Indonesia & Pakistan: Not two peas in a pod

Unlike Pakistan, Indonesia has harnessed its natural advantages to nurture a sustainable growth trajectory

Indonesia and Pakistan, both in India’s Asian neighbourhood, have been in the foreground this month for their national elections and the resulting change of guard at the helm of affairs. With the fourth and fifth largest populations in the world, the two countries also have the largest Muslim population. Both countries have been under military dictatorship/ authoritarian regimes at different points in their post-independence history, for almost the same number of years —a little over three decades. While Pakistan continues to struggle with the elected form of governance, Indonesia has had a long period of political stability after transitioning to democracy following the civil and political unrest in the wake of the East Asian Financial Crisis (EAFC) in 1998. However, Indonesia and Pakistan, present starkly contrasting long-term economic trajectories.

Indonesia has for long maintained an annual growth rate of 5-6 per cent, interrupted only by the EAFC in 1998 and, more recently, by the pandemic in 2020. Indonesia recovered soon and registered a gross domestic product (GDP) growth of over 5 per cent in 2022. Sustained growth has had positive consequences for the nation, with extreme poverty eliminated well ahead of the respective Sustainable Development Goals target date and the overall poverty rate reduced by more than half since the EAFC. Over the past three decades, Indonesia has experienced an almost steady increase in its Human Development Index (HDI) score and has been classified in the high HDI category since 2017. While it still has some catching up to do with its regional peers in Asean, four of which are in the very high HDI category, a notable feature of its development trajectory is the steady decline in the gender inequality index (GII). An increase of 10 percentage points in the proportion of the female population over the age of 25 with at least some secondary education over the last decade is impressive, even though the female labour force participation rate in Indonesia has been moderate and almost stagnant at around 50 per cent for more than 20 years.

Unlike Indonesia’s ability to overcome the regional crisis in the late 1990s, Pakistan has navigated from one economic crisis only to enter another. While it has registered a growth rate of over 6 per cent in some years in its 76-year history, these short periods have been invariably undone in subsequent years. In fact, in almost every decade, Pakistan has seen one or more years of 0-2 per cent growth of GDP. Over the past three decades, its per capita GDP (at constant 2015 US$) has increased by only 77 per cent, compared to more than two and a half times in Indonesia. The inability to sustain growth has impacted Pakistan’s performance on the poverty front, with almost 40 per cent of the population now living below the poverty line. It remains the only country in South Asia, other than Afghanistan, in the low HDI category. The GII index, though declining, remains well above the global average. The percentage of the female population above the age of 25 with some secondary education has declined from a little over 25 per cent in 2013 to 22 per cent in 2021. Female participation in the labour force is extremely low and has not risen beyond a fifth of their total population over the last three decades, thus remaining well below comparator developing economies in the world.

The contrast in the economic trajectory of the two countries is further apparent in their long-term growth strategies. Indonesia has given its manufacturing sector a push, over the past few years, using its mineral resources and re-working its global value chain (GVC) integration strategy, particularly in the electric vehicles (EV) sector. While Indonesia experienced increased GVC integration and parts and components trade over the last two decades, this was more in the upstream sector with a greater forward integration relative to backward integration. Also, with its GVC integration mostly in primary and low-tech sectors, Indonesia was not really a part of the triangular trade characteristic of GVC integration of lead economies in the East Asian region. The recent ambitious call to develop an indigenous EV supply chain based on its large nickel resources, therefore, is a step towards re-orienting its GVC integration towards higher value-added product manufacturing and exports. Towards this objective and as a key element of its national masterplan for industry 2015-2035, Indonesia is combining foreign investments with strategic industrial and trade policies. A combination of subsidies and export controls for nickel has been adopted by the Indonesian government. Furthermore, Indonesia has been trying hard to evolve a trade deal focused on critical minerals with the US, given its non-FTA status and, therefore, the inability to benefit from tax credits under the US Inflation Reduction Act. Preliminary talks towards such a partnership were held in November 2023. Indonesia is also, simultaneously trying hard to maintain the delicate balance with the larger, more willing investor, China, as well as fulfil the US expectations on environment, social and governance standards.  

In contrast, Pakistan has not, thus far, developed a sufficiently diversified industrial base, and there seems to be no recognition of the urgency of developing a trade and industrial strategy to overcome its current economic crisis or to catch up with its South Asian peers. The misplaced smugness stemming from its geographical strategic advantage and the associated excessive dependence on external finance has proved vulnerable to shifts in the regional geopolitical context and ill-suited to sustained economic growth and development. Manufacturing output has declined over the last few years and continues to be plagued by low productivity, limited R&D, stagnant exports and low levels of human capital development. Pakistan maintains a protectionist trade policy stance with a heavy anti-export bias, thus limiting potential opportunities to enhance its manufacturing competitiveness through integration with GVCs. Given its inadequacies in infrastructure, logistics and overall business environment, trade and investment benefits of its FTAs have been negligible. In the case of the FTA with China, for example, Pakistan is outcompeted in the Chinese market by its other FTA partners, including Asean economies, while the domestic market is flooded by cheap Chinese imports, raw material and final goods, further eroding Pakistan’s limited industrial base.

To sum up, while Indonesia is further harnessing its natural advantages to consolidate and augment a sustainable growth trajectory, Pakistan has failed to capitalise on either its population resources or its geographical advantages to nurture sustained economic development.

The writer is senior fellow, CSEP, professor, SIS, JNU (on leave) and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal