sites/default/files/ffs_indonesia_review_i1v1.pdf [2017, October 19] Vietor, R. 2017. Mexico’s energy reform. Available: https://sites.hks.harvard.edu/hepg/Papers/2017/Mexican%20Energy%20Reform%20Draft%201.23.p [2017, October 19] df Cuadra, J. Ramos-Francia, G & Sidaoui, R. n.d. The global financial crisis and policy response in Mexico. Available: http://www.bis.org/publ/bppdf/bispap54q.pdf [2017, October 19] Tambunan, T. 2010. The Indonesian experience with two big economic crises. Available: https://file.scirp.org/pdf/ME-_-.pdf [2017, October 19] World Bank, Data. World Bank national accounts data, and OECD National Accounts data files. Current account balance, Mexico, Indonesia. Available: https://data.worldbank.org/indicator/BN.CAB.XOKA.CD?end=2014&locations=MX-ID&start=1994 [2017, October 19] World Bank, Data. World Bank national accounts data, and OECD National Accounts data files. Adjusted Savings: gross savings % of GNI, Mexico, Indonesia. Available: https://data.worldbank.org/indicator/NY.ADJ.ICTR.GN.ZS?end=2014&locations=MX- ID&start=1994 [2017, October 19] World Bank, Data. World Bank national accounts data, and OECD National Accounts data files. Unemployment, total (% of total labour force) (national estimate), Mexico, Indonesia. Available: https://data.worldbank.org/indicator/SL.UEM.TOTL.NE.ZS?end=2014&locations=MX- ID&start=1994\ [2017, October 19] Aji, P & Ginting, E. 2015. Summary of Indonesia’s economic analysis. Available: https://www.adb.org/sites/default/files/publication/177010/ino-paper-02-2015.pdf [2017, October 19] G20 2016 China,- Growth Strategy Mexico. Available: http://www.g20.utoronto.ca/2016/2016growth-mexico.pdf [2017, October 19]