Street vendor selling porridge © hennyriedmueller

Indonesia’s economic growth is forecast at 6 per cent this year, down from 6.4 per cent predicted earlier, in line with a slowing of the country’s exports sparked by a world economic slowdown, the World Bank said on Tuesday…

However, it predicted Indonesia’s economy growth would rise to 6.4 per cent in 2009…

Despite the slowing global economy, in 2007 Indonesia’s economic growth accelerated to a 10-year high of 6.3 per cent, the World Bank said.

“This growth rate reduced (Indonesia’s) poverty rate from 17.8 per cent (in 2006) to 16.6 per cent (in 2007), based on the government’s poverty line,” it said.

The growth rate also reversed the recent trend toward jobless growth by causing unemployment to fall from 10.3 per cent to 9.1 per cent.

This is good news; and it is from the World Bank, which often offers gloomy prediction of Indonesia’s economic growth.

I am not a macroeconomist, but I am willing to bet that the economy this year will grow faster than 6 percent, maybe close to last year’s growth rate of 6.3 percent.

In Indonesia, more than 30% of children under the age of 5 years suffer from chronic malnourishment. The long-term consequences of childhood malnutrition are well established in the literature. Yet, little is known about the extent to which these children are able to recover from some of the long-term deficits in health outcomes caused by childhood undernourishment. To capture the association between nutritional deficiency at young ages and subsequent health status, a panel data is constructed using observations on children between the age of 3 and 59 months in 1993 who are followed through the 1997 and 2000 waves of the Indonesian Family Life Survey. A dynamic conditional health demand function is estimated, where the coefficient on the one-period lagged health status captures the extent of recovery, if any, from childhood malnutrition. This coefficient is also known as the ‘catch-up’ term. … [A] coefficient of 0.23 estimated here indicates that by adolescence, a malnourished child will grow to be only 0.95 cm shorter than a well-nourished child…

That is Subha Mani of the University of Southern California in a recent job market paper. She concludes “poor nutrition at young ages will cause some, but not severe, retardation in the growth of future height indicating partial catch-up effects”.

Once centimeter is still pretty large, I think. Besides, she also calculates that malnourished child will also have 0.6 less year of schooling.

Thanks to Arya Gaduh for the pointer.

The fall is not statistically significant, however, as Arya correctly suggests.

A back of envelope calculation gives me a standard error of the difference in the poverty rates of about 2 percentage points. It is so large so that it may overwhelm the estimated difference.

It means we cannot really say whether the poverty rate last year (17.75%) is really different from the rate this year (16.58%).

In that sense, the BPS’s press release is rather misleading. It reports that poverty rate declines, but it does not tell us the standard error of the fall.

It is as if BPS gets the number of the poor from the entire Indonesia’s population, not from a small sample of it only.

Of course, I am glad to hear that poverty rate falls. But, at the same time, BPS should acknowledge that there is too much noise in the data. That we do not really have convincing evidence that poverty rate has actually declined.

Using dynamic panel data models, we examine the effect of capital requirement on banks’ behavior in Indonesia. We find inconclusive results. Banks tend to comply with capital requirement: They increase their capital ratio when their CAR is lower than, or falling towards, the eight percent regulatory minimum. However, most of our results are statistically significant at 20-30% level of significance only. Moreover, our results are mostly driven by private domestic banks and heavily-undercapitalized banks that were closely monitored by regulator in the aftermath of the 1998 crisis. Whether, in normal circumstances, banks in developing countries like Indonesia comply with capital requirement, therefore, remains questionable.

That’s from another recent working paper by Parinduri and Riyanto. Comments and suggestions are welcome.

Indonesia’s economic growth (2002-2007)

Indonesia’s economy as a whole grows by 6.3%, which is also quite good. But, the slower growth is because oil and gas sectors continue contracting.

If this seven percent growth translates into lower unemployment- and poverty rates, all would be very well.

We examine the effect of strategic sale—the sale of banks to strategic foreign investors—on banks’ performance. The Government of Indonesia implemented such a policy as a part of bank restructuring in the aftermath of the 1998 banking crisis. Using difference-in-difference models, we find that strategic sale leads to 12%-15% cost reduction. These results are robust to the use of other estimators such as difference-in-difference matching-estimators and stochastic-frontier analysis, to that of other performance measures such as return on assets and net interest margin, and also to that of different types of samples. These suggest that strategic sale could play an important role in restructuring troubled banks in developing countries.

In short, the sale of Indonesian banks to strategic foreign investors a couple of years ago is a good thing.

That’s from a recent working paper by Parinduri and Riyanto.

“…[there is] an anomaly between the BI benchmark rate and bank deposit interest rates in Indonesia at present,” the central bank governor [Burhanudin Abdullah] told the House of Representatives Financial Commission at a hearing which began Thursday evening and lasted Friday.

He said the anomaly lay in the fact that the BI rate (8.25 percent) was higher than the bank deposit rate of 5 percent.

“The BI benchmark rate should have been lower than the bank deposit interest rate,” he added.

He may can call it an anomaly, but the higher Bank Indonesia benchmark rate is central bank’s own policy choice.

It is the consequence of central bank’s obsession to lower inflation rate by setting excessively high interest rate.

Stop by once every few months, though; I may write one post or two.

In the meantime, you can browse my categories of posts and archives, which are available in the sidebar.

Economic Growth Rates

From Takatoshi Ito’s paper on Asian Crisis; via Dani Rodrik’s weblog.